Formation resources for Texas for profit LLC

So you’ve decided to start a for profit, cash flow positive, self funded, jump started business in the great state of TX.  You’ve done your research and found that you want to start a series LLC to provide maximum flexibility and asset protection. 

This is the exact route I took with Turn Net Systems. We were formed in the last days of 2015. Three years later (almost to the day) I have learned quite a bit about forming,  administering, governing, operating an LLC. Yes those are four distinct functions. 

Some presumptions:

  1. You are not immediately taking outside capital. You want to reserve that option for later. 
  2. You are granting equity to founders, with desire to retain option to pay salary later
  3. You want to run it as a real business , with a Board Of Directors , officers etc 
  4. You aren’t afraid to armchair legal/accounting all the standard off the shelf bits. 
  5. You are starting with ~10 total people , across directors and founders (split perhaps into officers (managers) and individual contributors. For reference as of 12/9/2018, TSYS has four directors, three officers (CEO/CFOO/CTO) and four individual contributors. Officers are authorized in the operating agreement to enter into contracts , they report to the board quarterly etc. Individual contributors have broad authority (including budgetary) but do not have ability to bind the company into contracts (and some other pro forma items). 

Here’s what I used to get started , with all the above in mind (80% of that was in place day 1, 20% evolved over 3 years)

Legal: 

https://www.lonestarlandlaw.com/

Buy his book: https://www.lonestarlandlaw.com/book-info.html

Taxes:

Buy the Nolo books

Use Quickbooks Online, neat.com, get TurboTax . Your taxes won’t be that complicated the first few years as you are starting up.  Keep good records, scan them to neat. Integrate neat to QBO. 

Here’s a collection of links I used when forming the LLC/drafting operating agreement etc. 

Entity Formation

http://www.baylor.edu/content/services/document.php/181957.pdf << a great article on what exactly is liability from a legal perspective. capital calls are given extensive treatment.

http://www.sos.state.tx.us/corp/forms/205_boc.pdf

http://www.lexisnexis.com/legalnewsroom/tax-law/b/federaltaxation/archive/2012/06/11/substantial-economic-effect.aspx << here be dragons. You don’t want to be subject to a “substantial economic test” it’s where laywers and IRS act like cats playing with mice before killing them.

http://www.swlaw.com/assets/pdf/news/2010/02/18/Series%20LLCs%20(BXS)_BaharSchippel.pdf << the professionals are nervous about series llc, but that is their job no?

http://apps.americanbar.org/buslaw/committees/CL690000pub/newsletter/200807/kean.pdf << lots of good tax info in here

http://thestartuptoolkit.com/blog/2013/02/equity-basics-vesting-cliffs-acceleration-and-exits/ << vesting basics

http://www.mosaichub.com/answers/question/how-to-create-a-vesting-schedule-for-a-company << vesting llc practical

http://www.brightjourney.com/q/actually-setup-vesting-agreement-co-founders-w-breaking-budget << more llc vesting stuff

http://www.baylor.edu/content/services/document.php/181957.pdf << withdrawl/expulsion of members. ties into vesting.

http://foundrs.com/ << equity calculator

https://www.clerky.com/yc-stock-plan-forms << equity vesting for yc companies

http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html

Bizops:

http://firstround.com/review/Positioning-Your-Startup-is-Vital-Heres-How-to-Do-It-Right/
http://www.stmaryslawjournal.org/pdfs/Outenreath_Step12.pdf
http://comptroller.texas.gov/taxinfo/taxpubs/tx96_114.html

Here is a good collection of curated links on accounting:

https://bench.co/syllabus/bookkeeping/catch-up-bookkeeping-guide/
https://bench.co/syllabus/tax-deductions/small-business-tax-deductions/
https://www.irs.gov/publications/p535/ch01.html#en_US_2013_publink1000208623
http://blog.bench.co/how-to-go-paperless
https://www.odoo.com/documentation/functional/accounting.html
https://www.irs.gov/publications/p583/ar02.html#en_US_201408_publink1000269308
http://www.dwmbeancounter.com/tutorial/Tutorial.html

Most of the links were sourced from:

https://news.ycombinator.com/item?id=11239437

My approach to daily organization

I have a very simple pen/paper system for organization , maintaining notes and keeping on track.

It’s three notebooks :

The legal pad is used for note taking at meetings. I also use it for sketching out things with people. I’ve got a dedicated sketchbook and I bring that if I expect to do lots of sketching. I transcribe my notes to wiki page or email and I scan the intentional sketches . Then I shred the old pages.

The rite in the rain notebook is used for my daily/weekly focus sheet. It serves as a professional diary of sorts. It’s got one word entries , the actual details and work is stored in trello / OpenProject.

The little black notebook is used for quick notes (measurements, personal todos of administrative nature), scheduling reminders while on phone , grocery lists etc. it’s not for any permanent record or transcription .

I like this approach. Right tool for the right job , and mixing paper / digital works really well.

Thoughts on recruitment

I had a wonderful one on one last night with the CEO of a non profit that I serve on its board.

We talked about a number of key development issues for the organization. The one that really stood out and I want to discuss is recruitment .

1) build pipeline. Recruiting is just another form of sales. Just like fundraising and getting paying customers.

2) utilize a CRM. We’ve settled on suite CRM at TSYS. We use this across the brands.

3) once you’ve built your pipeline , start reaching out via email. Ask to have a 30 to 90 minute conversation. Or ask for referrals if they aren’t interested. The mail should be very short , a few paragraphs.

4) the goal of the conversation should be to quickly assess interest , fit, discuss the role.

5) have a small list of options. Three is the magic number I’ve found. Offer s range of commitment levels. Especially early in a startups life , people may want to try before buying.

6) be open with participation and auditing opportunities. Offer people the chance to join build sessions , meet the team, have dinner and drinks etc. team fit matters above all else.

7) offer real value. Discuss cultural fit , what kind of management style the person wants , ask what’s horrible about current position (as applicable). Have deep conversations and provide opportunity for true impactfulness and autonomy. Otherwise why bring someone in if you are just going to continue to (micro) manage.

Currently sitting in this framework

Here’s what I’ve been keeping in mind and skimming / re reading / thinking on over last few weeks

https://www.ribbonfarm.com/2017/11/09/ceos-dont-steer/

http://donellameadows.org/archives/leverage-points-places-to-intervene-in-a-system/

http://earlystagetechboards.com/

https://chrisbolman.com/strategy-develop-effective-framework/

I’m rapidly handing off the full product and operations aspects of TSYS to my highly trusted lieutenants. This lets me focus on capital raising . This requires incredibly deep strategic thought. Time to play chess at epoch a bunch I think ….

growing management team – some thoughts

So I recently brought a CTO onboard with TSYS. This has been a very good thing , it frees me up to focus on building redwood and fundraising the three massive funds. I’ll do a series of posts on that in the future.

I’ve also been handing off more CFO functions from myself to my COO/CFO (who also takes a daily ops role for Axios and really helped get that going).

Now that things are stabilizing , it’s critical to establish a proper team and hand off.

Here’s my “guide” on how to do that, basically just documenting what I’ve done . I’ll focus on CTO, since the CFO handoff has been continuous really and highly dynamic . I work very closely with my CFOO daily, she’s been with me since the beginning. There are some specific functions I’m handing off and that’s a blog post of its own, in proper LLC administration and some formation gotchas.

Ok enough qualifiers , let’s get to the actual subject!

1) have a one on one with the CTO. Cover personal matters , CEO/CTO relationship, areas of responsibility etc . Establish a solid relationship , make clear the empowerment and transfer taking place . Push CTO to hold you firmly in your lane and not come back and try to be CTO.

2) brief CTO on material risk and operational matters. They’ll be briefing the board on those matters instead of you at the next board meeting , so the CTO had best be fully informed AND EMPOWERED. The buck must stop with them. Keys must be handed over. This is for continuity reasons and for the CEO to truly hone focus and not be involved in product. Obviously this has to be done at the right time. Most startups try to start with a CTO. We didn’t , we hyper focused on direct customer to product/engineering conversations , demos, feedback etc. we were staring with a consumer product , the PocketOffice. So that made sense. With pocketoffice being ready for handing off to consultants to prepare for manufacturing, we are moving into a more complex product area (and have grown / refocused engineering along with that), a CTO coming on board makes sense.

3) have a transfer of power meeting with engineering , the new CTO and a member of the board present. It must be clear up and down the chain that the new CTO is the contact point. Leave the CEO alone , he’s got money raising todo.

Also of course , the CTO was vetted and approved by all of engineering and my outside counsel prior to being asked to join. Dinners were had etc. recruitment and true handoff is a delicate thing and must be done right.

Hopefully this post helps other bootstrapping CEOs to grow their management team.

Suborbital lab

I recently got a 1.0 of the suborbital lab put together.

We are now setup for through hole soldering and almost ready for smt once the reflow oven is done.

I’m watching the open source pick n place projects closely. Being able todo small batch production in house is very important.

I’ll put a full inventory of the lab together and post it soon.

Here’s some pics of the lab:

Quick share : Librepcb

https://librepcb.org/

I came across this on hacker news yesterday.

https://news.ycombinator.com/item?id=18569969

Been reading the comments and I watched the authors YouTube talk. It’s very interesting. I like diversity in free software tools. Especially in the non trivial spaces.

Suborbital is going to be in need of full in house free software/ hardware solutions for pcb assembly soon.

We’ve been slowly building a reflow oven

http://www.whizoo.com/reflowoven

Quick share : Board composition and management

So I recently have solidified my philosophy and framework on how to have effective BoD and managing the relationship etc. subject to change of course , but it’s solidified enough to capture

1) monthly meetings are critical

2) combination of remote and local members is key

3) you should have a roughly equal number of ceos and non ceos on the board.

4) you should sit on only one board of someone’s company on your board.

5) you should sit on two to five total boards , ideally with organizations in different stages of development , and definitely in completely different industries .

6) have dinner with your local board members weekly. Have one other member of your senior leadership team join the dinner , rotate through the team.