Tag Archives: Incorporation

Filing a Charter Is Not a Startup Incorporation

I’ve noticed a lot of recent articles promoting that a startup can “skip the lawyer” and incorporate via an online service. These sites typically list about 20 incorporation tasks they’ll do for your startup for around $250 plus the applicable state filing fees.

Sounds like a great deal, but there is more to a proper startup incorporation than simply filing the articles of incorporation with the Secretary of State. The 19 other “tasks” they list? Little or no value.

Want to vest your founders’ shares? Can’t do that through an incorporation service. In fact, typical incorporation services do not even offer a stock purchase agreement. And you can definitely forget about a technology transfer agreement or anything else IP-related. Documents like these are the critical components of a proper startup incorporation.

When you use an online incorporation service to incorporate your startup, you aren’t getting a deal on incorporation. Instead, you are overpaying for 1/10th of a proper startup incorporation.

If all you want to do is file a charter, you can “skip the lawyer.” And you can skip the incorporation service as well.

The When to Incorporate Decision-Matrix

In a recent post, I detailed some incorporation-related points of interest if I launched my own startup. The post presumed I made the decision to push forward with the incorporation of my startup. But how do you know when the time is right to incorporate your startup?

Advice Varies

There’s a wide range of counsel on this topic. Most lawyers will say you should have incorporated “Yesterday!” while some non-lawyers will say that you can wait until your first round of funding because “Google did it.” There’s no right or wrong answer on this one, but you probably did not need to incorporate yesterday nor should you wait until your first round to do so.

My advice to you is simply: Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.

But for those of you who prefer the quantitative, I put together the following decision matrix:

When to Incorporate Decision-Matrix

Answer the following questions and tally up your total score.

(1) Does your startup have more than 1 founder?

Yes –> 10 points
No –> 0 points

(2) Are you (and/or one of your co-founders) working on your startup full-time?

Yes –> 5 points
No –> 0 points

(3) Will your startup take longer than one year to exit?

Yes –> 5 points
No –> 0 points
Maybe –> 3 points

(4) Is your startup hiring developers or designers?

Yes –> 7 points
No –> 0 points

(5) Is your startup granting stock options or other equity compensation?

Yes –> 7 points
No –> 0 points

(6) Is your startup high-risk for a lawsuit?

Yes –> 10 points
No –> 2 points
Maybe –> 7 points

(7) Is your startup seeking seed or venture capital?

Yes –> 6 points
No –> 0 points
Maybe –> 3 points

(8) Is your startup signing contracts with third-party companies for business services (not for IP creation or development)?

Yes –> 4 points
No –> 0 points

The Results:

24 points or less: Save your $$$ on incorporation and spend it on an iPad.
25 points or more: Incorporate now (iPad version 2 will be better, anyways)

Feel free to suggest a revised/additional questions or weight to the matrix. Of course, this is meant to be more of a “fun” exercise for entrepreneurs rather than an absolute guide.

If I Launched a Startup

Here’s what I’d do in the beginning:


(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

Lockdown Lost-Founder IP

If you won the lottery today, how many long lost relatives (that you don’t recall) would come out of the shadows of your family tree to test the generosity of their favorite relative? I’m willing to bet a few.

Now if your startup received a $5MM Series A investment from a venture capital firm, how many developers (that you can recall) would come out of the shadows of the internet and claim to be your startup’s long lost founder? The answer to this question depends on how well your startup secures its intellectual property.

Lost Founders

You may not consider a developer that worked 1 day on your startup 2 months before you incorporated a “founder.” But if your startup becomes a wild success, the developer will. Even worse, this lost founder will have more leverage now with your startup than if you had acquired his intellectual property at the outset.

Even if you aren’t worried about long lost founders laying claim to your startup’s intellectual property, your potential investors are. The status of your startup’s intellectual property, including whether you have signed agreements with all developers, is typically among the first set of questions your startup will receive from a potential investor. Thus, it’s wise to lock down your startup’s IP early to prevent the lost founder problem.

How to Lock Down the IP

One of the most important aspects of a startup incorporation is the ability to transfer intellectual property ownership from the founders to the startup. Each founder is issued shares in the startup in exchange for the founder’s intellectual property (and usually a small amount cash). In other words, the startup issues shares to the founder as consideration for the founder’s intellectual property and small check. This element of consideration is required for the formation of a valid, binding contract. The exchange is typically handled via a “Technology Assignment Agreement.”

But what about developers who work for the startup that aren’t founders?

Consideration for services rendered should be given to all developers and consultants that work on anything IP-related at your startup. This includes whether the developer or consultant worked prior to your startup’s incorporation or afterwards. Like the incorporation, the intellectual property transfer will be executed pursuant to a Technology Assignment Agreement.

The consideration given to developers and consultants does not have to include your startup’s equity. Consideration can also be cash. But since cash tends to be a scarce resource at startups, such consideration typically takes the form of restricted stock or stock options.


Like the lost-relative problem occurs only upon a winning lottery ticket, the lost-founder problem only occurs if your startup is successful. To avoid lost founders from showing up on your startup’s doorstep, take proactive measures to lock down your startup’s intellectual property.