The Basics to Startup Legal With Venturous Counsel

Ethan Peyton: Hey everybody and welcome to the Startups Avant podcast. I'm your host, Ethan, and this is a show about the stories, challenges and triumphs of fast scaling startups and the founders that run them. Our show today is gonna be just a little bit different. And while our guest is a founder, we're bringing her into play more of an expert role. And we're gonna go deep on a few topics relevant to all founders and all startups. Our guest is Aravinda Seshadri. Aravinda is a founding partner of Ventures Council, a law firm specializing in advising early stage startups and founders. And I'm gonna keep this intro short because we've got a lot of good stuff to get to, but before we jump in, a quick reminder to hit that subscribe button so you never miss an episode. That's also the best way for you to support the show. And of course, we appreciate all your support, so thank you.

Aravinda Seshadri: It's going pretty well. Thanks for asking.

Ethan Peyton: All right, let's get into it and welcome Aravinda Seshadri of Venturist Council to the show. Aravinda, how's it going today?

Ethan Peyton: Good, good. All right, I don't want to dilly-dally. Let's get right into it. And so I mentioned in the intro, you are an attorney in the startup space. Can you give us a little bit of insight into your background and fill us in on how you came to Venturous Counsel?

Aravinda Seshadri: Great question. And essentially I knew that I wanted to work with startups. I went to Stanford. There's like in Silicon Valley had that sense of this is exciting. Went to a big law firm that had some notable startups on the roster and quickly realized it's very difficult to do a good job for small startups at a big firm constantly on heart, large transactions like M and A's and IPOs. And you know, everybody's really busy. 

So these smaller clients ended up getting the short stick. Meaning working just with me, a very junior associate without a lot of experience or resources and who's also very busy. So I didn't feel great about that experience. And I joined a boutique law firm with a colleague who had worked there who felt similarly. And I was at Silicon Legal Strategy for eight years. I was a partner there for five years. And it was very different, really focusing on early stage companies.

But I'd always cared a lot about diversity. In law school, I was president of all these alphabet groups. And as a partner at my law firm earlier, I really tried to recruit, retain, and mentor a very diverse team when I left as a very diverse corporate practice. And so I then switched to founders and I thought, hey, let's help the founder community as well. And started these trainings for women, BIPOC, LGBTQIA founders. And I couldn't fill them out.

And I was shocked because our team was really diverse, even the partnership was. And I didn't understand why we didn't have more diverse led startups, because I knew they were out there. And I then realized, you know, it's, it's a lean, mean boutique. We don't have marketing. We don't do outreach. It's all based on referrals. And if you're the first person you're in community starting, you're unlikely to be in the networks that'll have access to us. And we generally prefer working with referred clients and that just means that it's kind of hard to break into that. 

And so on top of all the other challenges that diverse led startups had to deal with, I was like, wow, dealing with a big law firm with being the smallest fish in the large pond at the big law firm. Or sometimes working with a lawyer who doesn't know what they're doing and you don't know that until it's too late. That's just a lot. That's a big tax. And I didn't want these diverse led startups to have to pay that. 

So I started this law firm where we exclusively work with diverse led startups and our aligned startups, allies that care about diversity and emerging fund managers who are diverse or have a focus on improving diversity in tech. And so that's what led me here.

Ethan Peyton: Gotcha, gotcha. So it was really a focus on the who you wanted to serve that led you to start your own thing, is that correct?

Aravinda Seshadri: That's right, because I've been doing the same sort of work for like the last 17 years. And honestly, it is varied enough. It doesn't really get boring, but I was missing that element of, um, you know, meaning and mission, and I'm really delighted to have found it.

Ethan Peyton: Do you feel like you're kind of able to now support not just the makeup of whom, but also the kind of size of startups that you felt were being not properly taken care of from those early days? Do you feel like Venturous Counsel really hits those types of clients?

Aravinda Seshadri: Absolutely. And, you know, I think that's probably the highest leverage is the clients that are just starting out and literally know nothing because it's very intimidating and expensive to ask all these questions from your big law counsel. And it's terrifying to just. So the way I like to describe it is every founder I know has a section of their brain that is just low key freaking out about legal at all times, like a broken smoke detector that is just right here, seeing an awful and you can't do anything about it.

But if you find a trusted legal advisor that you can give that piece to, you can really up-level your own, you just have so much more headspace and bandwidth and it just unlocks a lot of capability. And I've seen that happen with certain clients and I just, I want that for more diverse led businesses in particular.

Ethan Peyton: All right, I wanna ask a question. You mentioned that a lot of the founders that you end up working with, and especially just through the years in general, are referral clients from folks whom you're either already working with or that you just know that are in your networking group. If I am a founder, how do I know that I am in the right circles or the right groups to be referred to the actual folks who are going to help me and not just have to Google startup attorney and find the biggest firm with the best SEO. How do I know that I'm in the right circles to get the right help that I need?

Aravinda Seshadri: hard honestly. I equate it to somebody who is driving a car and goes to the mechanic and is like I literally don't know the maker model. That's how complex it is. So it's not it's understandable that people feel bewildered. What I can say is reach out to your network. I mean do you ask around and then once you get legal counsel referred like ask for references to people that have worked with them and identify if there are people in your stage, if there are people

how it's been to work with that council. And understand too, like get a sense of cost because that paying for big law fees and else in itself is difficult and a stress around the business. But maybe that's okay if you're getting great support and you feel amazing and seen and respected. But if you're not getting either of those things, it's problematic. But you also have to be realistic that like legal in this area does cost money. And in order to start a business, you kind of have to figure out a way to be able to pay those costs.

Ethan Peyton: So we've got a couple of deep topics that I wanted to go into today, but I think actually going into kind of the basics of, you know, as you're mentioning, these founders that always have that space in their brain that is freaking out about legal stuff. And I've played that game, so I totally understand what you're saying. It's like, am I doing this right? If I'm not doing this right, am I gonna get, is there something that's gonna, you know, it's just always something. So let's, so let's go with the basics. When is the right time for a founder to begin a relationship with some sort of legal counsel? Is it right when I form my LLC or corporation? Is it before that? Is it when something is going wrong? Is it right before I do something that I think is going wrong? When's the best time to start?

Aravinda Seshadri: That's a great question. I think it's a sliding scale that depends on your reserves. So it depends a little bit on like how much money you have on hand. A lot of times getting legal counsel involved sooner will cost you more in the near term, but will save more money later. A really relatable concept that startups may be able to understand is technical debt. You can kind of think of it as like legal debt. And most of the things can be fixed. Very few things can't be fixed. There are some things that you really actually can't fix. And so...

I would say if you're creating an LLC, which means, by the way, you're probably not wanting to raise venture startup angel capital. You're creating something just to shield yourself from liability and you're, you know, you have an entity and it's cheap and quick and easy. And especially if it's just you, it doesn't really matter that much. And you can probably avoid having a lawyer until you need to make contracts with people. And then I would definitely recommend getting someone involved because, yeah, you could become a contracts expert. 

But kind of what a waste of your time. So, you know, and it's great and it's amazing to be able to work with people who do that all day. So I would say for that… it's one thing. If you are creating an entity that plans to raise venture angel funding, and it's a different type of entity depending on that, not everything can kind of fit in that framework. But if it's that kind of a business, there is a tool that I recommend. I promise they're not paying me. It's called Clerky.

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: Why Combinator companies know, know very well about it. It is the only online platform that creates formation documents that are like usable and have almost no fixes that I need to make. I'm saddened when I see somebody who created a, like an LLC on legal zoom, and then I have to convert it. And it's just so much more expensive than if you had done it right in the first place and Clerky allows companies to do that without necessarily needing legal counsel.

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: I think there could be some benefits to talking to legal counsel about, you know, what is a good allocation or what is my vesting schedule? A lot of that, however, can be addressed if and when you're like, okay, this says legs, this is going to get funding. Let's make sure all our ducks are in a row. So it depends. And I think the earlier you get legal counsel involved, the more you're paying legal counsel in the near term, the less you're paying overall. If that's helpful. Unless you're just messing it up. Yeah.

Ethan Peyton: Okay, so the earlier the better, unless you think it's going to stay small. Gotcha, so testing it out, that's an interesting concept. So is it, I mean, we are, this company that we work for, Truic, is big in the LLC space and the incorporation space and all that stuff, and we recommend to lots of small businesses that they do use the LLC as the kind of vehicle to kind of put their business in. But obviously, just like what you said, if you're going to raise capital or do some other more start-up-y complicated type things, it may not be in your best interest to use an LLC. And I don't think that we're necessarily here to diagnose every case of what should be an LLC, what should be a corporation, what should be you know, something different like that. But I'm wondering if there's ever a situation where somebody thinks that, you know, I'm going to run this business by myself or kind of in a smaller sense for a couple of years and then I might look into taking equity or fundraising in the future. Is there a space where starting an LLC first and then transferring it into some sort of other entity later makes sense or?

Aravinda Seshadri: Such a good question. I'm glad you asked it actually, because I do think there are a lot of situations where starting as an LLC makes sense. It's cheaper, it's easier, there's less complexity, and it's a more tax beneficial structure. So it's a flow through entity. So there's no second layer of taxes. For most startups, they're not actually making money right away. So I would say it kind of depends on what the timeline is. If you're like, I'm gonna run this for like six months to test it out, then I'm gonna convert.

Ethan Peyton: Is it more of a, if you ever think that you're going to get funding, you should start it this way.

Aravinda Seshadri: That's going to cost you way more than if you just started with the right entity. But if you're like, it may be two or three years before I decide if I actually want to get funding for this venture, then it does make sense to start as an LLC. And if you're going to make profits in that time, that may be a reason. And I'm also going to say, although angels and VCs are very biased towards investing in Delaware corporations, there are situations where the tax benefits to having an LLC.

Like you can like work something out. It's just a hurdle, right? For most companies, it's not, you're not making so much money right after that. That you're that, you know, it would be great if that was a problem, right? But, um, you're not actually making enough money for that LLC structure to be that valuable. And so it's kind of a timeline that I would say. Um, and if it's a couple years, it is cheaper, it's quicker, it's easier to manage. 

Ethan Peyton: All right, let's get into the first of the topics that I really wanted to go deep in today, and that's cap table and equity and that sort of type of thing, because I know it's something that you, especially if you're going to take funding through the any time in the lifetime of your business, this is something that should be top of mind almost all the time. And let's start off at the very beginning. Can you tell us what a cap table is?

Aravinda Seshadri: So a cap table is short for capitalization table, and it's really just a record of how much is owned by each member of the organization, right? And so when you initially start, it might just be you or you have co-founders and you decide on your split between equity between the co-founders. And the important thing to remember is that it is a percentage. You should initially think about this as percentages. Please don't write down percentages because those percentages change over time and there's an implication that you wouldn't be diluted in future. And that like is not the case for anyone. Even the best investor is gonna be diluted by future investment. So, but think of it conceptually as percentages. And initially it's like the founder split. And then the next question is, how much are we gonna set aside to provide for our service providers, our contractors, our eventual employees, our advisors?

How much are we going to set aside? And the way I tell clients is, again, very speaking very much to companies that are going to get funding or planning to get funding. When do you plan to raise your priced equity run? And that's actually a different question than it used to be 10 years ago, because now there's the prevalence of safes and convertible notes. Most companies are raising on that instrument first. And this kind of, you kind of ignore that because basically what that is, is kind of a coupon against future.

the priced equity round that you're going to raise. It's like giving them a discount for investing early, but everything kind of decided and addressed at that equity round. So trying to evaluate and like do a hiring plan, like plan it out, figure out how much equity you're going to give away in order to hire for the roles that you need. It's homework you need to do anyway for the business. It impresses investors that you felt that through. And then you can create a pool that's set aside. 

So if you had two founders that were 50-50,percent each and then you wanted to create a 10% option pool, then the capitalization table is going to be 10% option pool, 45% founder one, 45% founder two. So it's easier to think of it in terms of percentages. I also see founders thinking, oh, well, I'm going to eventually give away equity to, so I'm going to plan for that now. Don't do that. It's all going to be a new discussion and part of the new negotiation and one of the main terms of that negotiation is the valuation, which is translated into how much of the company am I receiving in exchange for the money I'm giving to the company. So it's all going to be subject to negotiation at that point, so it doesn't make sense to try and predict what that is now.

Ethan Peyton: So there are some things that we should always be looking at, but there are other things that we kind of shouldn't. Is it a waste of time to plan some things because they are going to always change in the future? They're always going to be negotiated in the future? Or is it just that we just shouldn't think of this stuff right now? What's, it seems like planning ahead is usually the best idea, but it sounds like maybe in this case, it's not.

Aravinda Seshadri: Yeah, I actually think in some ways it's not because it really depends on how well the business is doing, how successful you've been in creating connections with different investors and communities that would be interested in investing, how well you've shown traction and improvement and you know that this is an investable company, and it may depend on the market right and essentially what you need to understand is how much money am I going to need to do X, Y, and Z and then as a negotiation point, how much of the company am I willing to give to these investors to give up in order to do X, Y, and Z? And that'll be a negotiation like between you and the investors and the more investors at the table, the more you've shown progress, the more you might've been able to bootstrap some, that's all going to be helpful to you, but those are the underlying questions. And I definitely have also seen the fact that

It was really bubbly in the startup market for, I don't know, like a decade. And now as of like, uh, maybe I'd say fall, uh, no, sorry, spring of last year, it started getting a lot tighter and a lot more, not as bubbly, like more equalized and, and maybe dipping down to like being a little undervaluing. 

These companies instead of overvaluing them. And it's been whiplash for companies who raised a really good valuation and now they have to consider potentially a down round or they have to consider a flat round and I've seen companies die because people are not willing to take the ego hit of having to raise that lower evaluation than before. The ego hit the like a reputational issue and yet it's happening to so many companies and so if you're so fixated on, okay, I'm going to raise that at 20 million for the restaurant and then a hundred million for the... It can be kind of...

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: …self-defeating. Honestly, you don't want to just aim for 20. You need to aim for as much as you can get for your company at that stage. If somebody's giving you 30, maybe that's what that, you know, but if you were aiming for 20, maybe you aren't looking for that. So I think it all becomes a negotiation and trying to plan that too much in the future. It's better to use that brain space to just kill it with the company than to try and pre-negotiate anything.

Ethan Peyton: Okay, that makes sense. So there are a couple of specific things that I'd like to get your advice on that I'm sure that you've been asked by many founders. And it's all kind of in the context of how that cap table looks and how things should be split and what should be parts of the conversations when these things are coming into our purview. And I think that I've got these things kind of in an order that makes sense, but I'll let you tell me if I'm way off. And I think the first thing that we should talk about is maybe founder split, and how founders, if there are multiple founders, should think about splitting the equity of the company that will be built.

Aravinda Seshadri: That's such a good question, actually. And it becomes, it's really one of those things where it's almost as important to have the conversation as it is to actually arrive at the documentation. So you wanna not only talk about what is fair as between the different parties, people sometimes overvalue the work they've done already, but actually the best way to think about the work you've already done is in terms of vesting and giving yourself more vesting credit for being involved earlier.

What you really are thinking about is. Oh, yes, thank you. So most shares, shares when they're granted are just granted. But you can apply what's called what's called a repurchase option, otherwise known as vesting to those shares. And what that means is, while I may have all the shares to begin with, if I leave the company after two years and I have standard four year vesting.

Ethan Peyton: Can you quickly define vesting credit?

Aravinda Seshadri: With a one year cliff, which means I don't invest anything in that first year. And then I best all of the quarter of the shares at the end of the one year anniversary. If I've been there two years, the company will be able to repurchase my shares at my original price, which is probably pretty low for the shares I haven't yet vested. So I will get half of the shares that I was initially granted. And then the company will be able to repurchase the other half, ideally to hire somebody else to do the role that I was previously doing. 

There's nuances, there's acceleration and things like that. But when you're talking about founder shares, I think it's important to think of early involvement sometimes as giving you credit for having been involved early, so you may fully invest sooner. But that doesn't necessarily mean that you would own 90% of it. And it's really, you're trying to think forward. You're trying to think, okay, what does this company need going forward?

Although I was a critical role and I get some credit for that and get some shares for that, now we're at the point where we're evaluating who is owed what. And the it's pretty important to make sure that everybody feels like it's fair and that you're giving shares to people who are going to be critical to the company's success in the future. So a lot of times people do it, split it equal. And I think that's fine. And then they can adjust on the vesting schedule.

Sometimes it is the case that one role is just harder to hire for and more critical to the company's development. And that may be the role that gets a little more equity. But the key is that everybody feels good about it because founder disputes are like, I don't know. Core diet in the U S economy. Like they're just the underlying cause of so many problems and issues and like early deaths of really viable, important companies. And I do feel like having the discussion of what it would look like if someone left, what would be fair that they receive depending on how long they've been involved. All that stuff is almost as important as what you put in the documentation, because if somebody leaves and it's on bad terms, it can take the company and it really sucks.

Ethan Peyton: So I think what you're saying is really, really valuable in that arguments between founders is generally something that's going to explode the business. Do you think, not necessarily cap table and equity specific, but just in general of communication and people having an understanding, do you believe that there is a way to kind of structure these partnerships is really what it is between founders?

that will allow for less opportunity if there is a founder dispute later and one or multiple founders want to leave, that it doesn't have to kill the entire company. Is there a way to set it up to protect against that in the future?

Aravinda Seshadri: The strongest, most valuable element is having that discussion early on. Like what would it look like if someone left? What would it look like if someone just left because they were sick of it? Or if someone wasn't doing what they needed to, or if the other people booted them out. And, you know, like think about different scenarios of what could happen and what would be fair in those situations. A lot of times, most founders that leave in order for the company to then be investable, we need a separation agreement with the founder.

So it can't just be like, okay, I'm out, peace out. No, for the company and for the shares that you may already have, and for those to have value, we need to paper this so that you're not gonna come back later and like, wink a vie the company, right? So it makes sense to talk about that. And maybe you can build in, okay, if I leave and it hasn't been a year yet, but I feel, it wasn't for cause, it wasn't for not doing my job.

Maybe I would get some acceleration of shares. Maybe I would get a proportional amount. If I was there seven months, I would get seven months out of a four-year vesting schedule accelerated in exchange for signing the separation agreement that the company is already going to want. You don't even have to document that. Just like if people feel like this is fair and what's reasonable. Then also when there is a founder dispute, really communicate and be open and have those discussions because when it blows up, it's because somebody hasn't said anything to the other people and they think that their mind is being read and someone's poor performance hasn't been communicated. And then all of a sudden it comes out of the blue and then people feel really blindsided and emotional about it. And that's when people don't make great decisions. So.

Ethan Peyton: So in the beginning when founders are talking about how to split things and how things are going to look in the future, investing schedules and all that good stuff, do you recommend that they're speaking to, you know, some sort of council while this conversation is happening? Or do you think that they, that people will be able to kind of come to an agreement and put together, you know, some sort of contract without council?

Aravinda Seshadri: That's a great question. I think if it's straightforward, you could use clerk A for a lot of it. And the, the one, the worst situation I think is when you have founders who've been working for a while, there's something valuable there. Then there's a founder dispute and nothing has been papered. It sucks for everybody actually. But it mostly sucks for the company because there's no baseline for much to work. So getting that stuff papered soon is important. If you're not ready to use counsel, at least use clerky. It's super cheap. 

It's not that user friendly, I think. So if you need help or if you, their customer service is amazing. Figure out how to document that first. But I think most of it is just coming to terms as people about it. Like you're going to trust your founders a lot. You're going to have to be sort of through thick and thin with them. So it's important to establish that baseline. And if the folks are not kind of acting in that way to act quickly about discussing it and addressing it.

Ethan Peyton: Yeah, and it's a great litmus test. If you can't get through a conversation about how things are gonna go in the future, then maybe that shows that communication is going to break down in a spectacular way at any sort of problem. So yeah, I think it's a great discussion that we always talk about focusing on the work and getting to product market fit, but this may be something that you should spend some real time and thought on before you get started.

Aravinda Seshadri: It doesn't take long, but it's hard. It's a hard conversation, which is why people avoid it. And as with most conversations that you avoid because they're hard, they're less terrible than you think when you have them and man, there's a lot of benefits.

Well, so as I said, I think it's really trying to evaluate how many shares you're going to need for the hiring plan you have established up until the next equity financing. And, you know, don't lose sleep over this because you can always increase or decrease. But I do like to have my clients go through that process because if you math it out, if you allocated like 50% option pool and you're basing all the grants based on having issued that full option pool.

Ethan Peyton: All right, let's jump back into cap table and stuff. You mentioned this earlier option pool. How should we go about, how should we think about that?

Aravinda Seshadri: Over-granting shares to everyone, unless you really are going to issue 50% of the company before you, you know, to service providers. That would be unlikely, I think. But, and also, the way that the YC safe is structured, if you have a lot of extra option pull that's unallocated, it actually, that option pull doesn't dilute the safes when they convert. So, there are things you can adjust. Don't lose sleep over it, but it's a worthwhile exercise to go through.

Ethan Peyton: All right, so the next few things that I think are really important, they all come down to fundraising, but I think there's a couple of different types of fundraising, and I've got three things here, and you can tell me kind of how they fit together, how they don't fit together, how to think about each of them, and if there's something that I'm missing. And those three different types that I have are kind of like the friends and family rounds, and I guess I don't have the bootstrapping or the founders each bringing their own.

their own dollars to the table. So you've got, I guess then you have the bootstrapping, friends and family rounds, angels and VC funding. How should we go about thinking about each of those and how will they separately and differently affect the cap table as we move forward?

Aravinda Seshadri: So, excellent question. For the bootstrapping, usually the founders have a founders promissory note, which is a very small, I mean, generally not a huge amount. And it may be with like a schedule attached to show the amounts, like it's max amount that's approved. And then like you show the infusions of cash that you've made to the company over time. That is generally just repaid by the company once you raise funding.

You don't get more equity. You already have all the equity of the company or most of it. Um, so usually that's that, that scenario, if it gets to a large amount to the point where, you know, it is like a hundred K or something like that, then it may make sense to figure out a way to document that as a convertible equity, but at the same time, you don't want to give yourself a sweetheart deal. Like that's again, it's like trying to pre-negotiate the scenario against a future investor. You want to show that you care most about the company. You take like… I'll just take whatever the deal is that the new investors come in on. That's what my safe might be. And there's actually a safe that kind of gives you that. It's like a kind of an MFN most favorite nation. Safe will effectively do that. Yes.

Ethan Peyton: Okay.

Aravinda Seshadri: Well, I mean, it's yeah, I guess it is non dilutive because it's getting paid back, but it's from you. So most people and you're also the, all the company. So it's all kind of, you know, six of one half dozen of another. I would label that as awesome if you can do it. And a lot of people don't have as much savings to be able to do much of it. You have to have some, I think, to be able to really make a go of it and get the resources you need, but that's a nice thing.

Ethan Peyton: Quick question on that, since that money is generally being paid back, would you label that as a non-dilutive investment? Or non-diluted?

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: Friends and family is another awesome thing to have if you can. But oftentimes it doesn't have to be, you know, you're incredibly well connecting, you just know all these rich people. There are ways of having like roll up vehicles that allow for you to raise smaller amounts from other individuals that are accredited. And there are a lot more people are credited nowadays than there were when that determination of what is an accredited investor first was rolled out. 

The monetary thresholds haven't changed, but inflation and people have been making more money. There are ways to do that. That I think generally is going to be on a safe or a convertible note. Increasingly, I'm seeing safes. That is just an infusion of capital to get the company to the equity financing and basically give them a discount in the form of a percentage discount on the future round or a valuation cap. 

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: So the valuation cap for the safe round is 8 million. If I raise at a 15 million round, these shares will get the same rights as those equity investors, but they'll convert at an 8 million. So they'll get almost like two shares for every one share that the new money investors are making. So they'll almost get a 50% discount, which is why people actually prefer valuation caps. But with friends and family, it's kind of hard. 

You may not have a sophisticated party on the other side who can really assess what that value is. So sometimes you just do a discount or even more beneficial to the company as you do an MFN, which is like, look, I'm going to put in money. I trust that you're going to raise another safe round and whatever those terms are, we'll join on those terms. But that's not as helpful or protective to the investors. And then the third is angels. I would actually say some angels are starting to, some angels do lead rounds.

And some VCs are getting involved earlier and earlier. There's quite a bit of mix in between these areas. But I would say angel VC, maybe raise one safe round or two. Keep in mind that the YC safe makes it more dilutive to raise more than one safe or convertible note round. I'm getting into the weeds a little here, but I think it's an important point.

Ethan Peyton: Wow.

Aravinda Seshadri: Unless you make some tweaks to the standard YC safe, it's a post-money safe, which means that it includes everything you raise as part of the denominator. So all the converted safes, their own shares will be in the denominator. It's like a recursive analysis, which means that they won't be diluted by themselves or any other safes that are being raised. But the way the YC is safe, right, by the round itself. So it's post-money of that SAFE round is the concept.

The problem is the way it's written in the standard YC-SAFE, it includes anything. It includes SAFEs, convertible notes, and it includes future SAFEs, or convertible note rounds you might raise. So if you use a standard YC-SAFE, and you just didn't know, and you just use that and everybody signed that, and you're like, oh, I could raise another SAFE round, or I could raise another equity round, it's actually beneficial for you to raise an equity round, because they're diluted by that equity round, but they wouldn't be…

Ethan Peyton: Right, by the roundest health.

Aravinda Seshadri: …by another safer convertible note round, unless you're able to put something in there that gives the company more flexibility, which is something that we do with our clients. So, and then the equity round, I think is like, that's the way to think of things in terms of milestones. Like that's where you want your option plan to run to. That's when the notes get converted. That's the big dilutive event where everything kind of gets finalized or papered. The rights of the investor. Sometimes you'll have a preferred investor have a seat on the board.

Before that, that's generally not happening with safe investors. Um, so is that helpful to kind of walk you through the different batches?

Aravinda Seshadri: And another thing I want to mention is there is non dilutive funding, like grants or other structures where people are just giving you money for trying to help get your stuff off the ground, you may not have to repay it. Most of the time with those grants, there is time spent in applying for the grants and there is a skill set of doing that. So it's not just I wouldn't call it free money, but it is another way.

Ethan Peyton: Yeah, absolutely. Go ahead.

Aravinda Seshadri: The third thing I'll mention, just so people know and it's on their radar, if your company is making revenue, there's something called revenue-based funding financing, which is something newer that I hadn't seen, you know, 10 years ago or so, and it's a way of really aligning the investor and the company's interests. And that is non-dilutive because you're paying it based on the revenue that you're receiving and the more revenue you make, the more the investor makes, so it's really nice and synchronous.

Aravinda Seshadri: No, because you, I guess you could think of it in that way, but basically you're getting money now and you're cutting them in on the revenue that you're making. So the more revenue you make, the better for you, but also the more returns the investor makes. It's not necessarily like loan payback. It can be structured in many different ways. It could just be like that, a loan that is paid back out of revenue, but that's like any loan, that's like intended, but this is more.

Ethan Peyton: So that one's more kind of like a variable loan.

Aravinda Seshadri: There could be really good benefits to the investor, but you don't have to cut them in on your cap table and it may not even be like a debt that's showing necessarily on your financials. So it's just something to keep in mind.

Ethan Peyton: Mm-hmm.

Ethan Peyton: Alright, so there's one more thing that I want to talk about with this fundraising, and that's, I believe they call it preferred, I think preferred stock, or preferred payouts. You know, if we go into a situation where we IPO, or somebody is acquiring the company, this section of capital, or this investor gets paid out first before...

Aravinda Seshadri: Thank you.

Aravinda Seshadri: So there are a bunch of words, so you're not wrong. It generally applies to preferred stock, which is the stock that gets issued in that equity round, that like fourth stage we talked about. And it gets issued to the safe holders as well, but they're getting a lower, what the term is called liquidation preference. So, and you can have a liquidation stack, which is like a bunch of liquidation preference all pulled together. This is what you'd have to make before the common stock sees anything.

Ethan Peyton: The other ones, can you tell us a little bit about maybe what the right word for that is, and how that works?

Aravinda Seshadri: The important thing to note with that is it's very much downside protection. In a scenario. Well, the terms that I had seen for many, many years are one X liquidation preference, non participating. And I'll explain that a little bit. What that means is that I just get my money back before you get other stuff. Like whatever dollars I gave to you, I get those dollars back before the founders see money out of this transaction.

Ethan Peyton: Yes.

Aravinda Seshadri: And that protects me and that's just like, it's, you know, I get, yeah. I, and I could end up with zero because if there's nothing in the transaction or the company dies, then I don't get anything. So it's not really the same as alone. The important thing is there's a concept called participation where I would get my money back and I would invest and I would get more afterwards and that is, that has been out of mode for a long time. The economy is a little tougher now. So maybe I'm seeing.

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: People try for that, try for participating preferred, but I would generally say no, because what that does is a 1X non-participating liquidation preference means that the investors and the company are really aligned after a certain point. The company doesn't wanna accept just enough to pay back the investors ideally if they could. And the investors actually would prefer such a good return that they don't even care about what they put in.

They're going to convert to common and be paid out just like the common holders. So it really aligned incentives in a nice way while providing some downside protection to the investors. We've also started to see brewing returns where like that one X kind of increases a little bit over time, depending on how long it takes for the company to exit. Makes sense if you think of it as a loan, which I don't think investors should. But, you know.

I could have invested this in a mutual fund and received 8% each year. So you should be giving me that return as well. That's only because I think the economy is tighter and it can be harder to raise money. They're able to put those things in. But it helps because the larger liquidation stack you have, the larger the transaction has to be to actually for you to see a lot of returns out of it. So yeah, that's like apart from your own dilution, which is just you own less shares overall because you've given some to investors. That's another factor that will affect your eventual evaluation of an exit scenario.

Ethan Peyton: All right, so let's talk a little bit about hiring and firing. Now, we've talked quite a bit about how to find and vet team members on the show, but I know that your view of hiring is from obviously a different angle. So I'd like to hear kind of how you think about hiring.

Aravinda Seshadri: Yeah, and I'm going to say something that everybody knows, but that people don't talk about, which is that most startups are not hiring employees right away. There are some costs and efforts to putting in, like getting payroll started. And a lot of times people are just getting equity initially, maybe. And so they're hiring consultants. I don't know how kosher that is from a legal perspective. If they're actually really operating just for you, really they should be employees. But most companies decide.

Ethan Peyton: And what sorts of questions that you hear most often from founders and just your thoughts on hiring as a startup attorney.

Aravinda Seshadri: The risk that I'm taking and hiring this one individual for a short period of time, just until we get all of our stuff sorted as a consultant, it's not too high. And, you know, it also allows us to make sure that they're a good fit for the company and we're working well together. And then a lot of times, once they raise some funds, then they're able to onboard people as employees and they've already worked together and it's a lot easier. So those first employees, that's the normal trajectory. 

And I think the decision about hiring, what I would say is that those people are how the company's culture is built. It definitely comes top down to a large extent, but if you hire somebody who does not reflect the company's values for whatever reason, it's going to affect the company in that way. So you should just be aware of that. And that's like a crucial factor in those first hires. And it becomes less important the larger the company gets, but it's still always important. So you could just see.

It's really important on those early hires. The important fact I have to say about firing, every founder will have to fire someone. I can't see a situation where this doesn't happen for one reason or another. And how you go about that can have such a disproportionate effect on your outcome. I can put all the language and all the separation clauses and all the acceleration clauses I can into the paperwork.

But if you're a dick about how you terminate someone, you're gonna pay for it. And also don't be a dick. So my advice there is one, most startups think that they have communicated, most founders think they have communicated a lot more about performance and performance issues than they have. Whatever you think you've said, you haven't actually said nearly enough because people tend to not wanna talk about these things or be like, well, it's obvious they should know. And the reality is, no, nobody knows until you say it.

And ideally, follow it up with an email where in hold hard, like letters and words, you explain the performance issues and what you expect from this team member going forward. I would say 90% of the terminations that are tough, that hasn't happened. The communication about the issues, the feedback, the willingness to work with the employee to improve those things if they're willing to work for it hasn't happened.

So if you do that, like you've taken away 90% of bad terminations, I would say. And also a lot of times when people get that feedback, they're like, oh, maybe I am not a fit for this company. I'm not just going to sit here and cling on. I'm going to look for something else. And if the market is good, they may be able to find something else. And you kind of just don't even have to deal with this termination situation at all. So that communication, I'm a really big fan of open and honest communication. It is hard, but man, it's so valuable. And like.

If people just did it more, I feel like we just have a much better, everybody would be happier. We just have a much better situation. So the more you can do that with your team, especially who is, who are like people you're working with all day, uh, the better. And also, um, there is a stage where the company is kind of shifting from startup scrappy mentality to we need structures, we need systems, we need big team, we need to scale.

Ethan Peyton :

Mm-hmm.

Aravinda Seshadri: And that shift can be really difficult. And most people who have an excellent skill set at the first are generally not excellent with that second part and that I'll just put that out there. It's really hard to like the CEOs that I have so much respect for and have identified and without ego have been able to make that transition and bring in people as appropriate without being so grippy about I have to do everything, which is what we're trained to do with startups. But that is how the company can grow. It's kind of like being a parent. Right, so at a certain point, the more you let go, the more chance of success you're getting. So.

Ethan Peyton: Yeah.

Aravinda Seshadri: Absolutely.

Ethan Peyton: Yeah, you go from wearing every single hat as a founder to passing out those hats and the less, it's the more used to wearing all the hats that you get, the harder it becomes to start to just hand out those hats over time to really bring people in as more specialized employees as more, as compared to the early employees who really need to have a complete tool set, whether they're not perfect at everything, but they can jump in and fix this because it's on fire, and then they can jump in and optimize this thing because they know a little bit about it. Whereas, yeah, just like what you said, when you're getting bigger and you're getting a little more structure, hiring more specialized people. And it's tough, it's tough as a founder, for sure.

Aravinda Seshadri: Yeah, yeah. And sometimes people, the company grows out of the area that they're an expert at and that's okay. And that is like, everybody has different lives and skill sets, but it's hard and I encourage people to kind of be evaluative about where the company stages and like what it actually needs. And it may mean that the CEO steps back, it may mean something like that. And that's tough, but it's, I mean, companies that make the hockey stick, I think their management is thinking in this way.

Ethan Peyton: So quick aside on this, when do you start thinking about either hiring an internal HR team or even possibly bringing on like a fractional HR contractor or company to act as some of the HR for your company?

Aravinda Seshadri: I would say we are generally our law firm is the HR, the early HR department for companies and it costs a lot. It costs a lot. So, if you can internalize that at a certain stage, that is at least all of the stuff that HR can do. And then they can just use counsel as like, is this the right form? Does this make sense? Oh, we have a sticky termination. How are we going to handle it? That saves a lot of costs. So it becomes a cost benefit analysis and you can.

Ethan Peyton: Wow, OK.

Aravinda Seshadri: Work with your lawyer to understand what the burn is on HR related matters so that you can understand the right time to bring in your own internal resource. There are also fractional HR. Like I believe a lot of companies use Gusto, Zenefit, some of these like platforms that do that work. And that can help a lot. But there, when there are problems, man, it's really hard to get things fixed. And so it is helpful to have internal HR, even if it's just to just deal with like Gusto or whatever platform that you're using.

Aravinda Seshadri: No, not at all. I agree.

Ethan Peyton: Yeah. Well, those platforms definitely don't help with the communication either. They give you documents, they give you, you know, some kind of like frameworks to work within, but they will not communicate for you. And that's the hard part anyway, as you mentioned earlier. All right. Anything that we should talk about in hiring and firing before we move forward.

Aravinda Seshadri: No, I think, I mean, the key is you want a documentation with anybody that you've terminated ideally, okay, if it doesn't happen and you know, that's fine. But you first of all want documentation with anybody working for the company so that the intellectual property is properly assigned to the company that is it done. It's really difficult to go through diligence. You have to figure out what they did and take it out of your product. And that can be really difficult. 

So Ideally, you get this all, like have them sign the standard paperwork and that assigns IP. And then for terminations, you have to give them something. So that could be, make sure the laptop is cleaned of all of the important company confidential information, give them the laptop because it's depreciated in value anyway, and it may make things easier for them. Or some cash or some vesting acceleration. You have to give them something.

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: And a lot of times the soft things that you can provide, like, you know what, I'm gonna blast on LinkedIn that you're amazing and I'm gonna like to actively try and search for your next position. These sort of soft offers again, will result in a better outcome. And honestly, they're the right thing to do. If it, especially if it's a situation where you're terminating because you yourself misjudged the role or the company grew out of a certain area into another stage. I mean, that's what you should be doing anyway. And it also will give you a better.

Ethan Peyton: Mm-hmm.

Aravinda Seshadri: It is. That's right. So this is, I'm going to talk about the Eisenhower matrix, which is important, not important, urgent, not urgent. It's like a four by four. And people spend all this time on the not important urgent section, and they don't spend time on the important, not urgent section, which is for startup.

Ethan Peyton: Absolutely, it's the opposite of being a dick. All right, can you tell us, what is your number one piece of advice for early stage entrepreneurs?

Aravinda Seshadri: Who are the people that are going to eventually be strategic partners or eventual acquirers? Do you want to make those relationships? Yes. And those take forever to make. And you have to have multiple points of contact because people leave big companies and you have to identify who those companies are, who those people are, and start making overtures. And that is a glacial process compared to the speed at which a startup works. So what I tell my clients and everybody I can talk to is

Set aside a few hours on your calendar, maybe even just one hour initially, once a quarter. Eventually, maybe it's once a month and it's more hours. But investing a little bit of time each over time into identifying who those people are, reaching out, using your networks, making connections, and then really providing updates like, hey, we're gonna do this, asking for feedback, letting them know when you've achieved objectives. This creates...

so much value. This can be done for investors as well. Like what are the investors that you want to invest in your space and that would be helpful to you that can make connections. This can be done with anything, but it's so easy to forget that piece. And I've seen really amazing companies end up with this amazing product, but the investors are tapped out. They can't reinvest. We have six months of runway. We really need to sell this company, but we've done none of that work. And so we're just sailing around with limited runway and they just sell for way less than their worth and it's tragic. So, um, think of it as like retirement plan for the company, like something you invest in a little bit each month and it pays the evidence, let me tell you.

Put it on your calendar. Like put a chunk of time on your calendar and like actually at least think about it during that time and it'll make a lot. I think it'll make a huge difference.

Ethan Peyton: The Eisenhower Matrix. Make one and put stuff in it and then revisit it every once in a while. Make sure you're spending your time. Yeah.

Aravinda Seshadri: No, that's such a good question. So our website is www.venturistcouncil.com. I know it's too long guys, but it also our logo is cool. So, and we're on LinkedIn as well. You can find me or no qVenturous Council on LinkedIn. You can email me directly. Honestly, if you can spell it all out, you're in already.

Ethan Peyton: All right, Aravinda, this has been a ton of fun. I just have one more question for you, and that is where can people connect with you online, and how can our listeners support and learn more about Venturous Counsel?

Aravinda Seshadri: My name is Aravinda, A-R-A-V-I-N-D-A at VenturousCousel.com. If you have questions, if you need resources, I just love to be a resource for this community. That's why I started this firm. I just want to make sure there's more information out there and that people are matched up with the right resources so they can not just make it, but like kill it. Yeah.

Ethan Peyton: All right, thank you so much for coming on. This has been a ton of fun. I’m going to give you the last word. 

Aravinda Seshadri: I guess the last word is the journey is really hard to be a founder. So don't neglect yourself either. And don't neglect your relationships and the things that sustain you because it's like put on your own oxygen mask first, like make sure you're taking care of yourself during this journey. And it will have an outsized effect and also life is a journey. Like if you're just hustling and grinding for years and years to an eventual goal, like you're not enjoying the time, precious time we have here on Earth. So that's my advice.