pdshrader

Just want to say thank you for this! I used similar settings from Lampasas, TX (about 90 miles from Austin) and the photos came out great! Hope your part of Austin cleared up in time for you to catch some!

What a lovely story and well-explained!

This "third way" is only really possible if you're strategically aligned with the "one round" investors you have. It's easy to point to a few companies that have gotten buy-in from their investors and generated a multiple of 100x returns, but for the vast majority of companies that raise one round, their investors are still going to push for "swing for the fences" returns - which usually means recommending raising more money.

Consider:

- Venture capitalists are generally funded with a 2% management fee and a 20% carry. AKA their limited partners (investors in the VC fund) are looking for returns over 10 years that are better than an index fund, even burdened by those extra fees. In other words, they've only achieved the most modest of success if they have a 3X overall average return, and are incentivized by the carry to aim for much much higher returns.

- VCs only make money if they can sell the shares. I.e. there's an M&A event, an IPO, or a secondary market.

- Even without a majority share, VCs generally get "preferred share" rights, which include the ability to force a company to have a public offering/sell itself (These are called "registration rights" in the Investor Rights' Agreement). Granted these haven't been used frequently in the last decade and a half, but it's a potential hammer that VCs can wave if a founding team/management decide to try to just run a company as a smaller profitable enterprise.

Startup lawyer here (but not your lawyer). This is good advice (ask a lawyer you trust for a referral in the right legal specialty).

More particularly for this question, while the state bar can be okay for referrals, you probably want someone who has worked in labor & employment law, or someone familiar with equity agreements if equity/stock is a meaningful component of the comp (look for a "startup lawyer" or "emerging companies lawyer"). Both of those will be familiar enough with the IP issues and general contract provisions. You'd probably only want an IP specialist if you're specifically licensing prior inventions (or you have IP-heavy side projects that you want to exclude).

Good luck!

Thanks for sharing this - not a conversation anyone wants to have, but there's a surprising lack of "good example" resources for those who have done this well.

For those who are interested in this type of subject matter, I can highly recommend Eric Goldman's blog (the primary source for this article), at https://blog.ericgoldman.org/

Goldman was one of the first "internet lawyers" in Silicon Valley in the 90s, and his blog is a treasure trove of interesting recent court cases on marketing and the internet.

I was curious about the details of this, so I looked it up.

There's a 15% excise tax statewide in CA. It used to be a straight 15% on top of the sale price, but now it's calculated based on the average market price for an arm's length transaction.[1][2] This is usually calculated based on the wholesale price plus a markup of 60%.[3]

On top of that, there's (normal) sales tax applied to the whole purchase, including the excise tax amount.[2] In California, that means a statewide sales tax of 7.25%, plus county and sometimes city sales taxes that can add on an extra 0-3.25%.[4]

In places with very little additional county and city sales taxes, e.g. Newport Beach[5], that means paying 15% excise plus 7.75% sales tax, for an effective total retail tax rate of 23.9125%.

In places with higher county and city sales taxes, e.g. Santa Monica [6] that means paying 15% excise plus 10.25% sales tax, for an effective total retail tax rate of 26.7875%.

San Francisco is on the lower end of the middle of the pack with a sales tax of 8.5% [7], so that means the effective total retail tax rate is 24.775%.

Of course, there are other cultivation taxes, use taxes, special local marijuana excise taxes and other permitting costs that apply to cultivators and distributors and retailers that may get passed along to customers[8][9][10], so you could say that "total taxes" are closer to 40%. But most retail buyers are paying about 24-28% on top of retail list price in sales + excise taxes.

Note: Prop 64 made it so most medical cannabis sales aren't subject to sales tax, so medical users only have to pay the 15% excise tax. [8]

[1] https://www.cdtfa.ca.gov/formspubs/l537.pdf

[2] http://www.cdtfa.ca.gov/industry/cannabis.htm#Retailers

[3] http://www.cdtfa.ca.gov/industry/cannabis.htm#Facts

[4] https://smartasset.com/taxes/california-sales-tax

[5] https://www.avalara.com/taxrates/en/state-rates/california/c...

[6] https://www.avalara.com/taxrates/en/state-rates/california/c...

[7] https://www.avalara.com/taxrates/en/state-rates/california/c...

[8] http://www.cdtfa.ca.gov/industry/cannabis.htm#Started

[9] https://www.latimes.com/projects/la-me-weed-101-tax-location...

[10] http://blog.margolinlawrence.com/all-about-california-cannab...

(Hijacking top comment for visibility)

Why/how is Robinhood now showing how far along I am compared to my friends on the waitlist? I dont believe I ever enabled any social sharing, and Robinhood's access to my contacts is shut off.

I do not feel comfortable sharing (and especially not broadcasting!) my financial decisions with people I am connected to on social media. This is pretty upsetting to me.

California startup lawyer here, but not your lawyer. This is not legal advice. There's some misinformation here, so I'll clarify:

- California won't enforce noncompetes, except for a very limited set of circumstances (i.e. selling your business and then starting a competing business).[1]

- If you live and work in California, then you get the benefits of California law (including the noncompete law above), no matter what your employment agreement says. UNLESS you were represented by a lawyer during negotiations and you agreed to a different state's laws. NOTE: This section only applies to employment agreements entered into AFTER Jan 1, 2017.[2]

If your employer tries to pull a fast one and says you are subject to another state's laws, then you can invalidate that clause, and you can get your attorney's fees paid by the employer if you have to litigate it. [2]

[1] CA Business & Professions Code Section 16600-16602.5 Link here: https://leginfo.legislature.ca.gov/faces/codes_displaySectio.... Note: once you get to get to Section 16603, there are some super weird laws prohibiting bundling horror comic books. Aren't laws fun?

[2] CA Labor Code Section 925. https://leginfo.legislature.ca.gov/faces/codes_displaySectio....

Lawyer here, but not your lawyer. We're just talking about generalized nonspecific hypotheticals here.

You aren't required to incorporate at all (but in many cases it's the best course for mitigating risk). People start businesses all the time without forming a separate entity. However, in the eyes of the law, that means that you and your business are one and the same. So if the business does a Bad Thing, you as an individual are responsible for all of the consequences of such Bad Thing. Similarly with taxes, all of the business' income gets attributed to you as an individual. Most people don't want these two things to happen, so they form an entity. You can go without, but it comes with significant risk, and you may end up forfeiting favorable tax treatment as a result.

These same issues get more complicated as soon as you involve others. Talk to your accountant. And consider what your risks are and how much your business is going to make. Find legal assistance for small businesses, or talk to a business lawyer as soon as you can.

What do you mean by "allow access to financing"? A fair number of founders maintain their stock ownership through an entity like an LLC. This could be for all sorts of reasons (tax planning, separating assets/liability). I would expect a potential investor (or their lawyers) to ask for the reasoning behind the structure, but assuming it's a relatively simple answer, that would be unlikely to have any major effect on the investment decision.

And on top of that, when you eventually do realize you want to change the domicile to Delaware, you find out that California corporations don't allow direct conversions into Delaware corporations, so you have to pay lawyers an extra couple thousand dollars to prepare merger documents to move the entity to Delaware.

Lawyer, but not your lawyer.

It's muddy for 2017 and prior years, but the new tax bill limits 1031 "like-kind" exchanges to real estate - so beginning Jan 1, 2018, it's a taxable event every time you sell a cryptocurrency, even if you're receiving another cryptocurrency in return.

The link you cited above covers this on page 4.

Keep in mind also that like-kind exchanges, if you're going to use them this year and for prior year reporting, require you to claim them explicitly on your taxes [1].

[1] https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills...

I agree that comprehensive catalogues matter more for music, but I think we're missing another area where Netflix and Spotify are similar (and where Spotify may arguably be better than Netflix): acting as a recommendation engine.

Netflix has been able to track exactly what types of movies consumers are into so that it can deliver more in the same vein. Originally, it would send consumers to other movies it licensed. Now, as a producer, it can direct consumers towards its own flow of productions.

Spotify's recommendation engine has long been a draw for many users. I believe Spotify is setting itself up to be able to increasingly direct users into its own Spotify-flow of artists and musicians. The recent change to playlist mechanics (so that playlists autoplay "recommended similar songs" once completed) will make this even easier.

Having a huge catalog is important, but controlling the flow of what's popular may trump the back catalog in the long run.

edit: Spotify is not as far along in the process as Netflix, obviously, and the entrenched nature of the music business doesn't help, especially with the market practice of locking artists into 7-year exclusive contracts. I believe it will go in the same direction - it's just going to take a little longer.

Private venture-backed companies sell stock in the form of "preferred stock", which comes with certain rights like liquidation preferences (they get their money back first) and protective provisions (i.e. "SpaceX can't do Y without getting our permission first"). Preferred stock is "convertible" into common stock because, upon an IPO or other exit, it's generally desirable for those early investor special rights to go away, as they won't make sense anymore. Liquidation preferences would be obsolete, and the veto rights in protective provisions don't usually belong in a public company.

- Source: venture lawyer, but not your lawyer

Lawyer here, but not your lawyer.

Anti-SLAPP laws are pretty limited, but a peer over in /r/law had a phenomenal idea for addressing this, which I'm copying over here. There's a little something called a

"'Motion to dismiss for failure to exhaust administrative remedies.'

The fun part is that this is normally used by government entities against citizens. I just don't see any obvious reason it couldn't be used by a citizen against a government agency that has filed a lawsuit the entire point of which is to thwart the exhaustion of an administrative process.

After all, citizens aren't allowed to sue for open records until the open records process is completed, one way or the other. Why should a government entity be permitted to sue before then?"

The Attorney General of NY says it's not:

https://twitter.com/AGSchneiderman/status/906195350532304896

If you have access to Intelligize through your firm, their product is excellent at parsing and tracing contract provisions in public filings.

Source: Not a representative of Intelligize, but I've used their product quite often at my firm.

@spinklock - it's the industry standard. My firm does the same (although now it's done through our file management systems instead of through software installed on our laptops).

Ehh, since VantagePoint (DE Supreme Court affirming Chancery Court, 2005) and Lidow (CA appellate court in dicta, 2012) there hasn't been anything saying that Section 2115 should apply that I've come across. It's not perfectly settled, but it's not unreasonable to rely upon.

Yup. Noting also that incorporation costs are generally a fixed ceiling, whereas the conversion costs are a likely minimum. ;)

Agreed. The argument Gust presents here for making a C-corp is pretty darn thin, if not verging on inaccurate.

I agree that a C-corp is the right way to go if you're planning on raising venture rounds, but the three reasons presented (can grant stock, can grant options, and required by investors) are misleading at best. LLCs can grant membership units/shares and profits interests, which can act functionally very similar to stock and options.

True, but most people don't actually know the practical effects of having an established body of law. Mostly because it's difficult to compare Delaware with 49 other different sets of rules in a digestible format.

Here's one example of the difference between CA and DE: California, as a baseline, generally requires class votes on amendments to charters. Delaware, as a baseline, generally requires only a majority of all capital stock to vote in favor of an amendment to the charter. This means that in California, the holders of common stock (or the holders of a prior venture round stock) could potentially block a future round of financing, which most VCs would say is not a great result.

* note also that there's the oft-quoted "60% of Fortune 500 companies are Delaware C-corps," but most people forget about the contrapositive - that 40% of the Fortune 500 are NOT Delaware C-corps. It's the most common way to go, but not the only way to go.

Startup/Venture Capital lawyer here (but not your lawyer). Winding up a corporation can take a little time, but it's generally not terribly complex. It's mostly filing a few forms with the state. However, there are more considerations that you'll want to make as you decide what to do - one question being, "who is liable for the acts of your company before the CA LLC existed?" Entities, when properly used, can shield you from personal liability. But if the entity is no longer in existence, then you may end up being personally liable for any acts (without the proper planning).

Startup/Venture Capital lawyer here (but not your lawyer). Agreed with chimeracoder below. As for cost, a few grand is a good minimum estimate, but it really depends on the complexity. If you've been around as an LLC for a while, you may have different types of equity that has been issued (e.g. profits interests), which will complicate the conversion process a bit. Your lawyer will also have to review the LLC's operating agreement to make sure there aren't any funky protective provisions or oddities that will complicate the conversion. Unlike most Delaware C-corp charters in the startup world, LLC operating agreements are extraordinarily flexible and variable documents, so it's a custom review almost every time we have to go through one of these conversions.

Sure, as a general rule, but conversions from LLCs to C corps can get very complicated as well in short order, especially when there have been different types of equity issued to founders/employees (e.g. profits interests, convertible notes, etc.). If the cap table is sufficiently large, it can cause ballooning legal costs pretty quickly. Not outrageously so, but companies can expect at least a few thousand to get added to the bill.

Startup/Venture Capital lawyer here (but not your lawyer). The foreign qualification requirement is fairly universal - California has it, too. There are occasions when incorporating in a different state can be beneficial, but generally if you're raising VC $$, VCs are going to want to invest in a Delaware C-corp.

Delaware is NOT the cheapest, but it is extremely flexible (both legally speaking and administratively speaking - there are very few states where you can pay a premium and find someone to come in on a holiday/weekend to file your restated charter to close a big deal), and it has a very well-established body of law. That means everyone knows what to expect. Think of it like a really great WYSIWYG editor, whereas other states' laws can be like coding a site in a brand new alpha release programming language.

I believe it's a misattribution to automatically equate lower-ranked law schools with "inferior legal abilities". Especially considering that law school coursework (1) is largely the same at various law schools, and (2) rarely covers the same subject matter as actual practice. The prestige is different, sure, but that is more an amalgamation of undergraduate GPA and LSAT scores than representative of actual legal ability.

Disclaimer: SCU law grad

First off, a share in what? Is this assuming that, like most startups seeking investors, the company is formed as a Delaware corporation? Or do you want something more along the lines of a partnership agreement, to use before any of the founders form an actual entity?

The form of this agreement would heavily depend on the context.