Jetpack the Story, Part 2 Founding mechanics
In part one we talked about the the time and the things leading up to our agreement to create Jetpack Cognition Lab on private equity funding. This current part covers the mechanics of creating a Delaware C Corporation and making the first steps with the baby company.
ycombinator, standard documents, SAFE agreement
The magic crew had introduced us to ycombinator and the model for funding early stage startups that they have created over time. It consists of a well consolidated process for setting up a company and dealing with investments with minimum headache. The process makes use of a set of standard documents that do not have to be modified when going from one company to the next. A central piece in this is the Simple Agreement on Future Equity (SAFE), a four-page document that can be consumed and understood by virtually anyone. In the SAFE a standard early-stage investment deal is laid down, requiring only a few variables to be filled in: the name of the company, the name of the investor, and the number of shares returned for what amount of investment.
Note: We are not associated with ycombinator in any way. What we did is adopt some of their processes and tools which are publically available.
The /Future/ bit in the SAFE takes care of the fact that all of this is only relevant if and only if some kind of positive liquidation event (LE) occurs during the time the SAFE is valid for. Relevant LE’s are created either by a new investment round, the company being sold or being closed down. In addition the SAFE puts rules in place to avoid unintended investor interference, which is a well known reason for startup fails. We took a SAFE and went with that.
create the company with Stripe Atlas in the US
One of ycombinator’s own startups is the payment service provider Stripe. They have a product called Atlas which takes the YC standardization idea to the app level. The Atlas app allows you to create a company by registering a Delaware LLC or C-Corporation and open a workable bank account in the name of the newly founded company through a five page form.
In case that you are a pure software business you are probably pretty much set at this point. If you registered a corporation like we did, the Atlas process involves a few more steps that you will be churning down in the weeks after the company initialization (for an LLC that’s probably true as well but I have not been there).
company structure: shareholders, directors, officers
A corporation is a legal entity designed for fluid changes in equity shares among a potentially large number of parties. The standard document creates a stock of 10M shares initially. These shares are all common stock (CS) which means that they come with a vote in the shareholder meeting. Another kind of stock is the preferred stock (PS), which does not include the right to vote but is served first in a liquidation event.
The corporation, its structure and organs are defined by the Bylaws which are standardized and part of the Atlas document stack. At the top of the decision chain are the shareholders with common stock. The shareholders then name one or more directors into the Board of Directors, which in turn may elect the company’s officers (CEO, CFO, ETCTO, ..). In the case of a two person founding team you end up in all three levels.
issuing stock, 40/40, 20 pool
Founding a corporation does not make you its owner automatically. To become the owner, the company needs to issue the stock to the parties involved. In order to avoid huge income taxes for the non-liquid assets of the young company, this needs to be done within a month after registering the company. During this period the shares are guaranteed to be evaluated at their par-value which is a very tiny amount. After completing the purchase agreement, one has to make sure to actually pay this amount to your own company and make sure the transaction is recorded in the company logs.
The stock purchase agreement also comes out of the Atlas process. The precise allocation of shares depends on the number of founders and their indivdual stakes of course. In addition, it is considered good practice to leave a portion of shares unissued. These comprise a pool, which we can use later on to give to the first few critical team members as an incentive. After a few discussions we went for a 40 / 40 / 20 split among founder / founder / pool using a standard four year vesting, one year cliff setup.
Note: the income tax issue is reflected onto your country of (tax) residence if you are not a US citizen or tax payer. Thus the 83b election form does not need to be completed and handed in for foreigners.
Depending on your situation you will need to direct company money towards yourself as an income. Starting with a full-blown employment is maybe too complicated in terms of administrative overhead and liabilities created. Based on different ad-hoc advice from our network we picked the two-freelancers-invoicing-to-company model. This means each founder will invoice their services and expenses to the company every one or two months, either in a direct way or as successive installments of a lump budget.
This article is a technical description of how to incorporate your company and some of the first steps towards getting it operational. Details include the process of creating a US company with Stripe Atlas as a foreign entity, considerations on issueing stock to founders, and how to pay yourself for freelance services in this first phase.
Registering the business locally within Germany is the subject of part three of the story, coming soon.