Apr 13, 2021 · 34m · we-live-to-build
The Phantom Stock Plan Founders Use Before Going Public
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Transactional attorney Cassidy Toles joins host Sean Weisbrot on the We Live to Build podcast to break down essential legal strategies for startup founders, covering business formation, cap table structuring, equity protection, and counsel selection.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Sean holds 23.6% of the talking time here. How this is scored →
Sean as informed peer 2.9 Guest teaching 5.1 Guest disagreement 1.3 Sean pushing back 0.0
speaking balance: gold is Sean, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 19:05 Dismissal of derivative startup NDA demands
Cassidy sharply ridicules founders pitching generic ideas like 'Tinder but for sex' who demand NDAs from investors, explaining why VCs refuse them to dodge frivolous lawsuits.
Hardest push from Sean ▶ 18:40 Sean highlights investor refusal of NDAsSean challenges the viability of early-stage NDAs by observing that investors increasingly refuse to sign them prior to a formal letter of intent.
Biggest teaching moment ▶ 7:43 Cassidy explains commercial LLC asset value post-failureCassidy educates Sean on an obscure legal advantage: a failed three-year-old LLC can be sold as an asset because it possesses an established commercial credit profile.
Sean holds their own ▶ 15:08 Sean's analysis of DoorDash voting rights and Series FF mechanicsSean demonstrates substantial domain fluency by dissecting DoorDash's public controversy over non-sunsetting voting rights and explaining how he customized his own founder share class in Singapore.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Sean as informed peer | Guest teaching | Guest disagreement | Sean pushing back | Why |
|---|---|---|---|---|---|---|
| Business Formation Strategies: Delaware C-Corps, S-Corps, and LLCs | 1 | 5 | 1 | 0 | Sean asks a broad opening question regarding starting a company. Cassidy delivers a detailed monologue comparing Delaware C-Corps, S-Corps, and LLCs, breaking down overhead and tax implications. | |
| Structuring Co-Founder Agreements and Planning for Business Failure | 2 | 6 | 1 | 0 | Sean asks how founders can structure agreements fairly and screen transactional attorneys. Cassidy educates him on how disputes arise during business failure and explains the asset value of a seasoned LLC with established credit. | |
| Mitigating Founder Risks Related to Marital Property and Divorce | 4 | 5 | 1 | 0 | Sean demonstrates practical background by bringing up the distinction between corporate constitutions and shareholder agreements. Cassidy clarifies which terms must remain fixed versus adaptable. | |
| Share Classes, Dilution Mechanics, and Founder FF Shares | 6 | 4 | 1 | 0 | After Cassidy explains share classes and dilution mechanics, Sean demonstrates deep familiarity with the topic by detailing the DoorDash IPO voting controversy and how he structured a sunsetting Series FF share plan for his own Singapore startup. | |
| The Reality, Defensibility, and Limits of Non-Disclosure Agreements | 3 | 5 | 2 | 0 | Sean notes the trend of venture capitalists refusing to sign NDAs prior to letters of intent. Cassidy agrees emphatically, illustrating why VCs avoid signing NDAs using the Silicon Valley game 'Pitch' and derivative startup concepts. | |
| Navigating California Employment Agreements and Arbitration Enforceability | 1 | 6 | 1 | 0 | Sean prompts Cassidy on California employment contracts. Cassidy provides a mini-lecture outlining legal hazards including contracts of adhesion, FEHA arbitration requirements, and handbook amendment restrictions. | |
| Structuring Employee Option Plans and Phantom Stock Mechanisms | 1 | 6 | 1 | 0 | Sean asks about share option plans, leading Cassidy into an explanation of phantom stock plans versus true equity pools with concrete case examples. | |
| Selecting the Right Legal Counsel and Avoiding Big Firm Pitfalls | 5 | 4 | 2 | 0 | Cassidy critiques big white-shoe law firms for charging inflated rates due to bloated overhead. Sean corroborates this with a detailed account of how he vetted lawyers in Singapore and chose a community-rooted practitioner with transparent fixed pricing. |
Statements from this episode (14)
Toles: Companies planning an IPO eventually must become Delaware C-Corps
“If your eventual goal is to go public, and almost every tech company and startup is eventually to go public, at some point you're going to need to be a C Corp. And if you're going to go public and do an IPO, you're going to need to be a C Corp incorporated in …”
Toles advises founders against incorporating in Delaware on day one
“An early stage startup frequently can't afford that cost, and I don't recommend incorporating in Delaware from day one. It's a capital expense that you don't necessarily need to operate on.”
Founders can use phantom stock before converting to C-Corps
“I just recently wrote a phantom stock plan for a company that's a S Corp and wanted to be able to issue shares to people before it became a C Corp, and there are ways you can do that, but you can't issue real equity, and that's a limitation.”
Toles: Co-founder lawsuits rarely happen over success, but rather commercial failure
“Lawsuits almost never happen over a company being successful. Now, there are exceptions. There was a lawsuit that happened because Facebook was successful, but that also happened because one of the founders did the other founder wrong. Usually, if you have two…”
Toles: A three-year-old LLC is an asset due to its credit rating
“An LLC that's been around for three years, In most states is an asset. Who owns the LLC when the company goes under? Because frequently with a startup, that may be the only thing you have that is worth anything after three years. And the reason the LLC is wort…”
Toles: Fire any attorney who fails to plan for business failure
“If the lawyer doesn't ask you what happens when the place fails, walk out the door and find a new transactional attorney to write your agreement, because if that question isn't asked, your attorney is not protecting you from what really, really matters.”
Toles: Best divorce protection is writing spouses directly into operating agreements
“I actually think your best case scenario is doing that third thing, because I gotta tell you, if you are spending the kind of time that most founders spend when they're founding a business, you are talking to your spouse, you are getting ideas from your spouse…”
Toles: Draft a shareholder agreement when selling equity to non-operators
“I think you create a shareholder agreement the first time you sell equity to someone who is not an actual operator. If, for example, I bring on a venture capitalist, there should be an agreement with that person where there's a shareholder agreement with them,…”
Toles: Almost every corporation now uses multiple share classes with voting restricted to Class A
“Nowadays, almost every corporation has multiple classes of shares, and usually A class shares vote, and no other classes vote.”
Weisbrot created a sunsetting founder share structure for his Singapore startup
“So what I did was I got my lawyer to research it cause it's not common in Singapore. So I got him to research it and we built a founders fund share system for me, but with the goal that if we go public, Upon going public, I instantly lose half the voting power…”
Toles: Business NDAs remain enforceable much longer than employee agreements
“The former sorts of NDAs, sort of the business opportunity ones,
Tend to be pretty enforceable for a pretty long time.
The latter tend to be enforceable for a limited period of time.
Usually that period of time is on the order of a couple of years, and usually…”
Toles: VCs refuse NDAs to avoid expensive frivolous lawsuits
“And so a lot of people don't want to sign the NDAs because they don't want to get sued for something that is actually not a violation, but looks like a violation from the outside.
Not because they're concerned they're going to lose the lawsuit because it's exp…”
Toles: Using LegalZoom for stock option plans leaves founders legally exposed
“I would never do something like trust a thing like LegalZoom for that sort of a thing. I think you're too likely to end up exposed if something goes south.”
Toles: Startups should avoid major white-shoe law firms until IPO or VC deals
“If you are a really successful tech company or startup, you will need to go with one of those firms when you are getting ready for your IPO, or when you are dealing with the deal that you finally cut with a venture capital company, and not before. Because thos…”