What are the life skills a startup CEO must learn to rise to the top?

There are tons of business skills, but life skills translate into good decision making (not always, but most of the time).  Gratitude, humility, and ability to listen (as mentioned) are key, but the ability to take life as it comes and be accepting of those changes, but willing to adapt to survive.  Many CEOs are so convinced in their product/service, that they fail to see the big picture of life and business, which I feel should include acceptance of today, gratitude for tomorrow and doing what you love, and willingness to change, no matter what.

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Where would one go in San Francisco to have an existing employment contract reviewed prior to leaving to found a startup?

Chris Barsness,

startup, finance, law, and tech nerd

I'm a startup lawyer and have dealt with many employment contract issues in my practice, although mostly when I was in-house; however, that may not always be the case.

You want a good local employment law attorney who has litigated employment contracts.

Although they are based in LA, I have used a few good people who focus on employment law (they can easily review your agreement with you by phone after you send it by email or fax):

Dominic Messiha
Littler Mendelson
2049 Century Park East
5th Floor
Los Angeles, CA 90067
Main: (310) 553-0308

Navid Yadegar
Yadgar, Minofar, & Soleymani
1801 Avenue of the Stars, Suite 1035, Los Angeles, CA 90067
(855) 667-7887

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Do ‘Standard’ Stock Option Contracts & Employment Contracts exist, a la Series Seed?

Chris Barsness,

startup, finance, law, and tech nerd

Early employment contracts and options can have long term effects on a company, so there are numerous state and federal securities, employment and contract law issues to be considered in those early agreements.  Getting qualified advice can be invaluable, even early on.  Whatever you do, don't simply buy or download "standard" contracts from a website to use.

That being said, it sounds like you are simply looking for examples to review and not necessarily use them.  I don't know of any standardized ones since employment law issues usually vary by state.  Go to the SEC website www.sec.gov or any finance site and look up securities filings for companies in your industry.  It takes time, but you can find copies of employment agreements, stock option agreements, and stock option plans filed as exhibits to various filings such as 8-K, 10-K, 10-Q, and others.  You will see that there are many standard clauses and formats used, so that is probably the best way to get access to public examples.

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What documents should stakeholders of a startup sign before the development start?

Chris Barsness, startup, finance, law, and tech nerd

This answer assumes from your question you are one of the original founders of the company or are coming in early on and are helping with development in something along an early employee role.

In some cases, it depends upon the type of company and/or development.  In the majority of startups out there these days, they are technology or internet based.  IP or Intellectual Property protection is generally the biggest legal issue in those types of startups.  Think "how do I protect my own ideas and developments to be sure I own them and how does the company protect what ideas or developments are developed by the company and it's employees?"

Some of those initial documents may be technology transfer or assignment agreements, non-disclosure/confidentiality agreements, employee proprietary information and inventions agreements.  To boil it down to the basics, any document that clearly defines what inventions, patents, patent applications, or developments you came into the company with that are yours, what you may be contributing to the deal (could be cash, time, or your ideas, designs, patents, etc.), what happens to developments made during the course of working with the company or possibly developed by you outside of the company, and what happens if you leave the company.

Obviously, you generally need to form a legal entity that will be the basis of the company (such as C corp, S corp, LLC, etc.).  If it is a corporation, there are usually founder stock purchase agreements or something similar with a stock certificate to represent your ownership interest in the company.  There may be shareholder agreements, buy-sell agreements, investor representation agreement/letter of accredited status, resolutions approving the issuance of stock to you and many other documents that could possibly be involved.  The stock issuance probably also requires a Form D filing or state blue sky filing to show compliance with state and federal securities laws.

I know it sounds like a lot, but there are a lot of things that need to be done in the early stages to avoid a lot of clean up or dealing with lawsuits down the road.

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Is hiring order determined by the date the employee signed an employment agreement or the actual start date?

Chris Barsness, startup, finance, law, and tech nerd

Need more information on why you want to know or what your definition of "hiring order" is?

The terms of the contract and state law would generally rule the answer and many employment agreements set out a start or effective date.  If the person signed the agreement with a delayed start date, I would say the actual start date since they are not starting to perform on the employment contract; however, you have made a hiring decision and entered into a contractual obligation on the date of execution.

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How should co-founders of a C-Corp get paid at an early stage startup with a small angel round?

Chris Barsness, startup, finance, law, and tech nerd

One thing you don't want to do is just start cutting checks to pay yourself without thinking.  One of the worst situations to be in is to have to go back to clean up the books and calculate the payroll taxes that were supposed to be withheld.  Depending upon the state you are located in, there are different rules for payroll and there are sometimes ways to avoid withholding.  A C-corp is not a typical pass through tax entity, so you have to look at your own personal taxes and then the company.  In California, if you are an executive, officer, director etc., you can be held personally liable for failure to withhold payroll taxes, even if the corporation goes out of business.

There are some payroll services that are pretty minimal in terms of expenses, but most of the time when I have setup payroll, I have had a bad experience with typical banks.  Go to a payroll processing company or use the online QuickBooks/Intuit payroll service.  Very low costs and pretty effective.  It is usually better to just have them withhold and send in the taxes; otherwise, it is too tempting to hold off on paying in withholding in a startup low on cash.  

You can tell them to defer salary or put a hold on payroll processing if the cash gets low and usually incur only a minimal fee or just cancel the service.  

Realize that just because you call yourself a consultant and don't withhold payroll taxes, the IRS and others have their own definitions and you can get stuck holding the bag, so accrue a deferred salary if you can and then pay yourself when you have the cash or do the salary through a payroll company.

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Is there a generic formula I can apply to determine fair pre-IPO stock option grants based on the company’s size and # of fully diluted shares?

Chris Barsness, startup, finance, law, and tech nerd

That is a common, but complicated question.  The key component is what is the valuation of the company.  With a private company, that can be somewhat subjective since there is no market to see what others are willing to pay for the stock.  If they give you any information about their valuation or what any recent shareholders paid for their stock on a per share basis, that can give you some insight into the value.  

The most common stock option valuation methodology is the Black-Scholes option pricing model, but that is beyond what you really need to determine as that is more of an accounting determination for the company.  There are numerous posts about option compensation, so that can give you some information, but it sounds like you have a general knowledge from your prior work.

Think about what portion of compensation the options represent.  If the estimated fair market value less exercise price of options times the number of shares in the grant is not much compensation compared to what you expected, you need to ask for more.  Don't think about the number of shares as a percentage of the company as that can change significantly and it doesn't really represent the value to you.  Also realize that there is a certain opportunity cost lost for your time in exchange for the value of the options if you never get to exercise the options (i.e. company stays private or other events).  

In terms of your curiosity from the company's standpoint, once they hit certain amounts of option grants, there can be added reporting obligations from a securities law perspective and they have to account for the value of the option grant as compensation expense.  In a private start-up, those non-cash expense amounts are not necessarily that big of a deal, but management still needs to report to the board and shareholders, so they can't just give away the company in stock options.  Plus, if they grant one employee a significantly different amount, they may face some upset employees as well.

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Why isn’t there a legitimate “critic” in Silicon Valley for early-stage startups?

Chris Barsness, startup, finance, law, and tech nerd

The critics don't always need to be vocal; there already are plenty of critics.  The company's most important critics are usually the board and investors, whether VC, angel, or otherwise.  Those are the ones that can direct a startup in the right direction.  When someone of value fails to invest in a future round, fires management, or quits the board, those are some pretty serious critiques of where the company is heading.

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How much would we compensate a person for introducing us to an investor?

Chris Barsness, startup, finance, law, and tech nerd

This is actually a complex issue that many startups have wrestled with for decades, how to compensate someone who helps bring cash to a needy startup, i.e. a "finder's fee"?

Companies push the limits on this, but the general legal answer is that in most states, unless that person is a registered broker/dealer licensed to sell a security, they can't get paid anything, equity or cash.  I will assume that your brother is not a registered/licensed broker/dealer.  Since the finder is helping to sell stock or other equity in your company to the investor, they can be considered a broker/dealer and would need to be licensed to get a finder's/success fee.  However, without these intermediaries, some startups would never meet angel investors and run out of cash, so there are some grey areas.  It is a matter or weighing the risks and rewards of the transaction.  

There is much more to the exemptions and securities laws involved to go into in this answer, but if you decide to pay something, put a finder's fee agreement in writing with certain limits on what the finder can do to keep their involvement minimal and how to identify their contacts.  Only agree to a set amount for the actual introduction to the potential investor.  When it comes to equity in your company, for most startups seeking initial seed angel funds, don't get too concerned about what the percentage of equity given out is since it will be diluted down in future rounds most likely anyway.

Giving someone an incentive can be amazing at how it produces results.  There are more strategic and legal issues to whether to put it in writing, and if you put it in writing, what specifically should go into the agreement, which is often something based upon state law and regulations, but I don't want to give away all my secrets.  In my experience, I have put together tons of finder's fee arrangements for part of a percent to 10% of the company when out raising money, but very few ever panned out and if they did, you can worry about how to get them compensated when the money actually hits the bank account.

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How can an engineer understand a stock option agreement at a startup?

Chris Barsness, startup, finance, law, and tech nerd

I am sure that you have heard this, but having a lawyer (or at least a CPA or tax attorney) review it for you is sometimes the best thing if the option grant is of significant value (or potential value). If it is something worth over $100,000 to you, it would seem to make sense to spend a little to have someone review it.  That being said, don't expect much of the terms to be changed.  Most option grant agreements are standard forms put together under the overall terms of a company's stock option plan.

Some of the terms can be negotiated as part of your general employment agreement.  The biggest issues to look at that can vary are number of shares, vesting schedules, exercise price versus stock price (which at most startups is not very easy to determine), and provisions for what happens upon you leaving the company sometimes  (e.g. do you have to exercise the option within 30 days of leaving or lose your rights).  You can look at what the company's current capitalization is to see what size piece of the pie you are being offered, but those numbers will change drastically by future investments and other company activity.  If there is an overall stock option plan, reviewing a copy of that as well will give you some insight into what terms are somewhat set in stone.  

I know there are some good posts on here with links to guides to understanding options, but I think the biggest thing to worry about are your personal tax consequences.

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