1. Home
  2. Funding, Financials & Legal
  3. Finance, legal & HR
Searching...

Finance, legal & HR

Key Questions

  • As a founder, how much do I really need to know about finance, legal and HR? Can I rely on others?
  • How can I quickly get up to speed on the basics of finance, legal and HR?
  • How can I find, evaluate and hire a great lawyer?
  • How do I work with a lawyer?
  • Do I need to do my own accounting? Should I hire a bookkeeper? CFO?
  • What HR issues do I need to know about to minimize the changes of a lawsuit?

Start Here

Kristy Nathoo: Managing Startup Finances

(28 min video.) Nathoo discusses common financial mistakes startups make. She emphasizes the importance of monitoring key financial metrics: bank balance, cash inflows, and outflows. Calculating burn rate and runway helps startups understand their financial health and avoid running out of cash. Nathoo advises against underestimating expenses, such as the full cost of hiring employees, and warns that early customer acquisition costs may rise over time. She stresses the need for honesty in financial assessments and regular reviews of financial metrics. Finally, as startups grow, it’s crucial to maintain accurate and realistic financial oversight to ensure long-term success.

Robert Seigel: Human Resource Issues in a Startup

(7 min video.) Seigel argues that startup teams often neglect HR due to immediate priorities like technology and customer acquisition, but this oversight can be harmful. According to Seigel every company has a culture, consciously designed or not, that impacts growth. He believes effective HR practices are crucial for scaling smoothly and fostering a positive environment. Prioritizing HR from the start helps build a cohesive team, avoid insularity, and ensure the company’s values and goals are clearly communicated and upheld as the organization grows. This investment in HR is vital for long-term success and maintaining a motivated, productive workforce.

Learn More

(35 min video.) In this video Proffitt and Carpenter address crucial legal matters for startups. They stress the importance of setting up legal affairs correctly from the start to prevent future complications. Key topics covered include ownership of ideas, equity distribution among founders, fundraising methods like convertible notes versus priced rounds, and valuation negotiations. They emphasize the significance of choosing the right investors and integrating growth strategies with legal considerations. Additionally, they highlight the necessity of documenting IP assignments and equity allocations meticulously to avoid disputes later on. The discussion also touches on the challenges of having difficult conversations among co-founders regarding equity distribution and the potential drawbacks of convertible notes in early-stage companies. Overall, the video provides valuable insights into navigating legal complexities for startup success.

Alexander Civetta: Six Common Contract Traps: A Field Guide

(7 min read.) Civetta’s article outlines six common contract traps in master services agreements that tech companies often face with larger entities. These include unilateral renewal clauses allowing indefinite customer renewal at fixed or minimally increased prices, hidden exclusivity provisions restricting market access, disguised Most Favored Nations clauses limiting pricing flexibility, broad deliverables definitions assigning vendor improvements to customers, omissions of critical vendor protections, and unbounded audit provisions allowing extensive customer access to vendor records. Civetta advises vendors to carefully review and negotiate these terms to avoid unfavorable agreements that can hinder their operations and growth.

Alexander Civetta: Stock Vesting in Startup Companies 

(8 min read.) This article on stock vesting in startups explains the importance of vesting in aligning founders’ interests with the company’s growth. According to Civetta, vesting ensures that founders earn their equity over time, motivating them to stay committed. The typical time-based vesting schedule is four years with a one-year cliff, whereas milestone-based vesting ties equity to specific achievements. Vesting provisions attract investors by assuring them that key personnel remain incentivized. Additionally, Civetta advises that founders should consider vesting acceleration clauses and be aware of the tax implications governed by Section 83 of the Internal Revenue Code, including the critical 83(b) election. Seeking professional advice is essential for optimal structuring.

(5 min video.) Feras outlines key considerations when choosing a lawyer. It emphasizes that while cost is a factor, it shouldn’t be the primary concern. Instead, prioritize a lawyer with in-depth knowledge and experience in your field, as they can save you significant money and hassle in the long run. 

Dinesh Melwani & Roman Gorokhov: Section 409A Valuations

(11 min read.) Melwani and Gorokhov delve into the complexities of Section 409A valuations, essential for tax and financial planning in startups. They emphasize the importance of timing and the need for third-party assessments to ensure compliance and strategic accuracy. The authors outline various valuation methodologies and discuss the “safe harbor” provision, which protects against IRS challenges. They advocate for a nuanced approach, blending different valuation methods to capture a startup’s true worth accurately.

Derek Colla: Post-incorporation Checklist: 10 Next Steps to Consider

(6 min read.) The article outlines essential post-incorporation steps for startups, including securing an Employer Identification Number (EIN), opening a business bank account, and establishing a formal corporate structure. Derek emphasizes the importance of drafting and adopting bylaws, issuing stock to founders, and holding initial board and shareholder meetings. The checklist also covers compliance tasks such as registering for state taxes and understanding ongoing legal obligations. By following these steps, startups can ensure proper legal and operational foundations, paving the way for smoother growth and management.

Brad Feld: Why Gross Profit Is More Important Than Revenue

(2 min read.) In this article Brad argues that gross profit and gross margin are more meaningful metrics for valuing companies than revenue alone. He explains that while revenue is a common measure, it can be misleading due to varying gross margin profiles across industries, such as SaaS and hardware. By focusing on gross profit and its growth rate, companies can better assess their financial health and create more value. This approach offers a clearer comparison between companies with different economic models and revenue streams.

Bill Reichert: The Art of Startup Finance: The Startup Finance Pyramid

(3 min video.) In this video, Bill emphasizes the crucial role of finance in startup success. He argues that entrepreneurs shouldn’t solely rely on bookkeepers and accountants, but actively understand the financial flows of their businesses. This understanding is essential for effective management and answering key questions investors will inevitably ask. Bill introduces a “Startup Finance Pyramid” framework, which outlines five key elements: Foundation, Processes, Business Model & Formula, Operating Budget & Long-Term Forecast, and Performance Monitoring. By mastering these tools, entrepreneurs can navigate the inherent uncertainty of the startup landscape, gain early warnings of potential issues, and ultimately build a successful company. Bill ultimately advocates for viewing finance not as a complex obstacle but as a powerful tool for achieving entrepreneurial success.

Bill Reichert: The Art of Startup Finance: Financial Foundations –  Your Balance Sheet

(4 min video.) This video focuses on the balance sheet and its importance in startup finance. Bill emphasizes the balance sheet’s role in outlining a startup’s assets, liabilities, and shareholders’ equity, providing investors with a clear understanding of the company’s financial health and standing. The balance sheet offers valuable insights into the financial health and standing of a company. For instance, it helps investors understand assets, liabilities, and shareholders’ equity.

By analyzing these elements, investors can gain a comprehensive view of the startup’s financial position and its ability to generate profits and meet its financial obligations.

Bill Reichert: The Art of Startup Finance: Financial Foundations –  Your Capitalization

(4 min video.) In this video, Bill demonstrates that a capitalization table, or cap table, is a crucial document for startups that outlines the ownership structure and funding history. It details different ownership classes like common stock, stock options, warrants, and preferred stock. Common stock is held by founders, employees, and advisors, while stock options are granted to employees to become future owners. Warrants are options to buy stock at a fixed price, often issued with debt or leases. Preferred stock is given to investors like venture capital firms, offering them preference in liquidation or sale. Convertible notes are debt instruments that convert into equity, often used by early-stage startups for fundraising. He concludes by stating that the cap table should be comprehensive and regularly updated to provide a clear picture of the company’s ownership and funding history for potential investors.

Bill Reichert: The Art of Startup Finance: Financial Processes – Your Income Statement

(6 min video.) Bill, in this video, stresses that the income statement is a critical document for startups as it provides a video-like view of their financial performance over a period. It starts with revenues, which represent total sales, and subtracts the costs of goods sold (COGS) to calculate the gross profit, reflecting the profit before operating expenses. Investors seek a high gross profit margin, typically 70% or 80%, signifying strong profitability. Operating expenses, encompassing R&D, engineering, marketing, and sales, are then deducted to arrive at the operating profit, which shows the profitability of the company’s overall operations. Finally, all other expenses are subtracted to determine net income, also known as net profit. Bill concludes by saying that investors analyze net income margin to assess the overall profitability and efficiency of the business.

Bill Reichert: The Art of Startup Finance: Financial Processes – Your Cash Flow

(6 min video.) In this video, Bill explains the importance of understanding your cash flow statement as a startup founder. He emphasizes that while net income from the income statement provides a starting point, it doesn’t represent the actual cash earned or lost during a period. Key adjustments need to be made, especially considering accounts receivable (money owed by customers) and accounts payable (money owed to vendors). Bill highlights the crucial role of accounts receivable in cash flow management. He advises entrepreneurs to actively pursue collecting receivables promptly, as delayed payments can negatively impact cash flow. Furthermore, he discusses how entrepreneurs can manage cash flow by strategically managing accounts payable. This involves balancing the timing of payments to vendors to align with incoming cash flow. Bill concludes by emphasizing the interconnectedness of financial statements: the income statement, cash flow statement, and balance sheet. Understanding these relationships, particularly the difference between net income and actual cash flow, is essential for investors. He stresses that entrepreneurs should actively engage in understanding and managing their finances, not just relying on bookkeepers and accountants.

Sam Altman: Later-Stage Advice

(7 min of 48 min video.) In this video, Altman stresses the importance of transitioning to later stages in startup growth. He advocates for establishing clear reporting structures and effective delegation while documenting company culture and values. Long-term productivity is emphasized through strategic planning and fostering repeatable innovation. Specific considerations include implementing formal accounting practices, optimizing tax savings, and developing media relationships for PR. Business development and negotiation techniques are crucial, alongside understanding customer needs for market fit. Altman shares that the growth trajectory involves experiencing spikes, troughs, and setbacks before achieving significant growth, highlighting the resilience required for startup success.

Bill Reichert: The Art of Startup Finance: Financial Budgeting – Your Long-Term Forecast

(5 min video.) In this video, Bill states that a long-term financial forecast is crucial for early-stage entrepreneurs to demonstrate their understanding of the business and market. He says that this forecast should be built bottom-up based on the business model formula, reflecting the company’s unique aspects. It’s important to involve multiple perspectives, including an optimist, pessimist, and realist who can analyze public company data for comparison. The goal is to create a reasonable first draft that can be iteratively refined and aligns with the business plan. Lastly, Bill reminds us that this forecast is not a fixed plan but a tool to guide the company’s development and accurately reflect the vision for the future.

Ran Matoki: Crisis Management: The CFO’s Vital Role in Startup Resilience

(4 min read.) In this article, Ran focuses on the pivotal role of CFOs in navigating crises within startups. Recognizing the increasing frequency of unpredictable events like pandemics, economic downturns, and global conflicts, he stresses the need for CFOs to be proactive in identifying potential risks and implementing robust mitigation strategies. He outlines five key priorities for CFOs during a crisis: prioritizing employee well-being, developing scenarios and utilizing data-driven forecasting, planning for business stability, establishing mechanisms for agile decision-making, and maintaining open communication with stakeholders. Ran emphasizes the importance of CFOs’ experience in crisis management for fostering resilience and a sustainable future for startups.

Pam Washburn: How to Choose a Lawyer for Your Startup

(6 min read.) Pam, in this article, reminds us that choosing the right lawyer for your startup is crucial, especially as it grows. While initial incorporation might be simple, you’ll need legal guidance on various aspects like equity compensation, contracts, and fundraising. She maintains that it’s essential to find a lawyer with startup experience, a collaborative firm culture, strong venture capital connections, and a good understanding of your industry. When assessing potential lawyers, consider factors like their availability, their fee arrangements, and how well you connect with them personally. She also encourages us to remember that the ideal lawyer will be smart, accessible, and invested in your company’s success.

(16 min read.) The article outlines the top seven legal mistakes startups make during investor due diligence and how to avoid them. These mistakes include unissued founders’ shares, unfavorable terms with initial angel investors, unsigned stock options with employees and advisors, lack of ownership of vital intellectual property, unprotected intellectual property, unfiled tax reports, and absence of regulatory policies. Understanding the VC business model and addressing these issues proactively can mitigate risks and streamline the due diligence process, ultimately aiding in securing investment. 

(22 min read.) The article provides a comprehensive overview of the legal framework for early-stage startups to issue stock options to employees, a vital tool for motivation and retention. It covers the allocation of an option pool, preparation of an Employee Stock Option Plan (ESOP), and the signing of option agreements, highlighting the need for compliance with tax and legal implications, especially in cross-border contexts. The article also details the distinction between ESOPs and option agreements, the mechanics of exercising options, tax considerations, and best practices to avoid common mistakes. It emphasizes the importance of legal structuring, particularly for global operations, and provides practical examples and expert insights to guide founders through the complex process.

(7 min read.) Daria, in this article, emphasizes the critical steps for incorporating a startup, highlighting the importance of selecting the right jurisdiction based on factors such as customer perception, investor relations, team location, and unique business needs. She outlines the significance of understanding legal structures to avoid complications and enhance trust with investors, recommending legal advice over informal sources. Daria details considerations for choosing a country for incorporation, such as operational ease, tax benefits, and IP protection. She also guides post-incorporation operations, including client acquisition and legal documentation, and discusses strategic fundraising preparation to ensure smooth investor relations and compliance.

Marcus Ryu: The Dangers of a High Compensation Culture

(6 min read.) Marcus argues that a high compensation culture (HCC) can hinder startups’ growth and profitability by creating unsustainable financial burdens. He criticizes the belief that paying premium salaries is necessary to attract and retain top talent, highlighting that such practices can lead to inflated expectations, operational volatility, and financial overreach. Marcus advocates for a culture of frugality, emphasizing the long-term benefits of equity, learning opportunities, and professional growth over immediate financial rewards. Founders should focus on a compelling mission and culture to attract talent and lead by example in deferring gratification.

Scott Orn: How to Calculate Burn Rate: The Startup Cash Burn Rate Formula

(4 min video.) Scott, in this video, discusses how calculating a startup’s burn rate, the amount of money spent each month, is crucial for financial management. He describes the two methods that exist: the income statement burn rate, based on accounting principles, and the cash flow burn rate, reflecting actual cash movement. The income statement burn rate is a good starting point, calculated using net income, while the cash flow burn rate is more relevant for capital-intensive businesses, derived from the operating cash flow and capital expenditures on the cash flow statement. The burn rate can be calculated over a three-month or six-month period, each offering advantages and disadvantages. Regularly tracking and reporting the burn rate to investors demonstrates financial awareness and builds confidence.

Tommaso Di Bartolo: How to Determine the Right Level of Burn Rate

(8 min read.) Tomasso emphasizes that determining the right burn rate for a startup is crucial for its survival and success. He stresses that a startup’s burn rate should be determined based on factors like investor support, valuation accuracy, product/market fit, hiring practices, expense management, and break-even potential. He believes startups should be cautious with their spending and ensure that they have a strong product/market fit before aggressively increasing their burn rate. Open communication with investors, careful expense management, and a realistic approach to break-even are essential for establishing a sustainable burn rate and achieving long-term success.

Roberto Bonanzinga: Revenues or No Revenues? This Is the Question

(5 min read.) Roberto, in this article discusses the different types of revenue and their impact on shareholder value. He argues that focusing on the right kind of revenue is crucial for long-term growth and success. He outlines five key distinctions: repeatable vs recurring revenues, validating the ideal customer profile vs revenue-driven customers, strategic growth vs tactical growth, the right vs wrong product mix, and sales/marketing channel validation. Roberto emphasizes that entrepreneurs should prioritize generating sustainable and strategic revenue, even if it means turning down short-term tactical opportunities that don’t align with their long-term goals.