The Boring (Legal and Accounting) Stuff that Matters
I had Joe DeFilippi and Sacha Ross drop by my Cornell Tech “Thinking Like a VC” class this week. We skipped the typical strategy and analysis this week, and walked the students through the more tactical legal and accounting factors of the start-up / VC dynamic.
Most first-time founders spend 99% of their energy on the product. The legal, tax, and fund mechanics? Total afterthought.
This is mostly right IMHO – you can’t tax-optimize a company making zero dollars. But ignoring the “boring” stuff is where founders create multi-million-dollar unforced errors.
Here are some of the hard truths we discussed – let me know what others we missed!
The 83(b) & QSBS Trap
Some incorporate as an LLC because it’s “easier,” or forget to file their 83(b) election within 30 days. Many founders don’t realize the benefits of QSBS, despite the fact that venture investors are now keenly aware of its mechanics.
The Napkin Equity Split
How (and when) you split equity with a co-founder (or co-founders) is still a bit of a dark art. Founder vesting (4 years, 1-year cliff) is the norm, and we had a discussion about founder re-vesting – why at first it sounds odd, but why VCs insist on it.
The Reserve Bias (Why VCs give subjective advice)
Founders assume their VC’s advice on when and how much to raise is objective. It’s not. It’s driven by their fund’s reserves, and most founders don’t think to ask about a given VC’s reserve policy. This is good intel when thinking about why a VC may be inclined, or disinclined, to encourage taking more capital.
The Fund Lifecycle
You aren’t just pitching a firm; you’re pitching a moment in time. If you pitch a fund in Year 1, they are aggressively deploying into new bets. If you pitch that same fund in Year 4, they’re reserving capital for winners and raising their next vehicle.
Your primary job is to build a great product. But the best founders also understand the structural mechanics of the game they are playing.
Move fast. Just don’t break your cap table.
