Start a Company in 4 Days: A Step-by-Step Guide

Streamlining Startup Logistics: A Four-Day Guide

Launching a startup is often a complex undertaking, presenting numerous challenges and potential errors. However, the initial logistical steps of establishing a startup should be straightforward. Intricate equity arrangements and cap tables can lead to increased expenses related to legal counsel and administrative overhead over time.

The Importance of a Simple Cap Table

At Pulley, we’ve assisted over a thousand founders in constructing their cap table and defining their equity structure. This experience has highlighted the benefits of simplicity from the outset.

A Four-Day Action Plan for Startup Launch

This guide provides a practical, step-by-step approach to get your startup operational within four days.

Efficiently establishing your startup’s foundation is crucial for long-term success. A well-defined equity structure and a clear cap table minimize future complications and allow founders to focus on growth.

By prioritizing simplicity in these early stages, startups can avoid unnecessary costs and administrative burdens. This focused approach allows for a more agile and responsive business model.

The following days will be dedicated to implementing this plan, ensuring a solid foundation for your venture.

Establishing Your Company: Incorporation

Currently, it’s typical practice to formally incorporate a business even during the initial seed stage. Within the United States, startups frequently choose to incorporate as Delaware C Corporations, authorizing 10 million shares. This represents a common configuration facilitated by platforms such as Stripe Atlas and Clerky.

Following incorporation, crucial decisions regarding equity distribution to founders and prospective employees must be addressed.

The initial step involves determining the equitable division of equity among the founding members. No universally accepted standard exists for this process. Some founders opt for an equal distribution, while others favor a 49/51 split to maintain control. Variations, such as an 80/20 split, can occur when one founder dedicates significantly more time to the initial concept.

Ultimately, a successful equity split is one that all founders perceive as just. If consensus on a structure proves elusive, a thorough reassessment of team compatibility for a long-term commitment—spanning a decade or more—is advisable.

Typically, founder shares are subject to a four-year vesting schedule, including a one-year cliff. This structure incentivizes founders to focus on building sustained, long-term value. Any deviation from this standard should be well-justified, as investors generally anticipate this vesting arrangement and will inquire about any atypical configurations.

Establishing an equity pool is also essential. A common practice is to allocate 10% to 15% of the total shares for future employees. However, the optimal size of this pool depends on projected hiring needs and achieved milestones. Insufficient allocation necessitates costly legal adjustments to increase the pool size, while over-allocation leads to unnecessary dilution.

Determine the appropriate equity pool size by working backward from your anticipated hiring plan. Estimate the number of hires required and the desired equity grants needed to achieve key milestones before the next funding round. Include a buffer in this calculation to finalize the equity pool size.

Establishing Banking and Payroll Systems

For companies located in California, particularly within the Bay Area, several banking institutions are well-suited for startup needs. First Republic Bank, Silicon Valley Bank, and Mercury are all viable options.

However, established national retail banks can also effectively manage your financial operations.

During the bank account setup process, it’s crucial to negotiate favorable terms. Specifically, aim for no-fee wire transfers and the elimination of standard account maintenance charges.

Following the establishment of your business bank account, acquiring a corporate credit card is recommended for streamlined expense management.

Ramp and Brex are frequently cited as excellent corporate card solutions tailored to the requirements of startups.

Managing payroll efficiently is also essential. Consider utilizing platforms like Rippling or Gusto to automate this process.

These services often extend beyond payroll to encompass broader human resource management functionalities.

Choosing the Right Payroll Solution

• Rippling provides a comprehensive HR and payroll platform.
• Gusto offers a user-friendly payroll and benefits administration system.

Both platforms simplify payroll processing and ensure compliance with relevant regulations.

Day 3: Securing Legal Counsel

While many nascent startups can initially operate without legal representation during the seed phase, engaging a lawyer becomes crucial if your venture operates within a heavily regulated sector, such as healthcare, or if you intend to pursue equity financing.

Law firms generally fall into two categories: boutique firms and large-scale firms. Boutique firms typically offer more economical rates due to their lower operational costs. Conversely, larger firms boast extensive networks with numerous partners.

When selecting legal counsel, prioritize recommendations from established founders within your specific industry. Reputable lawyers will generally avoid excessive billing practices, and many large firms recognize the financial constraints of startups, often allowing for deferred payment of initial legal expenses – typically between $10,000 and $15,000.

The cost of legal services associated with a Series A funding round can vary considerably, ranging from $30,000 to $60,000, contingent upon the intricacies of the deal.

Employ your legal counsel strategically to manage and minimize legal expenditures. Request readily available legal templates for common documents like employment offer letters, employee stock option grants, and Software-as-a-Service (SaaS) agreements. Resources such as Clerky, Cooley Go, and Pulley also provide access to these templates.

A common error among first-time founders is to overly rely on their lawyer for business strategy. The primary function of your legal counsel is to provide legal guidance, not to dictate business decisions. Their input should be considered alongside other relevant information during the decision-making process.

Day 4: Strategizing Fundraising Efforts

Securing funding isn't simply acquiring free capital; the process inherently involves equity dilution. The primary objective of fundraising is to assemble a capable team capable of achieving key milestones, thereby positioning the company for subsequent funding rounds.

Begin by working backward from your desired milestones to accurately calculate the necessary funding amount.

Determining Company Valuation

Prior to initiating fundraising, establishing your company's valuation is crucial. This process is often subjective, particularly for early-stage ventures lacking established revenue or a finalized product. Investors largely base their decisions on the potential of the idea and the overall market opportunity.

A common valuation method involves analyzing comparable companies within your industry. Seeking feedback from trusted sources can also provide valuable insights.

Presenting Valuation to Investors

When engaging with potential investors, have a clear valuation figure prepared and present it with assurance. Regional differences exist; investors in the Bay Area generally exhibit less sensitivity to valuation compared to those on the East Coast.

Funding Amount and Milestone Alignment

The amount of capital you seek should directly correlate with the personnel required to reach your predefined milestones. It’s strategically advantageous to set realistic expectations, increasing the likelihood of success.

Aiming to raise $1 million and exceeding expectations with $1.5 million in investor demand is preferable to planning for $2 million and falling short.

Choosing the Right Investors

When accepting funding, prioritize professional investors who comprehend the inherent risks associated with startups. The statistical probability of startup failure is significant, and it’s vital to avoid jeopardizing personal funds.

Specifically, refrain from accepting investments from family members that could compromise their financial security.

Equity Dilution at the Seed Stage

There's no fixed standard for equity dilution during the seed stage; it varies by industry. Capital-intensive sectors, such as healthcare, typically require larger funding rounds and consequently experience greater dilution than, for example, Software-as-a-Service (SaaS) companies.

Analysis of approximately 1,000 seed-stage capitalization tables at Pulley indicates that most startups relinquish between 15%-20% of their company equity.