If I Launched a Startup
Here’s what I’d do in the beginning:
Incorporation
(1) Entity Choice: Corporation or Corporation
(2) State of Incorporation: Delaware
(3) Authorized Shares in Charter: 10,000,000 Shares
(4) Type of Shares: Common Stock
(5) Par Value of Common: $0.0001
(6) Initial Founders Issuance: 8,000,000 Shares
(7) Founders Equity Split: Depends on the Team, But Quickly and After the Awkward & Difficult Conversations
(8) Vest Founders Shares?: Hell Yes
(9) Vesting Schedule for Founders Shares: 4 years with a One Year Cliff
(10) Consideration for Founders Shares: Cash & IP
(11) Handling of “Lost Founders”: Lock Down the IP (then Wish Them Well)
Raising Capital
(1) Length of NDA: 0 pages
(2) Fees Paid to Pitch my Startup: $0
(3) Investors: Accredited Investors
(4) Structure of First Capital Raise up to $1MM: Convertible Notes
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Absolutely brilliant cheatsheet – wish I'd had this years ago.
Love the post! There should be more of this stuff out there… it really helps geeks who have perfection or OCD research problems… as they don't have to procrastinate by wasting time "trying" to find this information!
Agreed!
Great post, thanks! Any similar suggestions for a side project pre-startup things to take care?
I must say, I love the conciseness of this post. The linking is also quite clever.
I don't see the point of issuing that many shares. I've always issued 1,000 and split up 100 initially the founders. 1,000 is enough to get the % breakdowns you need and you aren't charged for having that many shares outstanding: http://www.corp.delaware.gov/frtaxcalc.shtml
@ Gabriel – Yes, the metrics are the same with 100 shares or 10 million, but people tend to like the optics of larger share numbers. I find this especially true with the employees when it comes to option #'s.
Also, you can escape the franchise tax issue by using the "Assumed Par Value Method" which I wrote about in The Delaware Freak-out.
Those options are "by the book". If you don't look for venture capital don't make sense.
Doesn't it depend which state you're operating in? Since you might have to also file as a foreign entity and pay even fees.
Or you could just not worry about this until you build something people actually like.
So glad I read this post. Very straightforward and is going to come in handy because currently we're looking for seed funding. Thanks.
@ Justin – You are correct, quite likely I'll have to pay foreign incorporation fees in my home state. I'm ok with that for various reasons (including not wanting to do a later reincorporation merger with Delaware). I assume I'm going to have to move there eventually.
@ John – True. You can wait to incorporate until you have "something". Only downside(s) is that it may be harder to track down "lost founders" and you won't be able to start your long term capital gains holding period until you actually issue shares.
WOW!
I never seen such simplicity to describe clearly the hell to incorporate, a so on.
All of your options assume you want to look for Venture Capital.
What if you follow the 37signals.com/rework route and want to stay small? Would your answers change?
Great resource, second that comment above about seeing this format used more often.
Very useful. Thanks!
ceo
why a 1 year cliff? so you work for 11 months and walk away with nothing, while collecting no salary most likely? who would sign up for that? I think thats appropriate for employees getting a salary but for a founder?
Al – You can institute a provision that provides for full or partial acceleration upon firing "without cause" or the founder leaving "without good reason".
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it is the most sought after cheat-sheet..thanks a lot
Can you also suggest a incorporation service for non-US residents? There are lots of services out there and they charge anywhere from $300 to $800.
Thanks Ryan. Even for an Australian startup, your advice is very helpful… just not the Delaware bit.
Is there any particular reason you would choose Delaware instead of Nevada?
Super post.
Do you need to have a local presence (or agent) to incorporate in Delaware? For example we're in CA so how do we find a local agent in DE?
If you could drop "Protecting Intellectual Property" in between those two, I think this would complete me.
@ Rajiv – I don't have a rec for you, as I haven't used any of them.
@ Daniel – DE>NV simply because of future issues and I'm not concerned about IRS information sharing.
@ Amit – Yes, you need to have a registered agent if you incorporate in Delaware (or any other state you are registered with). I typically use CT Corp or BlumbergExcelsior. There are many others.
@ Eric – Sounds like a good idea. I'll also include stuff like "Docs we signed as co-founders" and things re incentive compensation in a future revision or just new post.
[...] The Startup Lawyer has a fantastic post detailing exactly how he would setup a company in Delaware (like he does for his clients). This includes: [...]
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Hi Ryan,
I would like from Europe register a DE company only for IP holding reason. Can you advice.
Thanks
brilliant. Thanks for the synthesis
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Ryan, this is awesome. Thanks for posting. Love the links to additional detail, too. Very helpful!
Great stuff. Moving up you are.
You mention vesting, perfect for my co-founders, but what about me?
Should my own shares vest? No co-founders yet, just me here. I did incorporate Ocean Kinetics, but haven't yet hired a law firm to draw up all the agreements. But this will be done before any other people are brought in… so vesting for mine or what?
Thanks a billion
Would you include preferred shares in charter? What if founders want to have a different class of shares versus the future employees that might get stock-options?
@ North – If the stock is for sweat equity, I don't see why not. Will likely be easier to pitch if you are willing to do the same (vesting).
@ Chris – I wouldn't. If you did want a different class of shares (like Class F or Series FF), you would have to put that in the charter.
[...] If I Launched a Startup | The Startup Lawyer – [...]
If we are already incorporated in Utah, how do we go about moving it to delaware?
RickM – Probably a reincorporation merger.
Great post Ryan.
Question, how much should I budget for C corp incorporation in DE by a reputable law firm? Just basic 2-way equity split, nothing fancy, no option pool etc. I've been quoted $4,000 – $6,000. This seems high.
Thanks!
CC – I think most big law firms will charge between $3k-$5k for a Delaware C corp. You can probably get it done for half that at a smaller firm.
Hi Ryan,
Excellent post! I've been reading the whole web about this topic and your post is the most succinct summary. What about incorporating using online services, like delawareinc.com, legalzoom.com and miriads of others. Any advice when to use/avoid them and why?
Thanks!
Igor – Legalzoom and the others can be fine if you are a one-founder startup, although keep in mind that their incorporation packages won't include anything like stock purchase agreements reflecting shares that vest.
Thanks Ryan, another question. Why not Wyoming? Infotaxsquare (http://www.infotaxsquare.com/comparison-delaware-nevada-wyoming.htm) provided a side-by-side comparison and Wyoming wins in every category, yet I never heard anyone recommending this state. What do I miss?
Ryan,
Love the post. (Love the site actually) Thanks for the information.
Re: "no one has any clue about Wyoming corporate law." Certainly you're not afraid to be the vanguard and help develop the case law to clear up the questions regarding Wyoming's implementation? The sentence may be hard to read to my tongue in my cheek.
Seriously though, is your selection of Delaware also dependent upon the nature of the startup? I've always considered instate costs such as manufacturing, real estate, employees and other hard costs can make incorporating within the actual state beneficial if you appeal to the civic incentive packages.
Igor – The short answer is no one has any clue about Wyoming corporate law.
Ryan — Great post. Thanks!
One thing that would be very useful and is hard to find info on, is raising "friends and family" $'s. Qualifiers, legalities, paperwork, a discussion of convertible debt, explaining to F&F what happens on failure, next rounds, dilution, etc.
If you're in a state with reasonable corporate laws (California or Massachusetts, for instance), why not a local corporation? It's a lot cheaper. If you're bootstrapping, it makes a difference. S-corp and LLC are also typically better choices for bootstrapped start-ups, I believe. Lower cost.
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Thanks Ryan, this is awesome!
@ Michael – Yes, my hypothetical startup is going to be seeking VC funding. Things like civic incentive packages may come into play, but not for me.
@ Alamgir – I think I've covered most of those sub-topics in various posts on this blog. There really is no difference in the legalities/paperwork, dilution etc between friends & family and complete third-party rounds.
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What would you do if you were starting up an LLC web based business? With 3 owners, 1 main.
(1) Entity Choice: LLC
(2) State of Incorporation:
(3) Authorized Shares in Charter:
(4) Type of Shares:
(5) Par Value of Common:
(6) Initial Founders Issuance:
(7) Founders Equity Split:
(8) Vest Founders Shares?:
(9) Vesting Schedule for Founders Shares:
(10) Consideration for Founders Shares:
(11) Handling of “Lost Founders”:
Raising Capital
(1) Length of NDA:
(2) Fees Paid to Pitch my Startup:
(3) Investors:
(4) Structure of First Capital Raise up to $1MM:
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