One of the most important early decisions that a founder will make is the legal structure for their startup, both in form (LLC vs. C-Corporation) and jurisdiction (home state vs. Delaware). For startups looking to sustainably grow using equity funding, founders should seriously consider the default of a Delaware C-Corporation. Naturally, many founders ask me why Delaware C-Corporations are attractive to venture capitalists. Ultimately, there are two reasons. First, there is an industry acceptance and expectation of Delaware C-Corporations in the venture context. Investors expect to see Delaware corporations and may even pass on an investment altogether if they don’t see this crucial indicator. Second, Delaware offers privacy, governance, and case law benefits that genuinely make it more attractive and cost-effective for founders. 

VCs Need C-Corporations 

When angel investors or venture capitalists invest in a startup company, they are investing their money in exchange for equity in the company. Investors prefer to invest in corporations for two main reasons: 

1. Corporations are not pass through entities. C-Corporations maintain profits and losses at the entity level as opposed to the individual owner’s tax returns. This is important for VC funds with institutional investors; pass through entities create difficult and expensive tax problems for these funds. Further, the C-Corporation structure allows venture funds to be truly passive investors unless access to governance is negotiated. 
2. Corporations use shares to represent ownership. For instance, it is easier to buy and sell shares of a corporation than it is to buy and sell a membership interest in an LLC because of the difference in ownership rights. C-Corporations also neatly allow for multiple “classes” of equity, a necessary trait to accomplish the industry expectation of a “Series Seed”, “Series A”, and future rounds. 

VCs Want Delaware

Most VCs and other investors will also require that a corporation be formed in, moved to, or converted into the State of Delaware.  Therefore, it is advantageous for startup founders to incorporate in Delaware from the outset of their inception. This is for two reasons: 

1. Delaware has a very robust corporate case law system. Venture capitalists and other kinds of investors prefer startups that are agile and can make decisions quickly. Delaware’s laws allow easier and quicker corporate decision-making, thanks to its very robust, well-known and well-understood case law that has developed throughout its history. 
2. Common Corporate Language. Because of Delaware’s general acceptance in the industry as the default entity and governing law, most investors, companies, and law firms use it to “speak the same language” in drafting and negotiations. When all parties understand the lay of the land intuitively, it becomes faster and cheaper to negotiate contracts, raise capital, and protect the business. 

Navigating the incorporation process can be time-consuming, expensive, and confusing. Having corporate counsel assist at the earliest stage can help to limit any unnecessary expenditure of time or resources. Attorneys at Founders Law routinely assist founders at the outset of their journey, and we are here to help.

Hind Abdelaziz is a startup and venture capital attorney based in Chicago, IL. She represents founders, startups and venture capital funds in a wide variety of corporate transactions, including raising capital and navigating issues associated with rapidly-growing startups. She can be reached at habdelaziz@founderslaw.com.