The Founder’s Desk: Preparing for Y Combinator (part 1)

A word of warning: this document is long. We know that. Ultimately, we decided that it was best if you had all of this information in one place. So, we let the author go wild. But ultimately, this is for you to use as you see fit. We have a checklist here at the top for those of you who just want to make sure that you have everything that you need. For those of you who want more information or a reference document to come back to, read along. So congratulations again! We loved our time in Y Combinator, and hope you do as well! 

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Note: While this document was created to help founders get ready for Y Combinator, we believe that any early-stage founder could benefit from preparing like they were about to embark on the YC journey. So regardless of your personal situation, read on!

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Y Combinator Required Documents:

• Excel cap table detailing the company's ownership structure
• Wire Instructions to the bank account for your US company (name on account must match the name on the YC investment documents)
• Certificate of Incorporation, as well as any amendments
• Bylaws
• Action of Incorporator
• Initial resolutions of the board of directors addressing organizational matters
• (If applicable) All other resolutions of the board of directors
• (If applicable) Resolutions of the stockholders
• All Founder Stock Purchase Agreements, Option Agreements and/or Vesting Agreements
• Evidence of Founder filed 83(b) elections (mailing receipt or file-stamped 83(b))
• Receipts issued by Company for Founder shares or evidence of payment (e.g., wire receipt or check)
• Intellectual Property (IP) assignment for each Founder (including IP created before the agreement, as well as future/forward-looking IP assignment)

Y Combinator Requires if your Startup has them:

• Stock Plan / Equity incentive plan
• All agreements with any existing investors (include Notes, SAFEs, priced round documents and side letters)
• Waivers related to YC’s investment (e.g., waivers related to existing investor or stockholder rights, such as pro rata / right of first offer, anti-dilution provisions, most favored nation clauses)
• All agreements with founders/existing shareholders (including any Right of First Refusal and Co-Sale Agreement, Voting Agreement, or other Shareholder Rights Agreements)
• Employment agreements, offer letters or indemnification agreements with founders, directors and officers
• Separation agreements, repurchase agreements or releases with former founders
• Documents related to any subsidiaries or related companies
• Documents evidencing ownership of any founder shareholding vehicles (e.g. trusts)
• 409A valuation report
• EIN number (contained in US Internal Revenue Service letter re: Form SS-4)

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Well hello again. Below you will find explanations and helpful information about the above items. As always, you should consult with your lawyers and other professionals before making any decisions related to your company.

Okay, with that out of the way, here we go with the required steps and documents prior to starting Y Combinator:

Item 1: Excel cap table detailing the company's ownership structure

A cap table is a document that shows the ownership structure of a company. It lists the company's shareholders and their equity stakes in the company, and includes information about equity grants, outstanding stock options, and other securities. To create a cap table, you'll need to gather information about the company's equity grants, outstanding stock options, and other securities. A cap table typically includes:

• Authorized shares
• Outstanding shares
• Unissued shares
• Shares reserved for stock options
• Valuation details of the last priced round (including pre-money valuation, amount of new equity raised, per-share price, and number of shares)
• Complete list of shareholders and related information, including: type of share they own (common stock, preferred stock, options, etc.), the exercise price or conversion rate for options or convertible securities, the number of shares, the current market value of the shares, and the ownership stake.

Once you have this information, you can create a spreadsheet or use specialized cap table software to organize the data such as Pulley or Carta. Don’t forget to look into the YC deal section for discounts! 

Item 2: Wire instructions to the bank account for your US company (name on account must match the name on the YC investment documents)

For YC, the US company must have a bank account in its own name. YC cannot wire funds to a subsidiary's bank account. Most banks will require an EIN to open an account [link to the EIN section below].

Brief Interlude - Incorporation documents

Items 3 - 12 are generally considered your base formation documents.They include your certificate of incorporation, bylaws, action of the incorporator, initial board and shareholder actions, founder stock purchase agreements, 83(b) elections, and IP assignment agreements. If you utilize a company formation service such as Stripe Atlas, most (if not all) of these documents will be provided for you. Okay, now let’s get back to the fun!

Item 3: Certificate of Incorporation, as well as any amendments

The certificate of incorporation, also known as the articles of incorporation, is a document filed with the state where the company desires to be domiciled that once accepted officially forms the legal entity. Some states only require the certificate to include the name of the corporation, the nature of the business the corporation will engage in, name and address of the registered agent and registered office, amount and type of stock that may be issued, and the name(s) of the incorporators.

However, the certificate of incorporation may also include additional provisions such as provisions authorizing multiple classes of stock, outlining the rights and preferences of the stock, and relating to anti-takeover measures (such as the creation of a classified board or requirement of supermajority voting). If there is any inconsistency between the certificate of incorporation and other governing documents, the certificate of incorporation controls. Amendments to the certificate of incorporation typically require the approval of the board of directors and the stockholders.

Item 4: Bylaws

Bylaws are a document that sets out the governance rules of a corporation. Bylaws are secondary to the certificate of incorporation, so if there is any conflict between the certificate of incorporation and the bylaws, the certificate of incorporation controls. What is covered in the bylaws can vary, but typical areas include the procedures for the meetings of stockholders and directors (such as record date, notice, and voting), the corporation's officers and any committees, and the issuance and transfer of stock certificates. Usually, the board of directors can amend the bylaws, although depending on the state, that power may need to be authorized in the certificate of incorporation.

Item 5: Action of the Incorporator

Immediately after the certificate of incorporation is filed, the incorporator, through execution of a written document, takes certain actions to organize the corporation. This document is typically called the "Action of the Incorporator." The Action of the Incorporator usually includes:

• The appointment of the initial directors of the corporation
• The adoption of the bylaws
• The issuance of stock to the initial shareholders

Item 6: Initial resolutions of the board of directors addressing organizational matters

Once the directors are appointed, it is customary to hold an initial meeting either in person or by written consent to transact further organizational business such as electing officers, opening bank accounts, issuing stock, and approving the corporate seal. A unanimous written consent shall have the same force and power as a resolution that was presented to the board and adopted at an in-person meeting.

7: Additional board resolutions

A Board Resolution is a record of decisions made by the Board of Directors during a board meeting. Usually, they are written when a new Board member is appointed. But they are also used if the company wants to sell shares, buy any form of intellectual property rights, and/or any other major decision that will affect the company in a significant way.

Item 8: Any shareholder resolutions

Similar to Board written consent, any action that can be taken at a meeting of the stockholders of the corporation to be taken without a meeting by written consent, unless otherwise restricted by the corporation's certificate of incorporation. The consent must be signed by the holders of outstanding shares having at least the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote were present and voted.

Item 9: All Founder Stock Purchase Agreements, Option Agreements and/or Vesting Agreements

A founder stock purchase agreement is a contract between the founders of a company and the company itself that outlines the terms of the founders' purchase of stock in the company. This agreement typically covers the number of shares being purchased, the price per share and any other relevant terms and conditions. 

The founder’s vesting will either be covered in the stock purchase agreement or in a separate vesting agreement. In either case, it will outline the terms under which the founders' equity in the company will vest. These agreements typically provide for the vesting of the founders' equity over a certain period of time, such as four years, with a one-year cliff. This means that the founders will vest in one-quarter of their equity after the first year and the remaining equity will vest monthly over the next three years. Founder vesting agreements help to ensure that the founders are committed to the company for the long-term and that they are incentivized to work towards the company's success.

Note: Each founder participating in YC must hold at least 10% of the company and the equity must have actually been formally granted (no "handshake agreements" or "understandings" to grant equity later)

Additionally, if the founder has any separate option agreements related to their equity, they must submit these to Y Combinator as well.

Item 10: Evidence of Founder filed 83(b) elections (mailing receipt or file-stamped 83(b))

An 83(b) election is a tax provision that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting, rather than at the time the stock vests. Only equity that is subject to vesting qualifies for an 83(b) election. 

To file an 83(b) election, the employee or founder completes and signs an IRS Section 83(b) form or letter that details certain key information, including:

• Personal identifying information (name, address, Social Security number);
• Description of the property awarded (number and type of shares of which company) along with the date received or purchased, any restrictions your shares are subject to and the fair market value of the shares on the date received or purchased;
• The amount paid for the company shares;
• The amount the employee will indicate as gross income on their income tax return;

After completing and signing the form, the employee or founder mails the election form or letter to their IRS Service Center and provides a copy to their employer. Best practice is to send your election form through certified mail with a return receipt in case you need to prove that it was sent by a particular date.

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‍Note: An 83(b) election must be filed with the IRS within 30 days of receipt of the property - there are no exceptions! Also, an 83(b) election is generally irrevocable once made. Please consult with your financial or tax adviser if you have questions regarding how an 83(b) election will impact you.

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Item 11: Receipts issued by Company for Founder shares or evidence of payment 

These are usually wire receipts or checks. Nothing too complicated here. 

Item 12: Intellectual Property (IP) assignment for each Founder

An intellectual property assignment agreement is a contract that transfers the rights in copyrights, trademarks, patents, trade secrets, or other intangible creations between parties. These assignments provide records of ownership and transfer while also protecting the rights of all parties involved in buying or selling IP. For YC, these IP agreement(s) should assign all IP to the company, including both IP created before the agreement was signed and IP created in the future.

This concludes our first part of the blog. On our next blog, we will share some additional documents it is recommended to pay attention to.

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Part 2  - Preparing for Y Combinator - Some additional documents to pay attention to 

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DISCLOSURE: This article does not constitute legal advice and should not be relied upon for business or legal decisions. Blee is not a law firm, or a substitute for an attorney or law firm. Blee is not liable for any damages arising from the use of or inability to use our service, product, or any material contained in it, or from any action or decision taken as a result of using our product or service. If you need legal or tax advice, you should consult an attorney or tax professional in your geographic area.