Victor Espinosa

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There’s one problem that will make me pass on a startup faster than anything else: not being incorporated properly. When it comes to incorporation, there’s only one right answer: the Delaware C Corp. The Delaware C Corp is the perfect form for tech startups. It lets you do things that other forms like LLC’s don’t. It also maximizes your ability to raise money. Let’s go through some of the reasons why investors love Delaware: 1) Stock options. A Delaware C Corp lets you grant stock options, which every tech startup needs to do. An LLC does not. If you’re going to attract great people, you have to give them equity. Stock options make that easy. Meanwhile, granting people equity in an LLC is very difficult. 2) Share classes. When investors put money into your company, they don’t want common shares. They typically get preferred shares, which come with more protections. When you get acquired or shut down, preferred shareholders get their money back first. I’ve had several companies get acquihired. Without preferred shares, I probably would’ve lost a lot of money. But because I had preferred shares, I got my money back. LLC’s and other corporate forms don’t allow for multiple share classes. For most VC’s, this is a nonstarter. 3) Predictable legal environment. Delaware has a precedent for everything. So many companies have incorporated in the tiny state for so long that the environment is highly predictable. The Delaware Court of Chancery is staffed by judges who are experts in corporate law. All they do is hear these kind of cases. Hopefully your startup never winds up in court. But if it does, investors want a predictable set of laws governing the dispute. 4) Downstream funding. Future investors will require you to be a Delaware C Corp. So if I’m investing now, I want you to have that squared away. After all, you’re going to need a lot more money in the future! Many VC firms can only invest in C Corps. Their Limited Partnership Agreement (LPA), the agreement they make with their investors, requires it. 5) Easy taxes. If you incorporate as an LLC, you will make your investors’ tax returns a nightmare. Any money you make will flow through to them, causing endless confusion. What’s more, other states may assess a corporate tax. Delaware doesn’t. A C Corp makes tax season easy. Wrap-Up Delaware C Corps are perfectly suited for tech startups. You can innovate on your product or branding, but not here. Starting a C Corp is easy — services like Carta or Capbase can make one cheaply in a couple of clicks. And if you started with an LLC or some other structure, don’t worry! You can convert to a Delaware C Corp. It’s just a matter of time and legal fees. And since it’s much easier to convert if you haven’t raised money, you want to do this as soon as possible. Raising money is hard enough. Give yourself the best possible shot — get incorporated properly!