The Founder’s Desk: Preparing for Y Combinator (part 2)

On our previous blog we went through all of the required items and documents for starting YC. If you only have the above item, then congratulations! You are all done. But most founders have additional documents and agreements related to their company. If your startup has any of the below, they need to be sent to YC as well.

Guy Shahar
December 19, 2022

On our previous blog we went through all of the required items and documents for starting YC. If you only have the above item, then congratulations! You are all done. But most founders have additional documents and agreements related to their company. If your startup has any of the below, they need to be sent to YC as well. 

Item 13: Stock plan / equity incentive plan

A stock plan or equity incentive plan is a structure that allows a company to award equity incentive compensation to its service providers such as employees, advisors, directors, and consultants. Stock plans must be set forth in a legal document that is adopted by the board and approved by the stockholders. 

Item 14: All agreements with any existing investors

This includes all Notes, SAFEs, priced round documents and side letters. (No need to worry if you do not have any existing investors. The hope is that after YC investors will be lining up to invest in your company!)

Item 15: Waivers related to YC’s investment

If you do not have any existing investors, it is likely that you will not need any waivers. However, if you do have investors, you should go through the documents and see if any waivers are necessary. For example, this would include waivers related to existing investor or stockholder rights, such as pro rata / right of first offer, anti dilution provisions, most favored nation clauses, etc. 

Item 16: All agreements with founders/existing shareholders.

This could include many different types of agreements. But a couple of the most common include a Right of First Refusal and Co-Sale Agreement, Voting Agreement, or other Shareholder Rights Agreements.

  • A Right of First Refusal (ROFR) gives a founder/shareholder the right to purchase shares of the company before they are offered to any other potential buyers.
  • A Co-Sale Agreement contract between shareholders in a company that allows them to sell their shares at the same time and on the same terms. This is often used to ensure that all shareholders have the same opportunities to sell their shares, and to avoid situations where one shareholder is able to sell their shares at a higher price than others.
  • A Voting Agreement contract between shareholders in a company that outlines how they will vote on certain issues or decisions. This is often used to ensure that a certain group of shareholders has a certain level of control over the company's decision-making process.
  • Shareholder Rights Agreements are contracts that outline the rights and privileges of shareholders in a company. These agreements may include provisions related to voting rights, dividend payments, and other matters related to the ownership and management of the company.

Item 17. Any employment agreements, offer letters or indemnification agreements with founders, directors and officers.

Employment agreements are essentially a fancy way of saying "job contract." They outline the terms and conditions of the employment, including duties, how long they will be working for the company, and how much they will be paid.

An offer letter is a document that a company uses to officially offer your employees a job. It usually includes details like job title, salary, start date, and any benefits or perks that come with the position.

Note: Whether something is an employment agreement or offer letter can have certain legal implications. This is something that you can discuss with your attorney. 

An indemnification agreement is a legal agreement where the company agrees to protect the other party from any legal claims or financial damages that may come up as a result of a specific event or situation. This is often used for founders, directors, and officers of a company to protect them from personal liability if the company gets sued or faces other legal issues.

Item 18. Any separation agreements, repurchase agreements or releases with former founders

Listen, sometimes things happen. If you have former founders who are no longer with the company, YC will want to see all documents related to the founder’s exit.

Item 19. Documents related to any subsidiaries or related companies

Oftentimes, YC founders started their business in another country. We did! If so, you probably have a non-US subsidiary company, or a non-US company completely or partially owned by your US parent company (maybe you even completed a Delaware Flip). If so, you’ll need to submit all documents related to your subsidiary company as well. Same thing goes for any YC company: if you have a subsidiary, you will need to submit those documents as part of your packet. 

Item 20. Documents evidencing ownership of any founder shareholding vehicles (e.g. trusts)

Some countries require that founders executing a Delaware Flip or creating a US holding company have the founders put their shares in some kind of founder shareholding vehicle (e.g. Israel requires that founders put their shares in a trust). If your shares are in a trust or some other kind of vehicle, whether mandatory or required, you must submit those documents to YC.

Item 21. 409A valuation report

A 409A valuation is an independent appraisal of the fair market value of a private company’s common stock (i.e. the stock reserved mainly for founders and employees, including the option pool). This valuation determines the cost to purchase a share. A 409A valuation is valid for a maximum of 12 months after the effective date—or until a material event occurs. A material event is something that could affect a company’s stock price. The most common material event is a qualified financing (or raising money above some threshold).

The price of a 409A valuation can vary, but the cost ranges anywhere from $1,000 to over $10,000, depending on the size and complexity of the company.

Item 22. EIN number (contained in US Internal Revenue Service letter re: Form SS-4)

An employer identification number (EIN), also known as a business ID number, is a nine-digit number assigned to your company by the IRS. A company uses it when filing the business's income tax return or payroll tax return. An EIN might also come in handy when opening a business bank account, applying for a business credit card or applying for a business loan.

You can apply online on the IRS' website or by mail or fax. International applicants also have the option to apply by phone. To apply for an EIN, the principal business must be located in the U.S. or U.S. territories and the person applying must have a valid taxpayer identification number, such as a Social Security number.

Luckily, the person submitting the application does not need to be the business owner. The applicant can be a partner or officer of the company. The IRS allows any "responsible party" to apply, which they define as anyone who manages the company's finances. Another individual, such as a secretary or assistant, can also apply provided that a responsible party signs Form SS-4 and fills out the third-party designee section.

Conclusion

That's it! Phew. We are exhausted. How are you doing? I am sure exhausted as well, but also really excited because you are now ready to start YC! Remember, YC is an intensive program that is designed to help you grow your startup as quickly as possible. It's important to come prepared and ready to work. If you want some more insights on what it was like to participate in YC, please don’t hesitate to reach out.

Good luck!

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.

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