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.
Subscribe & Connect
Please consider subscribing to The Startup Lawyer, following @startuplawyer on Twitter, or contact Ryan directly.138 Responses
-
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!
-
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!
-
Lar says:
Great post, thanks! Any similar suggestions for a side project pre-startup things to take care?
-
Great post, thanks! Any similar suggestions for a side project pre-startup things to take care?
-
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
-
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.
-
@ 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.
-
bubu says:
Those options are "by the book". If you don't look for venture capital don't make sense.
-
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.
-
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.
-
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.
-
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.
-
@ 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.
-
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?
-
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.
-
Great resource, second that comment above about seeing this format used more often.
-
Al Brown says:
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?
-
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".
-
Al – You can institute a provision that provides for full or partial acceleration upon firing "without cause" or the founder leaving "without good reason".
-
[...] March 17, 2010 at 7:13 pm · Filed under Business [From If I Launched a Startup | The Startup Lawyer] [...]
-
[...] full post on Hacker News If you enjoyed this article, please consider sharing it! Tagged with: Launched [...]
-
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.
-
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.
-
Thanks Ryan. Even for an Australian startup, your advice is very helpful… just not the Delaware bit.
-
Daniel says:
Is there any particular reason you would choose Delaware instead of Nevada?
-
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?
-
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.
-
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.
-
@ 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: [...]
-
[...] If I Launched a Startup | The Startup Lawyer (tags: advice business cheatsheet development entrepreneur entrepreneurship startup startups tips vc) [...]
-
[...] Shared If I Launched a Startup | The Startup Lawyer. [...]
-
MorningDew says:
Hi Ryan,
I would like from Europe register a DE company only for IP holding reason. Can you advice.
Thanks
-
Hi Ryan,
I would like from Europe register a DE company only for IP holding reason. Can you advice.
Thanks
-
[...] — YouTube and Viacom Battle in Court — The Financials Behind YouTube’s Growth — Best practices in setting up your startup legally [...]
-
Ryan, this is awesome. Thanks for posting. Love the links to additional detail, too. Very helpful!
-
Ryan, this is awesome. Thanks for posting. Love the links to additional detail, too. Very helpful!
-
North says:
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
-
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
-
Chris says:
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?
-
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.
-
@ 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 – [...]
-
RickM says:
If we are already incorporated in Utah, how do we go about moving it to delaware?
-
If we are already incorporated in Utah, how do we go about moving it to delaware?
-
CC says:
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!
-
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.
-
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!
-
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.
-
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?
-
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?
-
Michael Haskins says:
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.
-
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.
-
Alamgir Kahn says:
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.
-
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.
-
Peter says:
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.
-
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.
-
[...] If I Launched a Startup | Startup Lawyer (tags: startups legal) [...]
-
@ 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.
-
@ 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.
-
[...] I have, however, been dealing with a lot of legal and accounting work for Bakodo (http://bako.do) and for our app, http://bit.ly/bakodo. I like and appreciate The Startup Lawyer’s advice, specially the fact that he’s giving it our for free. He gives answers to questions a lot of people wouldn’t even know to ask. This post is specially helpful: http://startuplawyer.com/startup-issues/if-i-launched-a-startup [...]
-
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:
-
[...] If I Launched a Startup | Startup Lawyer – August 23rd %(postalicious-tags)( tags: startup legal advice business startups entrepreneurship incorporation law tips )% [...]
-
[...] has a great post about this and other questions related to incorporation logistics.(http://startuplawyer.com/startup...)Insert a dynamic date here BIU @ @ ReferenceEdit [...]
-
[...] If you are looking for more information about incorporation, check out my “If I Launched a Startup” [...]
-
[...] If you are looking for information about startup company incorporation, check out my “If I Launched a Startup” [...]
-
Profwire says:
Great posting and very relevant. I am considering Delaware Corp makes sense. Looking at the following:
10M shares in charter
Common Stock Pool 1 Founders Common Stock: 8M
Common Stock Pool 2 Option Pool Common Stock (Board, Advisors, Employees, Contractors): 2M
(Par Value Common ).0001
Preferred Stock Pool (I have heaed this may equal amount of common stock authorized in excess of founders common stock and the option pool common stock, is this true or what’s norm?): assuming structure first capital to raise 1MM via convertible notes? -
Great posting and very relevant. I am considering Delaware Corp makes sense. Looking at the following:
10M shares in charter
Common Stock Pool 1 Founders Common Stock: 8M
Common Stock Pool 2 Option Pool Common Stock (Board, Advisors, Employees, Contractors): 2M
(Par Value Common ).0001
Preferred Stock Pool (I have heaed this may equal amount of common stock authorized in excess of founders common stock and the option pool common stock, is this true or what’s norm?): assuming structure first capital to raise 1MM via convertible notes? -
Would you typically recommend that DE corps register in their operating state as a foreign corp or should they create a new corp whose stock is entirely owned by the DE corp?
-
jay says:
Ryan,
Does your recommended Authorized Shares (10,000,000 Shares) and Par Value ($0.0001) apply to non-IT startups as well?
Thx!
-
[...] If I Launched a Startup | Startup Lawyer lawyer says what he'd choose for equity, what kinds of stock, how many shares, etc. Jan 29th, 2011 by kevin. ← links for 2011-01-28 [...]
-
What are the best online resources (blogs, articles, etc.) on startups and entrepreneurship?…
There are thousands of great articles/videos/blogs out there on entrepreneurship. To keep this usable, I tried to limit my answer to a list one could reasonably get through in a single day. The links below are supposed to represent a variety of themes …
-
Ryan-
This is great advise and I am thoroughly enjoying reading through your entire site! We’ve launched a web-based LLC in NC and have started appointing common stock to executive staff we hire until we generate revenue of $XXX,XXX. Now we’re going after funding and your advice on “reserved stock option pool” was very useful! Keep the great posts coming!
GS
-
[...] In RevenuesCommunicating with codeOvernight success takes a long timehow to write a business planIf I Launched a Startup – by LawyerVenture Deal Terms Studies Hint Worst Is OverHow to pick a co-founderHow to Work with Lawyers at a [...]
-
Wayne says:
Hi Ryan,
If I live in California, and incorporate in Delaware, then I have to register a foreign corp. in California and paying Franchise tax in both states though. Please advise if I’m wrong.
Thanks
Wayne -
Great post Ryan!
I see how everyone says ‘great post’, then asks you a very convoluted ‘hypothetical’ question that you can tell they have their life savings riding on. But I’m not gonna do that. I’m just going to say:
Thanks for the amazingly informative post!
I’ll slip my convoluted legal question in some other time
-
Chien says:
There’s alot of double posting of comments here…Thanks for the list Ryan!
-
Sorry about that — I used to have disqus comments until it presented a formatting problem. I should be doing a refresh of the blog in a few weeks/months so hopefully it will be fix then.
-
-
Mike Weiss says:
Really?
You spend all this time, effort and $$ even before you had done market research to see if the product/service was even viable?
I hope you mean you’d do these things after. Please tell me not to take this literally. That these are the VERY first things you do.
Really?
-
Not the first thing, of course. But presumably when I was ready to make the startup a ‘business’ rather than a side project/idea.
-
-
[...] If I Launched a Startup | Startup Lawyer [...]
-
[...] ran across a dynamite set of posts for anyone launching a startup. It’s summarized at If I Launched A Startup and includes stuff on incorporation, founders stock, vesting, NDAs, and some other useful [...]
-
[...] Bookmarked If I Launched a Startup | Startup Lawyer [...]
-
Brett Colbert says:
Great info. Thanks – this will definitely save some time.
-
[...] State of Delaware. Doing it right only cost me an extra $150. Ryan Roberts recently published an awesome incorporation checklist. You should need to follow his advice and discuss it with your attorney.With Karabunga [...]
-
[...] the State of Delaware. Doing it right only cost me an extra $150. Ryan Roberts recently published an awesome incorporation checklist. You should need to follow his advice and discuss it with your [...]
-
[...] blogs and post to ascertain the fundamental formation details for Startups. In Ryan Roberts “If I Launched a Startup” (StartupLawyer.com) post he line items the top 11 items needed to get you up and running in the [...]
-
[...] Startup: Steps to take when launching a startup from the perspective of a lawyer. [...]
-
[...] the State of Delaware. Doing it right only cost me an extra $150. Ryan Roberts recently published an awesome incorporation checklist. You should need to follow his advice and discuss it with your attorney.With Karabunga [...]
-
Great list and choices. Love the zero page NDA. I think in a lot of cases NDAs put up more roadblocks then they are worth.
-
[...] If I launched a Startup By Ryan Robers [...]
-
The only point I would feel needs modification is #9 Vesting schedule. I feel it should be 30-30-20-20 over four years. Why? Because the hardest work is done in the first 18 months of the life of the company. Figuring out the business model, getting the initial traffic/users, etc. Founders should be rewarded for this since many may not be with the company a few years later for various reasons, whether they’re forced out or leave for their own reasons.
Otherwise great list.
-
[...] If I Launched a Startup Collection of linked advice from Ryan Roberts, aka @StartupLawyer. [...]
-
Impressive. We are trying to mimic this with the Argentinian law as a base. As a result I think it’s easier for all of us to move to USA. It’s so nerve-wracking to try to apply a law that was conceived to tax instead to foster growth! Excellent post and wait to hear more from us on your email account
-
[...] a Startup Great read, the whole StartupLawyer.com blog is killer, Ryan Roberts is awesome… If I Launched a Startup | Startup Lawyer Reply With [...]
-
[...] The Case for the Single Founder StartupIf I Launched a Startup [...]
-
[...] If I launched a startup – Startup Lawyer 2011年8月26日 yasulab カテゴリー:未分類 タグ: bookmarks , etc-law [...]
Absolutely brilliant cheatsheet – wish I'd had this years ago.