A few days ago, I wrote about Paul Graham and David Heinemeier Hansson at Startup School 2008. This article discusses three more talks, all of which deal with funding and legal issues. I’ll write more tomorrow about five remaining talks, which talk about building and marketing the right product.

I’m not going to spend as much time on the these 8 presenters. If you want to read more about the event, check out the videos themselves online, or other summaries of the event (Phil Crissman, Matt Maroon, Foodliker, etc.).

Raising money is an evil – make sure it’s necessary

Sam Altmann of Loopt discussed his experience raising venture money from Sequoia. VCs, in his experience, look for three things: the right market, the right team, and the right product. Each firm has a different emphasis, but all three really need to be in place. Sam introduced a great concept: demand by proxy. For example, if the most common text message is “where are you?” – which it is, apparently – then there may be demand for a mobile solution for locating people.

He also talked a bit about the process of raising money. Raising money is no fun, and it ultimately isn’t productive. Every week spent courting investors is a week that you aren’t working on your product, your marketing, etc. Of course, it is sometimes necessary. But if your company is going to raise funds, this should be the responsibility of only one of the founders, and (ideally) this should not be his or her only responsibility. This sounds obvious, but Sam has seen startups where multiple founders focus all of their energy on raising money for several months, which is tough on a company.

I can say from experience that raising money is a hard process, and that it really needs to be kept in check. If you need investment, you’re better off spending some time on your product as well; after all, if you can build a good product and get early signs of traction in the market, investors are going to be much more interested than if you just have an idea. And if you don’t get the funding you need and need to bootstrap, then you’re better off spending more time on the product as well.

Actually, there is one sense in which pitching to investors is productive (apart from the potential investment). Pitching helps you to nail your plan. Most angel and venture investors are careful with their money; they don’t want to throw it away. And most get pitched frequently – several times a week even. So they will typically be happy to point out what’s wrong with your business and why it won’t work. As an entrepreneur (who can easily get buried in a project and lose perspective), it is great to be challenged. Even if you get rejected, talking to a few smart investors will help your vision.

Hire good attorneys

Jack Sheridan, an attorney with Wilson Sonsini etc. (the law firm for Silicon Valley startups, according to Jessica Livingston), talked about legal issues for startups as they are founded, raise money, etc. The biggest take away was to have good lawyers. More specifically, Jack warned founders against participating preferred stock, where on liquidation an investor first gets paid back their original investment (the “preferred”) part, and then receives a full share of the remaining funds (“participating”; and cumulative dividends, where the company is obligated to pay a continual dividend to preferred shareholders, and where the obligation accumulates over time if it can’t be paid. In other words, if you take VC money under the wrong terms, your company could be a moderate success (e.g. sell for $20M), and the investors could walk away with just about everything.

The second main point was to be careful with vesting. Even founders’ stock should be vested, according to Jack. Let’s say three people start a company and divide ownership evenly. One quits after two months, while the other two work hard for years for low pay. The company is then acquired after 5 years. With no vesting, the founder who left still owns a significant portion of the company. Vesting takes care of this by issuing shares progressively over time. Brad Feld has a good article on vesting with details of typical terms, etc.

Find and ride the right wave

Greg McAdoo is a partner at Sequoia Capital, one of the top VC firms in the world. Greg gave a good overview of what VCs look for. Some of this was redundant with Sam’s earlier talk, though it was interesting to hear about VC funding from both sides (the investor and the entrepreneur). Greg emphasized the importance of finding the right market, using a surfer analogy. A surfer (entrepreneur) needs to wait for the right wave (market), and needs to hit it at the right time. The surfer can’t change the wave and can’t create the wave – they can just ride it, successfully or unsuccessfully. Similarly, a great product isn’t worth much if it hits too early or too late, or if there is no market for it.

Greg also suggested that startups build products for people whose hair is on fire. If you come across someone who is on fire, and offer them a solution, they’re likely to take it and unlikely to haggle with you on price.

Finally, try to find an unfair advantage – something that keeps other people from competing successfully with you. And try to increase this advantage over time, rather than just worrying about it early on.

Watch for the final post tomorrow, which will cover Paul Buchheit, Jeff Bezos, Michael Arrington, Marc Andressen, and Peter Norvig, along with a conclusion.