The last nine months have been a practice in self discovery — I’ve been keeping myself busy trying out startup ideas, consulting, and talking to investors and other entrepreneurs.  I’m pleased to say that the search has been postponed for now.  I’m working on MemCachier, a better memcache for Heroku.  And I’m working on it for the long run.  We’re going to turn MemCachier into a thriving business, and I’m stoked for the opportunity!

MemCachier provides a caching service to web developers that gives them an easier, cheaper way to scale their website.  Currently it’s available as an addon in Heroku.  Nerd stuff, I know.  But the reality is that I’m a nerd and I’m good at nerd stuff.  I couldn’t be more excited.  I’m working with Amit and his lab mate, David – the three of us make a great founding team.

Amit started building MemCachier about six months ago.  He launched it in private, then public beta on Heroku.  And earlier this week we launched into general availability.  Times are very exciting, and I’m stoked to have been invited by Amit to work on this with him.  My primary responsibilities will be on the business/company side of things, although I expect I’ll write a little code here and there as well.

MemCachier isn’t an entirely new concept — memcached has been around for a long time for websites who manage their own servers.  But memcached hasn’t yet been offered as an easy, managed solution in the cloud.  Enter MemCachier: the primary goal is to make caching easy for developers.

Anyway, I thought I’d update you guys with what I’ve been working on.  If any of you use a cache in Heroku, EC2, or anywhere, I’d LOVE to get your feedback.

I originally envisioned BreakStreak helping me and my friends be better about getting into a routine such as cooking more, working out, running, etc.  Rather than build a full fledged product, with a mobile app, complex reminders and check ins, and payment processing, I thought it’d be great to run an experiment first.  BreakStreak.com makes its users think they’re using a real product, complete with all sorts of fancy features.  But really they’re using a totally empty, fake product that’s tracking their usages in the background.  Cruel, I know, but this experiment let me disprove my original hypothesis that BreakStreak is a good implementation of my original vision.

The Product

BreakStreak is essentially a wizard that takes the user through a few steps.  The user is asked what routine they want to get into, along with a desired per-week frequency.  Then they’re prompted with a description of the product, and a few mechanisms for tuning their incentives — reminders, donations to charity if they fail, and guilt from friends.  Finally, they’re asked to create an account.  After creating an account, they’re directed to a page that explains this experiment, apologizing that BreakStreak isn’t actually a real service.

The Experiment

I wanted to see how far along in the wizard customers would get.  So I built the wizard such that only the user’s progress was stored, not the actual data associated with their routine.  For every single user I know exactly what part of the wizard they stopped at, what data fields they filled out (but not the values), and when they gave up with the wizard.

The Results

The results were very surprising to me.  Of 271 page visits, only 4 (1.5%) actually created a real routine and a real account (another 8 created test accounts).  Keep in mind, too, that those 271 page visits came from friends who found BreakStreak through my Facebook and Twitter posts — they weren’t a fair representation of the average consumer.

Furthermore, of those 271 page visits, 119 (43%) actually filled out the name of a routine (running, gym, etc.).  And of those 119, many were test routines such as “make sexy time,” “test,” and “masturbate.”  I built a little dashboard that models the funnel and the choice of incentive:

(You’ll notice in the chart that 12, not 4 finished.  8 of those finishes were tests, not real routines.)

Conclusions

My BreakStreak experiment proves two things: people want to be better about getting into a routine, and BreakStreak isn’t the solution.  The 43% conversion rate when prompted for a routine is very high.  However, the 1.5% final conversion rate shows that the product has fallen short of its original vision.

I built the BreakStreak experiment in about two days, whereas the real app would have taken me many weeks.  I was able to save tons of time otherwise spent on development by running an incredibly meaningful survey.  Instead of asking my users if they’d pay for something, I gave them a product experience that was real and let the results dictate their buying patterns.

I’m incredibly happy that I made the decision to run this experiment instead of wasting my time building the whole thing.  I’m stoked about the results, even with with (mostly) negative outcome.  Now I can rethink the original BreakStreak intention and either build a new/improved product or move on to my next idea.  (For now I’m choosing the latter.)

I’ve always been a fan of the Lean Startup movement, and this experiment drives home the importance of experimentation, at least for someone like me who’s relatively inexperienced building consumer apps.  Not to mention my sub-par design skills ;).

I’ve been asked by several investors lately why I want to start my own company.  I originally answered with the benefits — I want to make an impact, I’d love to not have to worry about money, I want to be able to provide positive influence to both our customers and employees, etc.  But I think what’s at the core of all of this is creativity.

I’m not creative in a traditional sense.  I can’t draw or paint, I can’t write my own music, and I can’t write fiction.  In fact, this blog has been my most enjoyed creative outlet.  Although I’ve longed for something more.  I’ve longed to have creative control over a business.

Startups can be brought from nothing to something in so many different ways.  Some of them attack a large market, others create an entirely new market.  Some hire consultants, others hire full-time employees.  And some bootstrap while others take investment.  Entrepreneurship really is an art, fueled by a different type of creativity.  Instead of painting a canvas or writing a bridge, entrepreneurs express themselves by creating a business.  We see the world differently and address that difference with a product or service that changes things in the same way music or art does.

Decisions to raise money, build a new feature, hire a new employee, make a new partnership, or change our brand or messaging are all creative decisions under the umbrella of entrepreneurship.  These decisions, and ultimately our product or service, are our canvas to communicate with the rest of the world.

I’m doing my own company because it’s the most effective way for me to express myself, given my skills and interests.

What follows is a very detailed description of how to raise money for your startup.  The advice mostly comes from the experiences I’ve had over the last few months trying to raise a seed round for a startup I’m doing.  I’ll start by introducing the steps and go into much more detail below.

1. Meet investors, hopefully through referrals.
2. Get a formal meeting setup and an opportunity to spend 60 minutes on your pitch.
3. Get a second meeting to talk to more partners at the firm; also start talking about investment terms.
4. Find more investors once you have some interest and high-level terms.
5. Close the round by finalizing terms and collecting money.
6. Yay you’re funded!  Now the real work begins.

And while I’m here, I’d like to clear up a common misconception in the tech world.  Raising money is not easy.  Yes, there’s a lot of money out there.  But it’s completely silly to think that you’ll be able to get some of that money without effort.  Investors are smart and care where their money goes.  If money comes easily you probably aren’t working with a good or smart investor, unless you’re already a big deal.

1) Meeting the investor: to pitch an investor you need to meet them first.  Most of the time you meet them over email — either by cold-emailing them (which basically never works in my experience) or by getting an introduction from a colleague or friend who knows them well.  Sometimes, too, you’ll meet them at conferences, tech events, or serendipitously in public.  Regardless, your goal in meeting them is to get a commitment to have a formal meeting.

This can all happen in one of two ways.  If you’re getting an introduction, you’re already set.  The investor will almost always take a meeting with you because someone they trust is referring you.  The best way to meet investors is to be referred.

However, if you aren’t getting introduced, you have to rely on your elevator pitch.  You need to be able to describe your idea in a sentence or two, and your goal is to grab their attention.  You need to convey your idea and intrigue the investor before they stop reading your email or start ignoring you.  Start with a few quick sentences about the problem your idea is solving, and from there be prepared to talk about the team, the story that led you to your idea, your plan for executing product-market fit, and your plan to grow.  The best advice I have is to be incredibly excited, passionate, and energetic — these are the best qualities an unknown entrepreneur can have.

2) The first formal meeting: now is your chance to really get them excited.  You’ll work with the investor’s admin to schedule a meeting, which will likely be 60 minutes long, though sometimes can be shorter.  You’ll likely be told who the meeting is with ahead of time, which will probably be with the investor you spoke with, along with another partner or associate or analyst.  And the meeting will almost always take place at the firm’s offices.  Although coffee shops and restaurants are common, too.  The CEO of your little startup will almost always take the first meeting, although all the founders can attend if they aren’t busy writing code.

Learn about the Investors
Start by asking the investors about themselves — learn about their backgrounds (you probably should have done this before the meeting, too), see what types of investments they’ve done, and understand why they’re in the investment profession.  Knowing their backgrounds will prepare you to cater your pitch more directly, and will give you more to relate to them with.

Tell the Investors about Your Team
After you know about the investors, tell them about you and your team.  Unless you have a product that is already performing extremely well, the investor is going to be more interested in the founding team than the product or idea.  Spend 5-10 minutes telling them about the founders’ backgrounds — where you each have worked previously, what you’ve accomplished, your general skills and interests, and why you’re going to be capable of making a successful startup.  If you got an introduction tell the investors how you know the person who introduced you.  The goal here is to convince the investor that you can start a successful company.

Once you’re done talking about yourself, you’ll want to transition into talking about your startup.  This can go one of two ways: either you have a vision, or you have a product.  Your pitch will be different in each of these cases — I’ll cover both below.  Though keep in mind that there’s really no right way to pitch investors — you need to tell a story that will inspire them in such a way that they’ll give you thousands or millions of dollars.

Pitching a Vision
Pitching a vision is mostly about defining a problem and solution, and showing that there’s a big market of people or companies that would buy or use said solution.  Pitching a vision can also be about a belief in the distant future, in which case your vision isn’t about solving a problem but instead about creating a new market entirely, just like the iPad did.

Pitching a vision requires that you have a good background, at least in most cases.  Without a product the investor won’t know what you’re capable of unless you’ve accomplished a lot earlier in your career.  They won’t invest in someone they don’t have confidence in with just a vision — they need to know you have the skills to execute on that vision.

The benefit to pitching a vision, though, is that you don’t need to have all the answers just yet.  You don’t need to know exactly how you’ll grow, or exactly how your product will mature.  Of course, you’ll need to have some idea about how you’ll do these things.  But especially if you have an incredible background, you can answer tough questions with, “We don’t know yet, but we’ll figure it out as we go.”  Many investors won’t invest in you, but the ones who believe in you will.

When pitching a vision don’t let the meeting get caught up in hypothetical issues around product and growth.  You probably don’t know the answers to hard questions.  Don’t try to answer them unless you have good, well thought answers.  Trying to answer them will put you on the defensive with an idea or plan that is already pie-in-the-sky, which will make for a very negative, unproductive meeting.  Don’t let the pitch focus on the challenges, let it focus on the opportunity and potential.

Keep in mind, too, that in most cases getting investment with just a vision will yield worse terms.  This might be OK, but keep in mind that the investor is taking a bigger risk investing in you without a product, hence the investor will receive more stock for less money.

In summary, consider the following points when you’re pitching a vision.

• Either have a very clear story around a problem, solution, and market size, or
• Have a very big, long-term picture of something new and different.
• Don’t get caught up in debating hypothetical growth or product strategies — have good answers but don’t let the meeting turn into a hypothetical debate.
• Make the pitch about the the founders’ ability to create something new and big.

Pitching a Product
Pitching a product or prototype is generally much easier than pitching a vision.  With a product the investor will know very clearly what exactly you’re doing, how well you’ve executed on the idea, and how the product can grow.  However, be prepared to be able to answer hard questions about how much growth potential you have, how you’ll make money, and how the product will develop.

When you have a product spend half of your pitch on the potential of your product, and spend the other half on your demo.  After you’ve described yourself, talk at a high level about the product and show how you think it can make an impact in your customers’ lives.  Then transition to a demo.  Have a good demo prepared, with real (or real-looking) data, and know exactly what you’ll show them and why.  Show them amazing things that customers and users have done with your product.  Show them that your product has substance.  Show them metrics that you have around engagement and traction, even if they aren’t good yet.

You won’t have any issue getting investment if your product already has a lot of traction.  Pinterest and Instagram never had any issue getting funding once their products started blowing up.  But chances are good that you’re raising money because you need help getting your product to take off.  If this is true of your startup — that you don’t have market traction — you need to be able to demonstrate to investors that your product has the capacity to grow.  You need to show them that you have a very clear go-to-market strategy, or a strategy for finding and acquiring users and customers.  A product without an obvious potential to grow won’t be appealing to a lot of investors.

In summary, consider the following points when you’re pitching a product.

• Your pitch should be part big picture and part demo.
• Be ready to answer hard questions about user behavior and growth.
• Be ready to show metrics, or at least answer questions about them.
• Have a very good strategy for selling and marketing your product.

3) The second meeting: if you get a second meeting you’re probably in good shape — the investor you originally pitched to in the first meeting likes you and/or your idea.  The investor now has two goals with the second meeting: get other partners to approve of the deal and talk about terms.

Most firms will require that multiple people approve a deal.  Only in some cases with very small seed funds and angels will you be able to accept money after speaking to one person.  You’ll likely need to give the same pitch you already gave, or at least an abbreviated version, to a larger audience.  You’ll also need to answer even harder questions that the investors have been thinking about since your last meeting.  Be as prepared as you were in your first meeting — this meeting is going to be a lot harder.

The second meeting is usually when investment terms are discussed, too.  You may not have a term sheet just yet, but you’ll at least be able to debate the high level terms around a deal.  If you’re doing a convertible debt round, you’ll talk about the value cap and discount at which debt converts to equity.  If you’re doing a VC round, you’ll talk about valuation, percentage ownership, and board dynamics.  Of course there are other terms, too, but in general the terms I’ve listed here are the big important ones that are debated first.  I’ve written previously about how investment terms work if you’re interested in more detail.

Go into this second meeting with a rough idea around what you want your terms to be.  Have a sense of how much of the company you’re willing to give away, how much money you want to raise, and why.  The amount of money you want to raise should be a function of what you need to be successful from a team and infrastructure point of view.  And raise enough money to give yourself at least 6-12 months of runway — plenty of time to take your startup to the next level.  The more runway you get, the more of the company you’ll give away.  So find a balance that you’re comfortable with.  And keep in mind, too, that sometimes terms are discussed briefly in the first meeting.

4) Find more investors: the chances are very low that the first investor you speak to will give you as much money as you need and good terms to match.  This is especially true for seed rounds.  The chances are good that you’ll need to find other investors, either to give yourself better debate fodder around terms, or to find a bigger audience to raise more money.  If you decide you need to speak to other investors, ask the first investor you spoke with to introduce you to their friends.  And go out and do whatever you can to find new investors.  Ask the first investor if you can mention their name and their interest to invest when speaking to other investors.  Hopefully the answer is yes, in which case other investors will be far more likely to invest in you knowing someone else will invest, too.  All of these new investors you find will invest on the same terms — be sure to discuss the terms you’re considering with the other investor.

You can skip this step entirely if you find an investor that you like, gives you enough money, on terms that you’re comfortable with.  Usually, though, you’ll need to find more investors.

5) Corral investors and close the round: OK, you’re in good shape.  You’re pleased with the investors who are interested in investing and you’re comfortable with the amount of money you’ll raise and the terms on the investment.  Incorporate your company if you haven’t already and create a bank account.  If your round is being led by a firm or individual, the chances are good that you’ve already sent a term sheet back and forth.  If you don’t have a lead investor, have your corporate lawyer create a term sheet for you and send it around to all the investors you want involved.  Considering you already spoke to them about terms, there shouldn’t be any surprises and they should be comfortable signing and writing a check.

A common misconception at this point is that the investor will drive this whole process.  No way.  The CEO’s full time job at this point is to get on the phone and meet with these investors until papers are signed and money is in the bank.  You need to make the effort to get the papers signed and the checks written.

6) Round: closed; now the real work begins: congratulations, you suddenly have a lot of money in your newly created bank account.  Now the real work and fun begins — you’ll start hiring, building, hiring more, marketing, selling, and doing whatever you need to do to turn your product or vision into a company.

Chances are good that you’ll need to raise more money at a later stage of the company.  Staying on good terms with your existing investors is in your best interests.  They’ll be the first to invest more money if they continue to like you and if you continue to do well.  They’ll also help you to be more successful, both in later fundraising rounds and in daily issues.

Working with an investor is like getting married — don’t marry someone you don’t respect. Don’t take investment from someone you don’t want to work with.

Many of you have asked me what the difference is between raising a seed round vs. a venture capital round.  I’ll explain the mechanics around each round, including the most common negotiation points, and then go into why you’d want to raise one round vs. the other.  I’ll start by explaining a venture capital round, and eventually explain that most early stage companies should consider a seed round.

Venture Capital Round: Explained

A venture capital round is an exchange of money for stock.  Venture capital rounds are referred to as Series X, where “X” is “A” for the first round, “B” for the second, “C” for the third, and so on.  Before any money is raised, the company’s shares are distributed amongst the founders and employees.  All of these founder and employee shares, with very few exceptions [1], are common stock, the same stock that you could buy from a public company.  A venture capital firm will purchase a certain percentage of the company in exchange for a lump sum of money.  The percentage they purchase is usually new shares that the company grants to the venture capital firm [2].  For example, if the company has 10M shares before the round, they may have 14M after the round, where most of the new 4M is owned by the investor.

The shares that are bought by the investor are preferred shares, which have certain preferences to common shares.  One of those preferences is liquidation.  In the event that the company is sold or goes public, the investor has first right to sell their shares.  For example, if a venture firm gives Compay Foo $5M and Company Foo later sells for $6M, the venture firm that backed them will get their $5M back and the remaining $1M will be distributed among the share holders.

In addition to getting preferred shares, the investor will almost always get at least one board seat, which more or less gives them more power and control.  You can read more about what the board does in Fred Wilson’s post last week – you’ll learn that board seats don’t have to be about power and control.

The venture firm wants to give the company as little money as possible for as most stock as possible.  The more stock the company gives away, the more diluted the founders’ and employees’ shares get (read: the lower their percentage ownership becomes).  The founder, on the other hand, wants to raise as much money as possible and give away as little shares as possible.  More on this later when we talk about negotiating.

The relationship between the amount of shares owned and the amount of money given is a function of the company’s valuation.  Let’s say Company Foo has a valuation of $7M before they raise any money, and Company Foo raises $3M from a venture capital firm.  That venture firm now owns 30% of the company ($3M / ($7M + $3M)).  We’ll see later that valuation is something that can be debated, too.

Typically a Series A investment is on the order of millions of dollars, and as the rounds go on to Series B and so on, the dollar amounts go up and the percentage ownership goes down.  It’s a risk equation — the earlier a company, the riskier they are to invest in, and the more ownership the investor should get for a smaller amount of money.

In summary, a venture capital round is an exchange of money for preferred shares and a board seat.

Seed Round: Explained

A seed round is still an exchange of money for stock, but usually this happens in the form of convertible debt.  Instead of the investor giving you money for a percentage of the company, the investor gives you money that will, at the time when the company is sold of raises a series A, convert into preferred shares.  Seed rounds are done by a wide range of investor types:  Angel investors, wealthy individuals; Angel groups, groups of wealthy individuals; seed funds, investment firms that only invest in early companies; and venture firms with seed funds — many venture firms have funds that are geared for much earlier companies.

Raising a seed round basically lets you avoid having a discussion about the value of the company.  As we’ll see later, you’ll raise a seed round when you’re very small and very early.  Trying to associate a valuation to a team with no product, or a product with no traction, just doesn’t really work.  The entrepreneur won’t be able to argue for a good valuation, which will give the investor a huge ownership for very little money.

The debt that you take from these investors converts when the company decides on a valuation, which happens either when the company is sold or when the company goes for a Series A.  And the debt converts according to that valuation.  Let’s say Investor Bob gives Company Foo $100K of convertible debt.  Then Company Foo goes and raises $5M on a post-money valuation of $10M.  Investor Bob’s debt will be worth 1% of the company ($100K / $10M ).

Seed round investors can protect the way their debt is converted by setting a valuation cap and a discount.  The valuation cap is the maximum amount of post-money valuation that their debt will convert at.  If we look at Company Foo and Investor Bob again, let’s say Investor Bob gave $100K with a $1M value cap.  Investor Bob’s debt will convert into 10% ownership ($100K / $1M).

The convertible note, in addition to having a valuation cap, can have a discount, too.  The discount is applied when the valuation cap isn’t reached, and it just means that the debt is converted at a discount.  If Investor Bob gave $100K to Company Foo with a $5M value cap and a 20% discount, and Company Foo later raised a Series A that valued them at $4M post-money, Investor Bob would get  3.125% ($100K / ($4M * 80%)) instead of 2.5%, which is what he would have gotten without the discount.

A seed round can be as small as tens of thousands of dollars, or as big as a few million dollars.  It all depends on how much money the founders think they need, and how much of the company the founders are willing to give up.

Lastly, a seed round usually doesn’t come with a board seat, although sometimes if one single investor gives a large sum of money, they may ask for one.

In summary, a seed round is still an exchange of money for ownership, but the ownership amount is determined at the time the company is valued.

Venture Capital Round: Negotiations

Disclaimer: I’ve never negotiated a venture round before, so what you see below is not anecdotal, but instead comes from everything I’ve learned through friends and coworkers.

Lots of different terms can be negotiated in a venture round.  The biggest and most commonly debated terms are the valuation, the dilution, and the board dynamics.

Again, the venture firm wants to maximize their ownership and minimize their dollar investment.  They do this by trying to negotiate a low valuation and big dilution.  If the company is doing very well they’ll have no issue negotiating a higher valuation and a lower dilution.  But said company will need to create a market for themselves by trying to find more than one firm who will participate, unless of course they find an investor right off the bat that gives them a deal they’re comfortable with.

Valuation is a weird thing.  It can be decided by the company’s revenue, growth, and growth potential.  But really it’s decided by a market.  In public companies the valuation is decided by the demand for buyers — more interested buyers increases the valuation.  The same is true for a startup, except that the startup is only considering a few different buyers (venture firms).  The negotiations that go on between these venture firms and the company will create the market and set the valuation.

Lastly, the investor wants to have a seat at the board.  As Fred Wilson pointed out, this should be a good thing.  The founders shouldn’t be scared of giving a vote to an investor — they should be excited to have an investor helping them make decisions.  But often founders do get scared by this and try to negotiate for more control over the board.

Seed Round: Negotiations

Seed round negotiation is far more simple.  You go out and try to find a few investors that you’d like to work with and set terms with them.  You debate the valuation cap and the discount, and once you settle these terms with one investor, all other investors participating in a seed round either accept or don’t — all investors in the seed round should get the same terms.

Why choose one type of round over the other?

You should raise a seed round if you’re very early, either without a product, without a team, or without traction.  The seed round will give you plenty of money to build your product, grow your team, and find a product-market fit.  You’ll be able to raise money without giving away much of the company, you won’t have to worry about board meetings, and you won’t need to worry about figuring out a way to value your little company.

If you raise a seed round and you use that money to accomplish a lot and grow, you’ll then go off and raise a Series A.

Companies will skip a seed stage and go strait for a Series A in very few cases: either the company is being founded by an incredibly amazing team; or the company is doing ridiculously well.

—

[1] Google founders introduced a class “F” share type which had higher voting rights and was only granted to the founders.  They were only able to get away with this because they were doing so well.  Ultimately the class “F” shares give the founders more control over the investors, no matter what, a deal that’s hard to argue when you’re not doing as well as Google was doing at the time they raised money.

[2] Sometimes the company will decide to sell common shares to the investor instead of creating entirely new shares.  In this case the founders or employees will sell some of their shares to the investor, but the individuals get that money, not the company.  This situation happens, but not that often.  And when it does happen, the founders will choose which employees get the liquidation — they won’t open it up to the whole company.

Bret Victor has an amazing talk, “Inventing on Principle,” where he shows the importance of immediate feedback to help us create beautiful and innovative things.  His thesis struck a chord with me in many ways, but mostly in the way that software can be built.  I’ve realized that for me agile development is about enabling creativity.

Agile development lets us try new ideas with very little risk.  Whether the new idea is a small UI tweak or a big new feature, agile and a good sense of minimum viable product (MVP) create a software development paradigm that lets us iterate on ideas very quickly, seeing how they work, nixing them when they fail, and seeing how something works with the smallest feedback loop possible.

Artists can see their art as they make it.  Musicians can hear their music as they write it (at least most of them ;).  Builders see what they build as they build it.  A software product is only seen by its creators when it’s used by other people.  Usage is the purpose of software.  Without usage, and especially without quick usage experiments, software can’t get outside of the minds of its creator.  Living in a box and building a monster product is like painting with your eyes closed.  If you’re really, really good, your software will be good, too.  But probably not.  Agile development lets software be as creative as art, music, or anything else.

Now that TownSquared is an official corporation, I’ve had to go through all sorts of processes and forms to get things up and running.  I thought I’d share that process here in case others were curious.

First step is to get a tax ID from the IRS.  You do this with a SS-4 form, and it takes about 5 minutes to fill out.  With a tax ID number you’re able to open a bank account and start doing payroll and what not.

The next step is to choose a bank to bank with.  Silicon Valley Bank (SVB) is a pretty popular choice for startups because they don’t have any fees and they have a huge collection of services for both extremely small and extremely large companies.  I have heard of some startups banking with larger consumer banks, such as Citi, Chase, etc, but SVB seems to be the norm. From what I can tell, as long as you don’t get charged fees you’re good.  And of course, make sure whatever bank you choose will be able to support you as you grow.  For example, you’re not going to want the $5M from you series A to go into a checking account.

The founders also need to do 83(b) elections, which is basically a way to avoid getting taxed like crazy for the millions of shares you purchase for a very small amount of money.  Speaking of which, the founders need to write checks to the corporation to purchase their restricted stock that comes along with being a founder.

Lastly, something to be aware of, if you’re doing business in California (and probably other states, too), the founders will need to be paid minimum wage.  This usually doesn’t matter, but if founders don’t pay minimum wage and one of the founders gets asked to leave, they could technically sue the business because they didn’t get minimum wage.  From what I’ve heard litigation sucks.

What ends up happening is that founders will either not pay themselves and bank on the hope that they won’t get into a fight.  Or founders will give money to the company (via an official note) and pay themselves the California minimum wage.

Of course paying yourself means you’ll need to setup payroll, taxes, accounting, and all the other glorious things that I haven’t gotten around to yet.  I’ll write about them when I get there :).