5 ms·

We picked the wrong lawyers for our first startup

96 points by kevinbracken 12y ago

tptacek 12y ago
Apart from the good background here about how the wrong lawyers can mess up your company: Operating without vesting is the most common and probably most harmful company formation mistake you can make. It is amazingly dangerous to do, and will very likely end up costing you something. Any lawyer who doesn't spot that and totally freak out at you is probably not the right lawyer for the kind of work we all do.
- kevinbracken 12y ago
  Completely agree. They seemed clueless about the fact that they could issue a restricted stock agreement and still allow us control of the company without having vested. It was awful.
- jarrett 12y ago
  On the flip side: Is there ever a situation in which cofounders legitimately want to make it impossible to oust a cofounder without his/her consent? Or should that always be possible for any sane company?
  - kevinbracken 12y ago
    It's a good question - we had wondered, will there be a situation in which a cofounder and investor could collude to get more equity for themselves? That sounds like the stuff of conspiracy theories more than young startups with very little money, though
  - tptacek 12y ago
    No, I don't think there is. In a serious dispute between founders, for the company to survive, there must be some mechanism to conclusively resolve the controversy. A blood pact not to remove cofounders disrupts those mechanisms. One way or another, a grave and unresolvable dispute between founders will leave you with some performing partners and some nonperforming partners. It's hard to imagine operating a company with a nonperforming partner on the books; not only do they have dramatically less of a stake in the company than everyone else, but they also have a gun to the heads of the rest of the company. It's worth adding that wanting to be on the books as a full partner/director/founder of a company that wants you ousted is, for a cofounder operating in good faith, irrational. When you start a company with other people, you have to decide first whether you're starting a company or a club. A club can disintegrate as a result of conflict and that's not a big deal. But if you're building a company, then the welfare of the company needs to be among the most important factors in resolving disputes.
    - jarrett 12y ago
      You've convinced me. This seems true for all companies.
    - joshu 12y ago
      If you are the partner who is bringing some substantial asset to the partnership (perhaps code or whatever) the ownership from this asset should be un-vesting. If it is a pre-existing product or business this can be substantial.
    - ottocoder 12y ago
      I have never heard the "club" vs "company" comparison before, but that seems like a great way to describe the mindset of founders. Is it possible to establish a company that is run like a club and are there any examples? Or am I extending the analogy too far? Perhaps some research organizations are set up along those lines?
      - tptacek 12y ago
        A lot of private law practices are run that way.
  - wpietri 12y ago
    As tptacek says, the answer is basically: no. When I started a company long ago, a consulting partnership, my cofounder and I picked the simplest dispute resolution mechanism: if we really couldn't agree on something, one person could name a price and the other could decide to buy or sell at that price, giving the purchaser sole control. It's basically the equivalent of how you teach two kids to cut cake in half. I was skeptical that we even needed that; after all, it was a partnership. With a friend! What could go wrong? But our lawyer insisted. Turned out he was right. I learned two lessons: 1) get a good lawyer at the start, and 2) it's worth thinking through the common bad outcomes and agreeing on how to handle them before the bad situation hits. Because once you're in a dispute, it is way too late to try to get agreement on how to resolve disputes.
    - blazespin 12y ago
      Shotgun clause is very typical, that's what they used here I suspect.
    - worldvoyageur 12y ago
      Traditional shotgun clauses have edge cases that can produce bad outcomes. A better model for a shotgun clause is one in which each partner names the price they would pay for the company. The partner who names the higher price then buys the company at the price half way between the two prices. Both partners win. The buyer gets the company at a discount to what they were prepared to pay, while the seller gets a premium to what the company was worth to them.
      - jacquesm 12y ago
        > The partner who names the higher price then buys the company at the price half way between the two prices. That's a nice twist. I used 'person that quotes highest buys out the other parties at that price', but yours is even better I think. Thanks!
        ronaldx 12y ago
        IMHO your way is better because the bids will be more genuine. The parent way can be gamed: the loser may benefit from deliberately bidding a bit higher than they would otherwise to force the winner to pay more. (Although you can argue this both ways, and auction theory does, I feel like this quirk could create animosity)
- thom 12y ago
  It's also important to check what the provisions actually are when a founder leaves with unvested shares. In the UK it's standard to require them to offer back the unvested shares at their nominal or par value (pennies, or fractions of). However, at least once I've seen lawyers use _market value_ as the phrase, which basically defeats the entire purpose.
  - at-fates-hands 12y ago
    >>> It's also important to check what the provisions actually are when a founder leaves with unvested shares. THIS. One of the most important things my attorney did for me is when I wanted to bring on a partner, we sat down for a few hours and hammered out every possible scenario that could happen. Where he would leave the company, if he dies and his wife thinks his shares are worth a million dollars. If the company is doing great and BAM! my partner decided to just up and leave the company, if the company gets bought out, how much does he get, etc. Now every time I see these stories, I think my attorney for watching my back and protecting my interests as well as my company. It's this due diligence I never would have thought to do, but am glad I hired a good attorney.
woah 12y ago
I'd like a little more detail on what happened with the cofounder. WTF? Did he have a mental illness? I mean, I could understand some decline in performance or something, but totally stopping? What was he thinking?
- kevinbracken 12y ago
  He became very skilled at making excuses, and saying he needed to "step back and strategize more." And it always kind of looked like he was working, but in reality he was producing 0 lines of code. That's when I brought on my current cofounder, who revealed that when he tried to work with cofounder 1, he got pushback, aggression, and eventually discovered from Github commits that he was doing literally nothing but living in our house for free and driving our car.
  - wpietri 12y ago
    That sucks, and I'm sorry it happened to you. For what it's worth, that sounds very anxiety-driven to me, and the response of a relatively young developer. From a tech cofounder, some tips for next time: Structure the work so that there is frequent, visible progress. At my last startup, the work was broken down into lumps that were at most a few days in size. Modest, regular accomplishment makes progress transparent to you, and smooths out the emotional roller coaster for you cofounder. Be present. My last cofounder and I spent most of our time within easy speaking distance. Later, as we hired more engineers, we kept him close to all the engineers. Whenever we had a product question, we just had to turn our heads to ask. The easier you make communication, the more you'll get. When there are issues, explicitly bring up both process and emotion as needed. The reason I became a developer was that it let me hide away in my parents' basement and not talk to people. That was great for coding skills, but not so great for knowing how to work with others or to understand my emotions. E.g., in this case you might have said, "Hey, I know that getting funding is really putting pressure on us. Honestly, it scares the hell out of me sometimes. So let's break the next few months work down into micro-deliverables. That way you'll always have something clear to work on, and I don't have to worry that things aren't making progress." Depending on circumstance, it can also be worth bringing in a business coach or therapist to help sort out these things.
thehme 12y ago
Not sure if anyone else picked this up, but for those who don't know everything about startups, this article does not really help. All points are missing more details and some are written assuming you know what is being meant without explaining clearly. For #1, I see that the cofounder did not contribute to the project, but what happened? why? was there a work contract or expectations that were not met? etc. For #2, what does the author mean by "It turns out that not every company in the US is incorporated in Delaware"; the author assumes everyone knows what is means and then adds that they "are incorporated in New York State"?. Then for #3, the author writes: "I asked what was the matter, and my attorneys said that “regulations” prevented them from sending it. A full two weeks after they received the check, they wired the money back to our investor and they asked him to wire the money to us directly. How embarrassing." While I think I figured out what was meant, somewhat, aside from the "regulations" part, it was not clearly describe who was asking who what and why exactly. I still don't understand what was not done correctly by the friend attorney.
- Breefield 12y ago
  Regarding #3, the regulations were "blue sky laws," which are more appropriate for shady securities that scam elderly women into giving away their pensions to hucksters. This wouldn't have happened if the friend attorney was used to dealing with startups.
  - jesusmichael 12y ago
    I doubt it was a "blue sky" issue. Since it seems like it was an "Accredited Investor" and they would have signed an waiver to that effect. Probably had more to do with the firm acting as a broker in the deal, and violating some state statute on unlicensed brokers/dealers. They deposited the funds, so they would be acting as an intermediary. If unlicensed could face serious fines.
  - thehme 12y ago
    Hummm...ok, thanks, I will look into this and see if I understand it better.
opendais 12y ago
I strongly disagree with #2. You have to incorporate multiple times if you start in Delaware [in this instance, in NY as a foreign corp]. This increases costs as you need a registered agent in both states, etc. Startups are cash strapped and should only incorporate in Delaware if they have no other choice. Otherwise, they are just paying twice for the privilege of using Delaware.
- danray 12y ago
  I'm not sure what you mean here. In almost every circumstance, a Delaware incorporation is the best choice. As the author said, if you don't start there and don't fail, you're likely to end up reincorporating there anyway.
  - gamblor956 12y ago
    A Delaware incorporation is almost never the correct choice for a business unless it has very specific reasons for incorporating in Delaware rather than the state in which it is actually located. The use of Delaware as the incorporation jurisdiction creates a significant amount of duplicative legal compliance costs, a substantial amount of additional tax compliance costs, and frequently makes a startup business ineligible for various startup incentives offered by the state in which it is actually located. Incorporating in Delaware is an appropriate choice if you intend to have a lot of investors, operate nationally very early on in the life of the business, or definitely plan to IPO. Otherwise, it's simply not worth it. (And note--reincorporating in Delaware is a tax-free reorganization from a US federal tax perspective, so it's not very expensive to reincorporate later in Delaware if necessary.)
    - afarrell 12y ago
      So you're saying that incorporating in Delaware is premature generalization?
      - sfall 12y ago
        yea, go delware when it warrants it.
mikeryan 12y ago
As a note, there's some very large and experienced firms in SV willing to take on a startup and do some amount of work for free at the beginning. I've had a major firm offer 10k of work plus introductions to VC's and other folks in their network. - Granted 10k is like 20-30 hours of some law firms, but still that can be quite a bit of work and likely your first 20-30 hours of legal advice can be your most important...
- danray 12y ago
  In addition, serious SV firms will offer a fixed-price basic incorporation package. This is great, not only because the fixed fee is low, but because it tells you your company won't be the firm's guinea pig as it learns how startup incorporations and financings work. You might be surprised at how many smaller corporate firms (especially those not based here) don't have this sorted out.
cannam 12y ago
As a non-American, I am slightly boggled by the bit about Delaware. I kind of, sort of knew about Delaware, but the idea that every startup incorporates there? Are all the SV startups nominally Delaware businesses? Can someone point to a nice potted summary of why a startup should incorporate there?
- UVB-76 12y ago
  From what I understand, Delaware is just a corporate tax haven. Around half of all public corporations are incorporated in the state [1] [1] http://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html http://www.nytimes.com/2012/07/01/business/how-delaware-thri...
  - Iftheshoefits 12y ago
    In both states in which I've participated in the operation of a business the rule is that any business which has operations in the state has to register and pay taxes in that state. Maybe VC firms require it, but to me incorporating in Delaware just means I'd have to keep track of another set of corporate regulations in addition to the ones in the state I actually do business in (currently California).
- gamblor956 12y ago
  Generally, there's no good reason to incorporate in Delaware unless you plan (or need) to take advantage of its unique corporate laws for legal conflicts in which you have the ability to determine jurisdiction. Otherwise, you simply end up subjecting your startup to the laws of Delaware and whatever state the startup is located in. (Tax-wise, you save little by incorporating in Delaware over a true corporate tax haven like Nevada, and you still owe state income taxes in whatever state the startup is actually located.)
  - jwb119 12y ago
    Maybe if you're a regular cash flow business. But if you're seeking VC money, you absolutely should be incorporating in DE or you risk running into the headache described in the article, IMO.
deleted 12y ago
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thinkcomp 12y ago
You can look up pretty much any lawyer in the United States on PlainSite (http://www.plainsite.org http://www.plainsite.org), which I run, and get a sense of the work they've done, whether on litigation or intellectual property. Incorporation data is harder to come by--but it's at least more than firms will give you. I'm hoping to add lobbying data soon as well.
- kevinbracken 12y ago
  Yup, we screwed up big! :)
ngoel36 12y ago
I cannot possibly say enough good things about choosing WSGR for my startup. Unbelievably generous and knowledgeable. Contact me if you'd like an intro to the people we worked with.
chiph 12y ago
In the case of the LLC some friends and I had a few years ago, we got a recommendation for a local firm from the lawyer father-in-law of the co-founders (he was out of state, and the relationship meant he had a conflict of interest and thus couldn't represent us himself). Big name, nice downtown office. Which should have been a warning sign... We had some questions about IP ownership in our day-job employee agreements and asked the firm for an opinion. Rather than a simple one or two sentence answer/explanation, we ended up with 3 of their people on a conference call, one of whom simply read that portion of the agreement back to us. And then got handed a $2400 bill for services rendered. Pick your lawyer almost as carefully as you pick a co-founder.
- deleted 12y ago
  [deleted]
fred_durst 12y ago
This story sounds a bit one sided. Sounds to me like the other cofounder chose a fantastic lawyer. I find it really, really hard to believe he did nothing at all for 2 months. Its possible its true, but considering how aggressive and forward your listed actions(bring in another dev weeks into the project to look over his shoulder, pushing him out completely after 2 months, using your own money to buy him out) I have a hunch this isn't the whole story. I wonder if its a bit more about the two of you having a disagreement about the direction of the tech/company etc and he became a bit unmotivated because you started bossing him around and treating him like an employee and not a partner. For example you ended trying to fire him like an employee and now your publicly throwing your friend the lawyer under the bus.
- kevinbracken 12y ago
  The ousted cofounder actually had no lawyer, he hates them. As for our friend lawyer, he's a great attorney, but just for big corporate law.
  - fred_durst 12y ago
    Hmmm, so the "cofounder" didn't even have a lawyer. Ok, here's a possible guess on what might have happened. You wanted to build an app for the idea you have. For gyms. From your personality and app, I'm guessing you like working out. You needed someone with some technical ability. Maybe you recruited this cofounder or he was a friend of a friend? Maybe a close friend? You made a deal with him because you couldn't pay him, but "generous equity" in the company. He stayed at your house etc, because he wasn't getting paid in real money while you guys were building the app. I have a hunch you had a lot more business experience and money in the bank. Then it sounds like its likely a combination of him being a bit over his head and realizing that he wasn't a real cofounder and was just an employee. Then you decide to fire him and he says, "Hey wait, I've been working for free all this time!". Then the legal bit ensues and you have to "pay him" for his portion of the company that he likely said was for his work. Did I get close? And your comments about the lawyer are definitely not the kind of thing I would do publicly about a friend and definitely gives me insight into your character in general. You might want to reconsider keeping this public.
zeeshanm 12y ago
Good thougths. But I think your lawyer being a friend or not is not as important. You need to hire right people for the given job in hand at the right time. It is just that most often these right kind of people for hackers not happen to be in their circle of friends. But not impossible.
noonespecial 12y ago
Lawyers specialize like doctors. Don't hire a podiatrist to do heart surgery.
- kevinbracken 12y ago
  Best reply.
jackgavigan 12y ago
Vesting is absolutely essential. Just Do It. http://jackgavigan.com/2014/04/23/vesting/ http://jackgavigan.com/2014/04/23/vesting/ For lawyers, you need someone who's familiar with how startups operate. Lawyers specialise in different things, just like doctors and engineers do. Would you go to a neurosurgeon if you had a problem with your prostate? Or to an electronic engineer if you needed a bridge built? You want to find a firm that has had lots of experience with startups. As for recommendations from other startup founders. If in doubt, go to Orrick. I've heard nothing but praise for them and they've been really generous in supporting LDN2SFO.
- larrys 12y ago
  "If in doubt, go to Orrick. I've heard nothing but praise for them" Which attorney in particular? I am sorry if you take this the wrong way but I don't think a statement like that is helpful. First you said "I heard". So it's not your personal experience with any attorney at Orrick that has helped you and not even the experience of a close friend or acquaintance that you know (at least by the way you've phrased this). In law this would be hearsay evidence? Anyway all this does is build a legend of a firm that while may be suited for a startup it may also not be. As far as "support for LDN2SFO" that's nice but that is marketing and (I'm guessing) pro bono work. All else equal I guess you keep that in mind. But all else (pricing, the particular attorney) is rarely equal. By the way I would feel (almost) the same way if someone said "Grellas has a great reputation here on HN and has been generous in supporting HN so I would choose Grellas".
goeric 12y ago
Clerky.
larrys 12y ago
This is really no different than what non-computer people go through when they assume that a "computer guy" that they know is a jack of all trades and an expert in all areas and aspects of computing. (Simply because they know so little so they have no way to assess competence.). But even with respect to sub specialties (say computer security) there is the tendency to think that someone who knows more than you knows everything. It's really difficult to pick a good professional for all situations. And unfortunately simply relying on other's opinion (which seems to be the obvious way, referrals) may not work either. [1] [1] Specifically, for law, part of what an attorney advises on is protection against future things that might happen. [2] If a friend recommends an attorney that they were happy with and they have only been in business a short time how do you know that things will be find years later? Additionally, there is a great deal of bedside manner and likability with any professional that can cloud judgement. (Happens with medicine as well.) [2] Not to mention the entirely separate concept of to much protection against a super unlikely occurrence may impede a business.
pjbrunet 12y ago
I would like to see more postings like this on Hacker News. - Best startup lawyers? Is there an app for that yet? - Do lawyers ever get equity? Why or why not. - Has microlending made this easier? (Open-ended question.) - Why doesn't the "Delaware corp" have more competition from other countries?
jesusmichael 12y ago
Lame article. Most if these issues that arose could have been handled easily by a first year MBA. 1. There are so many ways to get rid of this guy I can't mention them all. However, vesting is a good idea. 2. The incorporation, create a DE entity and sell the IP to it. 3. Most likely a broker/dealer statute that the lawyer was grappling with. If a two week delay in funding is a problem. Then they have bigger problems.
rgraham 12y ago
Anyone have recommendations for lawyers for bootstrapping?
lauradhamilton 12y ago
I would also suggest reading documents (such as the Shareholder agreement) before signing them. This guy obviously knew about vesting, but somehow didn't realize it wasn't in the Shareholder agreement?
danielweber 12y ago
I remember one start-up, trying to figure out how to disassemble the start-up. Everyone thought it was a horrible idea. They were offended, like a pre-nup. To be fair, there's a good chance I was probably in that group. Not having it was really bad. A similar thing happened with my uncles in an old-fashioned boring normal-world business many years ago. Unlike divorce, companies are not meant to be for life. Plan for separation.
will_brown 12y ago
As a lawyer with a former corporate law practice, for one of my side projects I created a legal service company (ameristartup.com). AmeriStartup takes the legalzoom concept, but tailored incorporation/compliance "packages" specifically for Delaware Corporations and then beat legalzoom on their prices. Great service, better value, addresses real world problems yet zero traction. I even reached out to YC direct to try to offer the incorporation/compliance/registered agent services to YC companies at a discount, I never heard back. I think a YC company (Clerky) did/does the something similar and may already provide YC companies with these services.
- opendais 12y ago
  I'm slightly concerned you are promoting this without mentioning the fact that any 'tech' company is going to need to register as a foreign entity in their home state as the salary for a single engineer is going to qualify you as 'doing business' in that state, especially if you also have any sales in that state.
  - will_brown 12y ago
    I offer 3 services: Incorporation; Annual Compliance; Qualification. Under Qualification on the home page it reads: Make sure your Delaware Corporation is qualified in every State your Startup is physically present. I will add that on my Learn More page, but do you have any other suggestions to highlight that issue as it is on the Home page already?
    - opendais 12y ago
      Ah, I only looked at the Incorporation Page. Oops. :)
      - will_brown 12y ago
        Not an oops at all you provided valuable feedback. I will add some verbiage on the incorporation page about the need to qualify to do business in other states. Thanks.
ubi 12y ago
TLDR; Use https://www.clerky.com https://www.clerky.com [I have no interest in clerky, they just rock]
- mrmch 12y ago
  +1 for Clerky; faster and more concise replies than my "startup specialized" lawyers.
cleeb 12y ago
Yep, Just want to say that we are starting all of our startups with www.wilmerhale.com. I really can recommend them! Chris

96 points by kevinbracken 12y ago

Apart from the good background here about how the wrong lawyers can mess up your company: Operating without vesting is the most common and probably most harmful company formation mistake you can make. It is amazingly dangerous to do, and will very likely end up costing you something. Any lawyer who doesn't spot that and totally freak out at you is probably not the right lawyer for the kind of work we all do.

kevinbracken 12y ago
Completely agree. They seemed clueless about the fact that they could issue a restricted stock agreement and still allow us control of the company without having vested. It was awful.
jarrett 12y ago
On the flip side: Is there ever a situation in which cofounders legitimately want to make it impossible to oust a cofounder without his/her consent? Or should that always be possible for any sane company?
- kevinbracken 12y ago
  It's a good question - we had wondered, will there be a situation in which a cofounder and investor could collude to get more equity for themselves? That sounds like the stuff of conspiracy theories more than young startups with very little money, though
- tptacek 12y ago
  No, I don't think there is. In a serious dispute between founders, for the company to survive, there must be some mechanism to conclusively resolve the controversy. A blood pact not to remove cofounders disrupts those mechanisms. One way or another, a grave and unresolvable dispute between founders will leave you with some performing partners and some nonperforming partners. It's hard to imagine operating a company with a nonperforming partner on the books; not only do they have dramatically less of a stake in the company than everyone else, but they also have a gun to the heads of the rest of the company. It's worth adding that wanting to be on the books as a full partner/director/founder of a company that wants you ousted is, for a cofounder operating in good faith, irrational. When you start a company with other people, you have to decide first whether you're starting a company or a club. A club can disintegrate as a result of conflict and that's not a big deal. But if you're building a company, then the welfare of the company needs to be among the most important factors in resolving disputes.
  - jarrett 12y ago
    You've convinced me. This seems true for all companies.
  - joshu 12y ago
    If you are the partner who is bringing some substantial asset to the partnership (perhaps code or whatever) the ownership from this asset should be un-vesting. If it is a pre-existing product or business this can be substantial.
  - ottocoder 12y ago
    I have never heard the "club" vs "company" comparison before, but that seems like a great way to describe the mindset of founders. Is it possible to establish a company that is run like a club and are there any examples? Or am I extending the analogy too far? Perhaps some research organizations are set up along those lines?
    - tptacek 12y ago
      A lot of private law practices are run that way.
- wpietri 12y ago
  As tptacek says, the answer is basically: no. When I started a company long ago, a consulting partnership, my cofounder and I picked the simplest dispute resolution mechanism: if we really couldn't agree on something, one person could name a price and the other could decide to buy or sell at that price, giving the purchaser sole control. It's basically the equivalent of how you teach two kids to cut cake in half. I was skeptical that we even needed that; after all, it was a partnership. With a friend! What could go wrong? But our lawyer insisted. Turned out he was right. I learned two lessons: 1) get a good lawyer at the start, and 2) it's worth thinking through the common bad outcomes and agreeing on how to handle them before the bad situation hits. Because once you're in a dispute, it is way too late to try to get agreement on how to resolve disputes.
  - blazespin 12y ago
    Shotgun clause is very typical, that's what they used here I suspect.
  - worldvoyageur 12y ago
    Traditional shotgun clauses have edge cases that can produce bad outcomes. A better model for a shotgun clause is one in which each partner names the price they would pay for the company. The partner who names the higher price then buys the company at the price half way between the two prices. Both partners win. The buyer gets the company at a discount to what they were prepared to pay, while the seller gets a premium to what the company was worth to them.
    - jacquesm 12y ago
      > The partner who names the higher price then buys the company at the price half way between the two prices. That's a nice twist. I used 'person that quotes highest buys out the other parties at that price', but yours is even better I think. Thanks!
      - ronaldx 12y ago
        IMHO your way is better because the bids will be more genuine. The parent way can be gamed: the loser may benefit from deliberately bidding a bit higher than they would otherwise to force the winner to pay more. (Although you can argue this both ways, and auction theory does, I feel like this quirk could create animosity)
thom 12y ago
It's also important to check what the provisions actually are when a founder leaves with unvested shares. In the UK it's standard to require them to offer back the unvested shares at their nominal or par value (pennies, or fractions of). However, at least once I've seen lawyers use _market value_ as the phrase, which basically defeats the entire purpose.
- at-fates-hands 12y ago
  >>> It's also important to check what the provisions actually are when a founder leaves with unvested shares. THIS. One of the most important things my attorney did for me is when I wanted to bring on a partner, we sat down for a few hours and hammered out every possible scenario that could happen. Where he would leave the company, if he dies and his wife thinks his shares are worth a million dollars. If the company is doing great and BAM! my partner decided to just up and leave the company, if the company gets bought out, how much does he get, etc. Now every time I see these stories, I think my attorney for watching my back and protecting my interests as well as my company. It's this due diligence I never would have thought to do, but am glad I hired a good attorney.

woah 12y ago

I'd like a little more detail on what happened with the cofounder. WTF? Did he have a mental illness? I mean, I could understand some decline in performance or something, but totally stopping? What was he thinking?

kevinbracken 12y ago
He became very skilled at making excuses, and saying he needed to "step back and strategize more." And it always kind of looked like he was working, but in reality he was producing 0 lines of code. That's when I brought on my current cofounder, who revealed that when he tried to work with cofounder 1, he got pushback, aggression, and eventually discovered from Github commits that he was doing literally nothing but living in our house for free and driving our car.
- wpietri 12y ago
  That sucks, and I'm sorry it happened to you. For what it's worth, that sounds very anxiety-driven to me, and the response of a relatively young developer. From a tech cofounder, some tips for next time: Structure the work so that there is frequent, visible progress. At my last startup, the work was broken down into lumps that were at most a few days in size. Modest, regular accomplishment makes progress transparent to you, and smooths out the emotional roller coaster for you cofounder. Be present. My last cofounder and I spent most of our time within easy speaking distance. Later, as we hired more engineers, we kept him close to all the engineers. Whenever we had a product question, we just had to turn our heads to ask. The easier you make communication, the more you'll get. When there are issues, explicitly bring up both process and emotion as needed. The reason I became a developer was that it let me hide away in my parents' basement and not talk to people. That was great for coding skills, but not so great for knowing how to work with others or to understand my emotions. E.g., in this case you might have said, "Hey, I know that getting funding is really putting pressure on us. Honestly, it scares the hell out of me sometimes. So let's break the next few months work down into micro-deliverables. That way you'll always have something clear to work on, and I don't have to worry that things aren't making progress." Depending on circumstance, it can also be worth bringing in a business coach or therapist to help sort out these things.

thehme 12y ago

Not sure if anyone else picked this up, but for those who don't know everything about startups, this article does not really help. All points are missing more details and some are written assuming you know what is being meant without explaining clearly. For #1, I see that the cofounder did not contribute to the project, but what happened? why? was there a work contract or expectations that were not met? etc. For #2, what does the author mean by "It turns out that not every company in the US is incorporated in Delaware"; the author assumes everyone knows what is means and then adds that they "are incorporated in New York State"?. Then for #3, the author writes: "I asked what was the matter, and my attorneys said that “regulations” prevented them from sending it. A full two weeks after they received the check, they wired the money back to our investor and they asked him to wire the money to us directly. How embarrassing." While I think I figured out what was meant, somewhat, aside from the "regulations" part, it was not clearly describe who was asking who what and why exactly. I still don't understand what was not done correctly by the friend attorney.

Breefield 12y ago
Regarding #3, the regulations were "blue sky laws," which are more appropriate for shady securities that scam elderly women into giving away their pensions to hucksters. This wouldn't have happened if the friend attorney was used to dealing with startups.
- jesusmichael 12y ago
  I doubt it was a "blue sky" issue. Since it seems like it was an "Accredited Investor" and they would have signed an waiver to that effect. Probably had more to do with the firm acting as a broker in the deal, and violating some state statute on unlicensed brokers/dealers. They deposited the funds, so they would be acting as an intermediary. If unlicensed could face serious fines.
- thehme 12y ago
  Hummm...ok, thanks, I will look into this and see if I understand it better.

opendais 12y ago

I strongly disagree with #2. You have to incorporate multiple times if you start in Delaware [in this instance, in NY as a foreign corp]. This increases costs as you need a registered agent in both states, etc. Startups are cash strapped and should only incorporate in Delaware if they have no other choice. Otherwise, they are just paying twice for the privilege of using Delaware.

danray 12y ago
I'm not sure what you mean here. In almost every circumstance, a Delaware incorporation is the best choice. As the author said, if you don't start there and don't fail, you're likely to end up reincorporating there anyway.
- gamblor956 12y ago
  A Delaware incorporation is almost never the correct choice for a business unless it has very specific reasons for incorporating in Delaware rather than the state in which it is actually located. The use of Delaware as the incorporation jurisdiction creates a significant amount of duplicative legal compliance costs, a substantial amount of additional tax compliance costs, and frequently makes a startup business ineligible for various startup incentives offered by the state in which it is actually located. Incorporating in Delaware is an appropriate choice if you intend to have a lot of investors, operate nationally very early on in the life of the business, or definitely plan to IPO. Otherwise, it's simply not worth it. (And note--reincorporating in Delaware is a tax-free reorganization from a US federal tax perspective, so it's not very expensive to reincorporate later in Delaware if necessary.)
  - afarrell 12y ago
    So you're saying that incorporating in Delaware is premature generalization?
    - sfall 12y ago
      yea, go delware when it warrants it.

mikeryan 12y ago

As a note, there's some very large and experienced firms in SV willing to take on a startup and do some amount of work for free at the beginning. I've had a major firm offer 10k of work plus introductions to VC's and other folks in their network. - Granted 10k is like 20-30 hours of some law firms, but still that can be quite a bit of work and likely your first 20-30 hours of legal advice can be your most important...

danray 12y ago
In addition, serious SV firms will offer a fixed-price basic incorporation package. This is great, not only because the fixed fee is low, but because it tells you your company won't be the firm's guinea pig as it learns how startup incorporations and financings work. You might be surprised at how many smaller corporate firms (especially those not based here) don't have this sorted out.

cannam 12y ago

As a non-American, I am slightly boggled by the bit about Delaware. I kind of, sort of knew about Delaware, but the idea that every startup incorporates there? Are all the SV startups nominally Delaware businesses? Can someone point to a nice potted summary of why a startup should incorporate there?

UVB-76 12y ago
From what I understand, Delaware is just a corporate tax haven. Around half of all public corporations are incorporated in the state [1] [1] http://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html http://www.nytimes.com/2012/07/01/business/how-delaware-thri...
- Iftheshoefits 12y ago
  In both states in which I've participated in the operation of a business the rule is that any business which has operations in the state has to register and pay taxes in that state. Maybe VC firms require it, but to me incorporating in Delaware just means I'd have to keep track of another set of corporate regulations in addition to the ones in the state I actually do business in (currently California).
gamblor956 12y ago
Generally, there's no good reason to incorporate in Delaware unless you plan (or need) to take advantage of its unique corporate laws for legal conflicts in which you have the ability to determine jurisdiction. Otherwise, you simply end up subjecting your startup to the laws of Delaware and whatever state the startup is located in. (Tax-wise, you save little by incorporating in Delaware over a true corporate tax haven like Nevada, and you still owe state income taxes in whatever state the startup is actually located.)
- jwb119 12y ago
  Maybe if you're a regular cash flow business. But if you're seeking VC money, you absolutely should be incorporating in DE or you risk running into the headache described in the article, IMO.

deleted 12y ago

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thinkcomp 12y ago

You can look up pretty much any lawyer in the United States on PlainSite (http://www.plainsite.org http://www.plainsite.org), which I run, and get a sense of the work they've done, whether on litigation or intellectual property. Incorporation data is harder to come by--but it's at least more than firms will give you. I'm hoping to add lobbying data soon as well.

kevinbracken 12y ago
Yup, we screwed up big! :)

ngoel36 12y ago

I cannot possibly say enough good things about choosing WSGR for my startup. Unbelievably generous and knowledgeable. Contact me if you'd like an intro to the people we worked with.

chiph 12y ago

In the case of the LLC some friends and I had a few years ago, we got a recommendation for a local firm from the lawyer father-in-law of the co-founders (he was out of state, and the relationship meant he had a conflict of interest and thus couldn't represent us himself). Big name, nice downtown office. Which should have been a warning sign... We had some questions about IP ownership in our day-job employee agreements and asked the firm for an opinion. Rather than a simple one or two sentence answer/explanation, we ended up with 3 of their people on a conference call, one of whom simply read that portion of the agreement back to us. And then got handed a $2400 bill for services rendered. Pick your lawyer almost as carefully as you pick a co-founder.

deleted 12y ago
[deleted]

fred_durst 12y ago

This story sounds a bit one sided. Sounds to me like the other cofounder chose a fantastic lawyer. I find it really, really hard to believe he did nothing at all for 2 months. Its possible its true, but considering how aggressive and forward your listed actions(bring in another dev weeks into the project to look over his shoulder, pushing him out completely after 2 months, using your own money to buy him out) I have a hunch this isn't the whole story. I wonder if its a bit more about the two of you having a disagreement about the direction of the tech/company etc and he became a bit unmotivated because you started bossing him around and treating him like an employee and not a partner. For example you ended trying to fire him like an employee and now your publicly throwing your friend the lawyer under the bus.

kevinbracken 12y ago
The ousted cofounder actually had no lawyer, he hates them. As for our friend lawyer, he's a great attorney, but just for big corporate law.
- fred_durst 12y ago
  Hmmm, so the "cofounder" didn't even have a lawyer. Ok, here's a possible guess on what might have happened. You wanted to build an app for the idea you have. For gyms. From your personality and app, I'm guessing you like working out. You needed someone with some technical ability. Maybe you recruited this cofounder or he was a friend of a friend? Maybe a close friend? You made a deal with him because you couldn't pay him, but "generous equity" in the company. He stayed at your house etc, because he wasn't getting paid in real money while you guys were building the app. I have a hunch you had a lot more business experience and money in the bank. Then it sounds like its likely a combination of him being a bit over his head and realizing that he wasn't a real cofounder and was just an employee. Then you decide to fire him and he says, "Hey wait, I've been working for free all this time!". Then the legal bit ensues and you have to "pay him" for his portion of the company that he likely said was for his work. Did I get close? And your comments about the lawyer are definitely not the kind of thing I would do publicly about a friend and definitely gives me insight into your character in general. You might want to reconsider keeping this public.

zeeshanm 12y ago

Good thougths. But I think your lawyer being a friend or not is not as important. You need to hire right people for the given job in hand at the right time. It is just that most often these right kind of people for hackers not happen to be in their circle of friends. But not impossible.

noonespecial 12y ago

Lawyers specialize like doctors. Don't hire a podiatrist to do heart surgery.

kevinbracken 12y ago
Best reply.

jackgavigan 12y ago

Vesting is absolutely essential. Just Do It. http://jackgavigan.com/2014/04/23/vesting/ http://jackgavigan.com/2014/04/23/vesting/ For lawyers, you need someone who's familiar with how startups operate. Lawyers specialise in different things, just like doctors and engineers do. Would you go to a neurosurgeon if you had a problem with your prostate? Or to an electronic engineer if you needed a bridge built? You want to find a firm that has had lots of experience with startups. As for recommendations from other startup founders. If in doubt, go to Orrick. I've heard nothing but praise for them and they've been really generous in supporting LDN2SFO.

larrys 12y ago
"If in doubt, go to Orrick. I've heard nothing but praise for them" Which attorney in particular? I am sorry if you take this the wrong way but I don't think a statement like that is helpful. First you said "I heard". So it's not your personal experience with any attorney at Orrick that has helped you and not even the experience of a close friend or acquaintance that you know (at least by the way you've phrased this). In law this would be hearsay evidence? Anyway all this does is build a legend of a firm that while may be suited for a startup it may also not be. As far as "support for LDN2SFO" that's nice but that is marketing and (I'm guessing) pro bono work. All else equal I guess you keep that in mind. But all else (pricing, the particular attorney) is rarely equal. By the way I would feel (almost) the same way if someone said "Grellas has a great reputation here on HN and has been generous in supporting HN so I would choose Grellas".

goeric 12y ago

Clerky.

larrys 12y ago

This is really no different than what non-computer people go through when they assume that a "computer guy" that they know is a jack of all trades and an expert in all areas and aspects of computing. (Simply because they know so little so they have no way to assess competence.). But even with respect to sub specialties (say computer security) there is the tendency to think that someone who knows more than you knows everything. It's really difficult to pick a good professional for all situations. And unfortunately simply relying on other's opinion (which seems to be the obvious way, referrals) may not work either. [1] [1] Specifically, for law, part of what an attorney advises on is protection against future things that might happen. [2] If a friend recommends an attorney that they were happy with and they have only been in business a short time how do you know that things will be find years later? Additionally, there is a great deal of bedside manner and likability with any professional that can cloud judgement. (Happens with medicine as well.) [2] Not to mention the entirely separate concept of to much protection against a super unlikely occurrence may impede a business.

pjbrunet 12y ago

I would like to see more postings like this on Hacker News. - Best startup lawyers? Is there an app for that yet? - Do lawyers ever get equity? Why or why not. - Has microlending made this easier? (Open-ended question.) - Why doesn't the "Delaware corp" have more competition from other countries?

jesusmichael 12y ago

Lame article. Most if these issues that arose could have been handled easily by a first year MBA. 1. There are so many ways to get rid of this guy I can't mention them all. However, vesting is a good idea. 2. The incorporation, create a DE entity and sell the IP to it. 3. Most likely a broker/dealer statute that the lawyer was grappling with. If a two week delay in funding is a problem. Then they have bigger problems.

rgraham 12y ago

Anyone have recommendations for lawyers for bootstrapping?

lauradhamilton 12y ago

I would also suggest reading documents (such as the Shareholder agreement) before signing them. This guy obviously knew about vesting, but somehow didn't realize it wasn't in the Shareholder agreement?

danielweber 12y ago

I remember one start-up, trying to figure out how to disassemble the start-up. Everyone thought it was a horrible idea. They were offended, like a pre-nup. To be fair, there's a good chance I was probably in that group. Not having it was really bad. A similar thing happened with my uncles in an old-fashioned boring normal-world business many years ago. Unlike divorce, companies are not meant to be for life. Plan for separation.

will_brown 12y ago

As a lawyer with a former corporate law practice, for one of my side projects I created a legal service company (ameristartup.com). AmeriStartup takes the legalzoom concept, but tailored incorporation/compliance "packages" specifically for Delaware Corporations and then beat legalzoom on their prices. Great service, better value, addresses real world problems yet zero traction. I even reached out to YC direct to try to offer the incorporation/compliance/registered agent services to YC companies at a discount, I never heard back. I think a YC company (Clerky) did/does the something similar and may already provide YC companies with these services.

opendais 12y ago
I'm slightly concerned you are promoting this without mentioning the fact that any 'tech' company is going to need to register as a foreign entity in their home state as the salary for a single engineer is going to qualify you as 'doing business' in that state, especially if you also have any sales in that state.
- will_brown 12y ago
  I offer 3 services: Incorporation; Annual Compliance; Qualification. Under Qualification on the home page it reads: Make sure your Delaware Corporation is qualified in every State your Startup is physically present. I will add that on my Learn More page, but do you have any other suggestions to highlight that issue as it is on the Home page already?
  - opendais 12y ago
    Ah, I only looked at the Incorporation Page. Oops. :)
    - will_brown 12y ago
      Not an oops at all you provided valuable feedback. I will add some verbiage on the incorporation page about the need to qualify to do business in other states. Thanks.

ubi 12y ago

TLDR; Use https://www.clerky.com https://www.clerky.com [I have no interest in clerky, they just rock]

mrmch 12y ago
+1 for Clerky; faster and more concise replies than my "startup specialized" lawyers.

cleeb 12y ago

Yep, Just want to say that we are starting all of our startups with www.wilmerhale.com. I really can recommend them! Chris