Ah, startup incorporation – one of those first bold strokes on your blank canvas of entrepreneurial success. There’s a flurry of decisions whirling around you, and the process can feel as daunting as navigating a labyrinth in the dark. 

Here, we’ll shine a light on that maze, illuminating the when, where, and how (and definitely the how not) of launching your startup into the legal stratosphere. 

Now, remember this, if nothing else: as you embark on this exciting journey of setting up your startup, do it with the fiery spirit of a founder whose sights are set on her venture scaling the dizzying heights of success – think multi-million, even billion-dollar brand. 

Just picture it, and let that be your guide.

When should you incorporate your startup?

Like jumping into cool water on a sweltering summer’s day – the answer is straight away, and especially before you let your creativity run wild and start building any technology. This holds even more true if your startup has a partner in crime – another founder. 

When you incorporate your startup, it’s like a secret handshake between founders. It sets in stone the distribution of ownership and safeguards the precious IP, ensuring it stays in the family – the company.

Leave it too late in the game, and a founder might have a change of heart, walking out the door and taking all the genius they created with them – a catastrophic blow for the startup.

Moreover, with an officially incorporated startup under your belt, you not only solidify your business’s credibility but also arm yourself with a shield of limited liability protection from the company’s debts and other sneaky obligations. You don’t want your personal assets – think your nest egg, your bank account – at risk, do you?

Show you’re more than ready for your startup to sail the high seas of investment.

However, don’t forget this crucial non-legal nugget: the incorporation of your startup early on is a tangible testament to your belief in your startup’s viability, showing you’re treating it as more than just a weekend hobby.

When we hear founders whisper about holding off until they see if their concept gains traction before making it official, it sends a signal that they might not fully believe in their venture, or at the very least, are unsure of themselves.

And, if you’re wavering or harboring doubts, a sharp-eyed investor will pick up on it quicker than a hawk spotting its prey. 

Making your startup official early on communicates that you believe in what you’re doing enough to make it official, protect the IP, resolve critical founder issues, and shield your personal assets from risk. These are the astute business decisions that future successful startup founders would make.

Should you choose a corporation or LLC?

Like trying to navigate a corn maze in the dark, the question of corporation or LLC keeps our clients up at night. There’s a cacophony of conflicting advice on the internet. And your choice casts a long shadow – it affects the business and personal taxes you’ll pay, your company’s legal compliance obligations, and what type of funding you can reel in.

For the rocket-ship-growth tech companies we collaborate with, who are planning to bag capital through angel investors or venture capital firms, a C corporation (nestled in Delaware…but more on that in a minute) is the golden ticket.

Venture capitalists steer clear of investing in LLCs (or S corps) for a plethora of reasons. 

While some angels are okay with casting their investment nets in the LLC waters, most will be rooting for you to be a corporation. They’ve got their eyes on your future success, and they know you’ll need to be a corporation to secure the next round of VC funding.

Sometimes, we encounter clients wanting to start out as an LLC because it’s simpler and less formal. Their plan? If their business takes off, or they score funding and investors, they’ll just switch it up.

But this way of thinking casts doubt on your faith in your startup. Instead, how about this: “We’re launching this venture with our eyes set on success, and we want to set up our startup with the best structure for VC investment.”

Try slipping into a pitch that you set up as an LLC because you weren’t sure if your startup would take flight. Investors aren’t just putting their money behind ideas – they’re investing in the people they believe can bring those ideas to life.  

So, if you’re a tech startup with ambitions to leverage OPM (other people’s money) to grow your business, set the stage for success and kick off as a corporation right from the get-go.

What state should you incorporate your startup?

One word: Delaware.

It might seem odd that one of the tiniest states in the country hosts such a throng of corporations. But, Delaware is famous for its voluminous body of corporate law. The Delaware General Corporate Law (DGCL) brims with well-defined laws crafted by corporate law maestros.

Not only that, Delaware’s Court of Chancery is a specialized court handled by judges who are masters of corporation laws rather than a jury. The court grants swift resolutions compared to other state courts, which means startups can better predict outcomes in handling legal disputes.

Moreover, Delaware is one of the few states that allows for the cloak of anonymity for its directors and owners, as the state doesn’t require the disclosure of this information in public filings.

Investors are cozy with Delaware corporate law and feel more at ease investing in Delaware corporations. And while Delaware might be their preferred location, the available technology makes it a breeze for attorneys to help you set up a Delaware corporation – it’s the most popular business type for startups, after all.

At NewWave Law, we harness this technology to smooth your path to incorporation and beyond (think stock plan creation, issuing equity or stock options, managing your cap table, and maintaining a data room).

Should you DIY your incorporation?

Well, that’s a solid no.

Think about it: “What would the founder of a multi-million dollar or billion-dollar startup do?”

A founder with her eyes on such a prize recognizes the value of recruiting experts to handle the tricky stuff, while she focuses her energy on scaling her business and prepping for fundraising. After all, founders are in the tech business, not the legal business.

While some businesses might manage to DIY their setup or use a low-cost service like Legal Zoom, a tech startup isn’t one of them.

Dressing your startup in an investment-ready structure can be as complex as assembling a jigsaw puzzle – there are lots of pieces you need to get in the right place. Most budget-friendly services don’t understand the unique needs of a tech startup.

Even incorporation services targeting tech startups leave some key decisions to the founders that typically require expert legal guidance. Getting these decisions wrong could result in a hefty bill for cleanup.

Trust us, we’ve seen this story play out too many times.

Enlist the help of a startup lawyer (not just any business lawyer). It’s a smarter move in the long run, and it’ll grant you peace of mind, knowing it’s been done right. And with that peace of mind, you’ll have more mental bandwidth to build a successful startup. 

Want to know more about hiring a startup lawyer? Check out our blog: What Questions Should I Ask Before Hiring a Startup Lawyer.

Conclusion

By this point, you should understand that incorporating your startup is about more than just dotting the legal I’s and crossing the legal T’s. How you navigate your incorporation

and the decisions you make reflect your mindset as a founder and high-level executive.

Don’t let the process tie you up in knots.

At NewWave Law, our mission is to boost funding for startups with women at the helm. As a woman founder, you’re already tackling obstacles just by being you. So, don’t add to those hurdles by incorporating outside of Delaware or as an LLC and then having to justify your choices to potential investors.

Don’t give them any reason to question your decision-making prowess.

If you’re plotting a course for success right from the get-go, incorporate early, as a Delaware corporation, with the support of a startup lawyer.

Many startups have navigated the choppy waters of Delaware incorporation with NewWave Law’s expert help. So, are you ready to ride the wave to your startup success?