[valuearb]

Number one thing is discussing the equity split and what happens if one of you quits.

I have a friend who helped start someone selling a breakfast product. The plan was my friend would invest $20k and the partner would run it as a local business, and they'd split 50-50. Very quickly my friend got excited by the potential and started working full time to help, ends up investing hundreds of thousands of dollars, doing all e-commerce, marketing, negotiations, paying for industrial quality kitchen, etc, while the partner just mixed and packaged. Sales shot up and the company begins to have significant value, but still requires more investment.

They needed to switch from an LLC to a C corp so they could get funding and start giving stock options to attract/keep good employees. The partner conceded that my friend was doing the lions share of the work and had put a ton of money in while he had put in nothing, and that my friend should have most of the initial stock in the C corp. But they struggled to agree on an exact split.

So then the partner talks to friends and family who of course tell him "it was YOUR IDEA, you shouldn't have to give up anything!" and comes back refusing to sign anything (which scotches the C corp conversion). Eventually he's able to force my friend to buy him out for a totally unreasonable price.

So my specific advice is.

1) Never start a new venture as an LLC unless you don't plan to ever share equity with employees AND you expect it to be a cash flow business that will pay out all profits directly to partners.

2) Always force all partners to vest their equity over years. You can do incentive stock options, or restrict stock units, or however you want. If you can't afford a lawyer to draw it up yet, at least put the arrangement in writing and agree to it, so that if you have disagreements and need to part ways, you aren't being forced to buy half the business from some guy who mixed ingredients for 6 months.

[brianwawok]

Just because your friend botched his LLC us no reason not to use one. LLC can be fantastic. You think if they were a c corp 50/50 day one the break up would have been any better?

[valuearb]

Well it would have been far easier to offer employees stock options, and far easier to raise financing. And faster and easier to codify a different split when his partner was amenable to it.

Tech Investors hate LLCs cause they hate K1 forms.

[brianwawok]

Converting LLC to S/C corp is not hard though! Your entire chain of evidence was about two founders who had very different commitment levels, and had trouble converting. Of course they had trouble converting. They also would have had trouble diluting for investment if you did not dilute 50/50. There was an underlying problem there, and the corp conversion was the rip the bandaid off moment. It had to happen, and the sooner it happened the better!

Unless you know day 1 you are going to get investment (like, that is your entire goal of your business - say you already have ycom ready to invest), I still contest you should almost always start LLC. If say you putz around and bootstrap for a year, your taxes and accounting and everything else will be SO MUCH EASIER for the first year. Then sure, if you light on fire and need investments from traditional VCs, cool you can convert. What % of random startups founded on hacker news get to the point of VC investment? My gut would tell me 10% or less, but no idea how to measure this.

[valuearb]

I actually agree with most of what you wrote, an LLC is cheaper/easier especially when you have no money and need to focus on building product.

But when do you bring on employees? ie non-partners. I hugely recommend giving them equity options and now you have to convert, which is more costly than being a C corp from the start.

Also your 10% figure isn't close. investment comes from family, angels, and VCs. Probably over 50% get some type, and now your tax returns and theirs just got much more complex. As does future investment.

If you can afford to start as a C corp, it's often worthwhile.

[brianwawok]

> But when do you bring on employees? ie non-partners. I hugely recommend giving them equity options and now you have to convert, which is more costly than being a C corp from the start.

I am not giving early employees equity, going market rate salary instead. But you can totally issue shares as an LLC though. In fact they are more flexible. You could add more rules or regulations around it.

Investments from family and angels do not need to be equity, it could also be various debt instruments. In these cases no tax magic to worry about, it stays very simple.

Perhaps my boat is different because from day 1 I was 90% not planning to get VC money. If your plan is 90% from day 1 to get VC money, then I guess you would want to optimize that path.

[valuearb]

I highly disagree with not giving early employees equity. I've always given them even to the receptionist and they have a substantial impact on building a better team environment. It becomes "their company" and you get more commitment, better efforts and even more honesty.

And issuing employees shares in an LLC is a mess. Giving straight participation is taxable. Giving appreciation rights is complicated to do and manage. Doing it in a C Corp is basically automated with all the tax issues clear and codified.

Complicating your deal with Angels is also a good way to get them to walk away. You can use convertible debt if you are on the verge of a VC round, but you have to be a C corp in that case. And you have to agree on convertible terms that will attract Angels but not scare off VCs. Angels typically want to be investors, even most family members, and an LLC makes that a mess.

If you don't want to get VC money that's fine, but you better be sure.