If I Launched a Startup(thestartuplawyer.com) |
If I Launched a Startup(thestartuplawyer.com) |
Downsides to incorporating in Delaware:
1) You still pay full taxes in the state you are operating in (you don't get to avoid taxes by incorporating somewhere else).
2) If someone sues you, they can choose to sue you either in Delaware (forcing you to travel to Delaware to defend yourself), or your local jurisdiction. The Delaware courts can be friendly to business, simply because they are often not jury based, but since you're not operating there, they don't have to sue you in those courts. And, the person suing you gets to choose the place they are most likely to win in.
3) Many states will require you to register as a "foreign corporation", possibly for more money than just incorporating there.
Yes, you can structure your company more flexibly, but are you really using some complicated structure that is only allowable in Delaware?
Edit: Just in case I'm misinterpreted, I do think this is a valuable post as a whole.
Also, in true hacker tradition, it's probably easier to hack the available free startup legal document sets if you are a Delaware corporation. Most if not all the docs assume the startup entity is a Delaware corporation.
VCs and their lawyers prefer Delaware incorporations because everything's business-friendly, there's well-established case law, and therefore things like financings are easier to do.
He said:
>1. Flexible Laws.
Yes, this is slightly more attractive for VCs. But I imagine, unless you are in an odd state, that VCs can handle corporations incorporated in, say, California.
>2. No Wildcard Juries.
If you're sued in Delaware, which you don't have to be.
>3. Precedence = Less Litigation.
Ditto.
>4. It’s Free! (Well, almost)
Foreign corporation registration may end up making it more expensive.
> A little bit cheaper than California ($100..but they nail you for $800 every year in franchise fees)
You don't get out of California franchise fees by incorporating somewhere else. See California's Franchise Tax Board document FTB 1063.
>5. Privacy
Since you may have to register as a foreign corporation, this anonymity in Delaware may be moot.
For startups that have product and market before funding, it would be more fair to have a "regressive" vesting schedule, e.g. 25% immediately vested, 30% 1st year, 20% 2nd year, 15% 3rd year, 10% 4th year.
Splitting 10s makes sense in certain circumstances.
VCs will sign NDAs when doing so benefits them. Such situations do exist, but they're rare.
Although only the percentage ownership should matter, many employees react very differently to getting a tiny number of options at a relatively high strike price vs. a big whopping number of options at a miniscule strike price.
This tidbit comes from my girlfriend who is a tax specialist and consultant who also read the article.
I've read and followed his advice to form my first corp recently. But it took a few days of research to understand what he was saying and why.
It still costed me over $2k to get incorporated though.
Getting a lawyer to double-check things, or something else?
Anyway - single-trigger acceleration can lower the valuation of an acquisition, because the founder can then walk away. This is something VCs won't really like. Double-trigger is more usual.
His example comes to $175.
And it may be much worse depending on specifics or if you take this specific advice but incorporate in another state.