Running a startup can be a complicated, difficult process fraught with pitfalls and ample opportunities to make mistakes. But the logistics of setting up a startup should be simple, because over the long run, complicated equity setups and cap tables cost more money in legal fees and administration time.
The logistics of setting up a startup should be simple, because over the long run, complicated equity setups and cap tables cost more money in legal fees and administration time.
My company, Pulley, has helped more than a thousand founders build their cap table and equity structure.
Here’s a tactical guide to get your startup running in just four days.
Day 1: Incorporate
It is now standard to incorporate your company at the seed stage itself. In the U.S., startups incorporate as Delaware C Corporations with 10 million authorized shares. This is the standard setup when you use services like Stripe Atlas or Clerky.
Post incorporation, you need to answer a few questions on how to grant equity to founders and future employees.
First, you should determine how you want to split the equity between the founders. There is no standard for doing so — some founders split shares equally, while others do 49/51 splits for control. Some founders even may have an 80/20 equity split because one founder spent an extra year on the idea.
At the end of the day, a good equity split is one that all founders find fair. If you can’t agree on a structure, you should have a deeper discussion on whether this is the right team to work with for the next decade or more.
Most founder shares are subject to a four-year vest with a one-year cliff. This vesting schedule aligns incentives to reward founders for creating long-term value. Have a good reason if you plan to deviate from the standard structure, as investors expect this vesting structure and will ask questions on anything atypical.
You should also create an equity pool. Standard procedure is to set aside 10% to 15% of your shares for employees, but that may or may not be a good idea for you, as equity pools are affected by how many people you hire and your milestones. If you set aside too few shares, you will have to pay a lawyer to do the paperwork to increase your pool size, but if you set aside too many shares, you will see unnecessary dilution.
Work backward from your hiring plan to determine the size of your equity pool. Calculate how many people you need to hire and how much equity you want to grant to hit your milestones before you raise the next round. Add a buffer to this total to reach your equity pool size.
Day 2: Set up a bank account and payroll
If you’re in California, Bay Area banks like First Republic Bank, Silicon Valley Bank and Mercury are all good choices, but traditional retail banks also work well.
When setting up your bank account, negotiate for free wire transfers and no fees. Afterward, once you have a bank account, get a credit card for payments. Ramp and Brex are great options for startups looking for corporate card solutions.
For payroll, Rippling or Gusto are good options, as they also provide human resource management services.
Day 3: Find a good lawyer
Most startups do not need a lawyer at the seed stage, but if you are in a regulated industry like healthcare or need to raise an equity round, a lawyer can be very helpful.
There are two types of law firms: boutique and large scale. Boutique firms are more cost-effective because they do not have as much overhead, while large firms have hundreds of partners. In a large firm, the partner matters more than the firm.
As with most things, trusted founders in your industry are the best source of referrals. Good lawyers do not nickel and dime startups, and most large firms understand that startups are cash-constrained and defer payment for the first $10,000-$15,000 in legal spending.
The legal fees for a Series A can range from $30,000 to $60,000, depending on the complexity.
Use your lawyer wisely to keep legal fees in check early on. Ask for free legal templates for offer letters, employee equity grants and SaaS agreements. These templates can also be found on sites like Clerky, Cooley Go and Pulley.
Many first-time founders make the mistake of deferring to their lawyer as the business expert. Your lawyer’s role is not to make business decisions, and their feedback should be one of many data points you consider when making decisions.
Day 4: Plan fundraising
Fundraising does not mean free money, because the process results in the dilution of your equity. The goal of raising money is to hire a team to hit the milestones you need to raise your next round. Work backward from your milestones to determine how much you need to raise.
Before you start fundraising, determine your valuation. This is more of an art than a science, as your company can be pre-customers and pre-product and investors are probably betting on you and the market to determine whether your idea will succeed. One way to value your company is to look at the valuations of comparable companies in your market. Also consider asking friends for feedback to test the waters.
When talking to investors, have a number in mind and reveal your valuation confidently. Bay Area investors tend to be less valuation sensitive compared to East Coast investors.
The amount you raise should depend on how many people you need to hire to hit your milestones. Set low expectations to increase the chances of meeting your goals — it’s better to raise $1 million and have demand for $1.5 million from investors than to plan to raise $2 million and not hit your goals.
When you get to the funding stage, make sure to accept funding from professional investors who understand the risks, as it’s more likely than not that your startup will fail. Don’t take your grandparents’ retirement money to fund your idea.
There is no standard for how much your equity will be diluted at the seed stage, and depends on your industry — for example, healthcare companies typically need to raise more capital than SaaS firms and so will see greater dilution. We’ve analyzed around 1,000 seed-stage cap tables at Pulley, and most startups give away 15%-20% of their company.