INCORPORATION

Many companies start by incorporating in the state where the founders live or the company is doing business. "Local" states are preferred because counsel is more familiar with the corporation statute and incorporation process, and it is assumed that professional and filing fees can be saved. However, venture capitalists, almost without exception, favor Delaware as the state of incorporation. Thus, many investors will require a company to re-incorporate in Delaware or merge with a Delaware corporation and then qualify as a foreign corporation in the state(s) in which business is going to be conducted before an investment is made. In addition to the delay and expense of reincorporation, there is the risk of having another entity reserve the proposed name.

Incorporation in Delaware is favored because its General Corporation Law (Title 8) is easy to comply with and offers management speed and ease of operation. Title 8 is supported by extensive case law and a business court that brings predictability and multiple precedents to almost every issue of corporate governance. Thus, when negotiating and drafting the language of a term sheet or transactional document, the venture capitalist is guided by multiple precedents and an appreciation of how a court would rule on many issues.

Deciding what entity form is best for your company when incorporating requires an understanding of how each entity is taxed, as well as other liabilities. LLP, LLC, C Corporation, and Subchapter S entities are all discussed in more detail in the Accounting & Finance chapter.