Getting Your Early-Stage “Start-Up” House in Order

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For anyone who has ever put a home for sale understands there are a lot of steps that must be taken to make real estate “showcase” ready for prospective buyers. These steps may include de-cluttering, new paint, modern finishes, and décor, and hopefully, the homeowner’s real estate agent is advising with the goal to obtain maximum market price. As a firm that has counseled thousands of start-up companies, this analogy holds true for preparing your start-up company to showcase to potential investors.

Corporate Structure

Corporate structure matters.

If your company is relying on raising funds from venture capital firms or angel investors, your company should consider a Delaware C-Corporation structure. Many early-stage companies elect to be structured as a Limited Liability Company, also commonly known as an LLC. LLCs are very flexible with respect to ownership and management structure, and are generally known for having a more favorable tax treatment; however, the equity options that LLCs can offer are limited. Most investors prefer to receive stock or shares of a corporation. If you are structured as an LLC, and a serious investor comes along, be prepared to convert to a C-Corporation. If you are completing this conversion in the middle of a fiscal year be prepared to spend extra fees to your accountant to deal with complex tax issues for completing the conversion from an LLC to a C-Corporation.

As a Delaware practitioner, I am in a unique position to work with founders all over the world and the most common question I receive is…why Delaware? Delaware is definitely not a “one size fits all” for every company; however, if you are a start-up and looking to raise capital from venture capital firms and angel investors, they like to work with Delaware C-Corporations.

Delaware has a very flexible general corporate law and a specialized Court of Chancery with a judicial bench highly experienced in corporate matters. Delaware has volumes of corporate case law which makes Delaware corporate law reliable and predictable.

Founder’s Equity

If a company is dealing with more than one Co-Founder, it is advisable to seek legal advice early to ensure that expectations are clear as to work-share and capital commitments.

It is important to ensure that equity arrangements are established early and that flexibility is built in as the company grows. It should be an expectation for all co-founders that institutional or accredited investors will change the management dynamic of a company and be prepared for corporate changes when you reach your first seed round of funding. Co-Founders should have the important conversations in the early-stages so that everyone presents flexibility and a united front when investors come along.

“Clean” Corporate Books

The organization of a company’s corporate books and records is underrated. A company can have the most “polished pitch,” but when it comes time to deliver the corporate books and records to your potential investors for review, it is important to have them ready for delivery. You certainly don’t want to turn potential investors off by not having your incorporation documents, by-laws, resolutions, shareholder agreements, and capitalization table ready for review. Being disorganized is a red flag for investors.

These corporate books cannot be created overnight. It is very apparent when your documents have not been professionally prepared. There should also be a relevant Non-Disclosure Agreement ready to be executed as you explore expanding your corporate venture.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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