How is company formed
We’ve been doing the corporation setup work for Adylitica and setting up shares and officers and all that boring stuff, it’s all kind of a pain in the butt but stuff that needs to get done.
It’s led me to think about stuff like different classes of shares and the normal startup processes. Normally start-up companies go through a process where they shop their stuff around to vcs, eventually get a terms-sheet, raise a first round of funding, issue a bunch of preferred stock to the vcs and give them some board seats.
I’m pretty skeptical of this whole process. First, the venture capitalist model supports companies that get huge or die quickly, as each partner can only manage a limited number of startups. Thus they often actually push companies to grow quickly or die quickly, so they can move on to the next bet. Why is this bad? To use a metaphor, to grow a fire you need to start with small twigs and move up to logs only when the fire can support it, often throwing big logs too soon on a small flame is just counterproductive.
Secondly, preferred-shares are how venture capitalists really cover their bets. They get paid first in liquidity events. This encourages ponzi-scheme like management: new investment must be brought in to pay off the original investors.
Finally, the new legal barriers to IPO make aquisition much more attractive - combine this with the preferred shares and there is a strong incentive to build companies just to be bought by other companies, instead of making it in their own right.
