Crowdfunding the creation of the next version of LFGSS

David, any update on how this is going along? I've opened my seedrs account, and can't say any of the others are tempting me at the moment.

Certainly not the one that wants to challange Ann Summers...

YES!

tl:dr We have to wait a few days to hear about YC before acting on Seedrs and opening for investment. Additionally there are very hard decisions we (myself, the developer and 6pt) need to answer regarding structure of the company that has to be finalised before Seedrs or YC.

I sought legal advice on Monday from two firms, utilising the free hour they give you. The firms are Orrick and Taylor Wessing.

The simple question to them: This is where we are, here are our options, is there anything that needs to be done, and that requires me to instruct legal representation or advice, prior to raising money through Seedrs or participating in YCombinator (should we get it)?

The answers were very lengthy and thankfully don't require that we instruct a firm, but they could be boiled down to:

We cannot proceed with Seedrs whilst there is a possibility of getting on YCombinator. We must delay Seedrs until we hear from YC in a way that is final.

That is, YC will demand the establishment of a new Delaware registered corporate entity.

As such, this would add great complexity if you were to issue equity against a UK corporation that was no longer the primary corporate entity.

If it's possible to wait a few days to avoid creating this problem then do so, as you might find yourself in breach of Seedrs investment rules, or have created a very complex situation that will cost a lot to unravel.

We were due to hear back from YCombinator on Monday this week, but they have delayed ( http://news.ycombinator.com/item?id=4774288 ) and will now start issuing notifications Thursday, late PST time I guess.

Which means we hear Friday morning.

The YCombinator process is roughly:
1) Apply (end of Oct)
2) Get notified of interview (mid Nov)
3) Get interviewed in San Francisco (late Nov to beginning of Dec)
4) Start YC (early Jan)

As soon as we are rejected (if that happens), then we can start with Seedrs... but for now I'm very frustrated by having to wait, but the lawyers were unanimous on waiting to see.

We must re-visit the shares within the company today

Today we have 2 shares, nominal (fake) value of £1 each.

To create shares to issue 10% to Seedrs we would need to basically go and re-write how many shares we have.

But there is an issue. If we create 98 shares, such that there are now 100 shares... then we have just created value of £98 and HMRC don't really care whether this is real money or not... they want their tax. For £98 that isn't a problem... but...

Once we receive investment the shares have a real (and not nominal) value. At the proposed rate of £50k for 10%, 1 share would effectively be £5k.

Now imagine what happens if we create the shares after starting the Seedrs process. Yup, 98 x £5k in potential tax liability (specific circumstances determine which tax, and who pays... but if they were held by founders then it is Capital Gains Tax).

Also imagine that at some point we might have an investor come in and want to plop down £1m. Great, but what if the share price said that this amounted to 17.3246%? How do you split 100 shares into fractions?

The answer is to create, say, 1 million shares.

But then, the nominal value of £1 makes that hard too.

So... we need to sub-divide/split our 2 shares now, such that the nominal value is a fraction of a penny per share, and we end up with 1 million shares. Then, and only then, do we offer Seedrs 100,000 shares for the £50k.

This helps us avoid tax on invented numbers, allows us to handle fractions and complex issuing in future.

We must re-work the existing equity split between the founders/early employee

This is the really hard one.

To date I'd been modelling the split based on experience from the music industry. I'd witnessed time and again that bands would rip themselves apart because this person earned more than that person.

I'd seen in some bands that peace was achieved by an equal split. Blur, Belle & Sebastian and other bands I've worked really closely with did this, and it achieved a lot of good even though there have always been arguments externally that Damon Albarn, Graham Coxon and Stuart Murdoch gave up too much.

To me, this was a good and fair thing to do.

However, it turns out the music industry is not the tech startup world. And literally every person I've spoken to (both law firms, 2 investors, 3 founders, 1 early emp at another company) have been aghast.

The investor view is that equal split rings alarm bells. There can be no easy to way to resolve conflict. It's an indication that we aren't willing to confront difficult questions. It shows weakness in leadership. If they invest £Xm in future, they want to know that the people most likely to make good on that investment are rewarded and inventivised in relation to what they brought into the company and how they will use that in future for the benefit of the company: all of the equity should be justifiable based on what that individual is bringing to the business.

Simply: Investors are put off, to the point of not investing, if they don't see a very realistic and hard split of equity amongst those in the business they're investing in.

The founder view was that no matter how you plan it, nothing goes to plan. Almost everyone will leave, and you need to deal with that as best you can. You can't have anyone (self included) with an already vested x% of the company. As that opens the door to someone leaving (for whatever reason) and then not contributing whilst everyone else still slogs it out for 5 years, before appearing again and then expecting their share.

The founder view is that not only do you need to say: You only get this if you put in the sweat and hardship. But you also need to be in the position that should someone leave, then whatever % of their allocation hasn't vested is available to the business to be re-allocated such that one can attract talent in to replace it.

The early employee view surprised me. In the valley the standard rate is 0.25%-1% if you receive any salary at all, much lower than I would've guessed. I shouldn't disclose other people's terms, but the founders I spoke to all shared their splits in the past and the early emp I spoke to discussed his. It varied between 1% and 15% with 5% being the average for the first employee or three depending on precisely what they were bringing in (had to be something the business didn't have to be higher) and whether they were being paid. The guy I spoke to was on 5% and didn't get a salary yet was full-time, the highest rate of 15% was being paid in a 2 person company that had no investment and no investment leads.

What this means is that I fucked up the first and biggest decision. I thought the only angle was internal politics for the company and that to make this happen it is worth the sacrifice of my (as the potential biggest shareholder) slice.

What I didn't bear in mind is that large investors simply won't invest if this isn't realistic, and that everything that can go wrong probably will and I need to be thinking in the interest of the business and not any individual (including me) for the vesting schedule and splits.

Which basically means that you now have two introverted geeks who prefer to avoid politics having to have very hard conversations about who gets what and why.

And of course, as we need to resolve this before we can sub-divide the stock and allocate, and that needs to be done before we can go to Seedrs... then in this few day gap pre-YC decision we are having to work this out which isn't comfortable for either of us.

The long story short: A few days for YC news, we have a load of very stressful decisions to make and some admin in preparation. If YC reject us on Friday then we can finally submit the Seedrs proposal, otherwise we carry on waiting until post-YC interview.