Tyler Tate

Design, code, coffee. Founder & CEO at https://Crema.co, the coffee marketplace.
Aug 9 10 min read

Startup Cheat-Sheet: How to Incorporate

Your Company
So, youre ready to setup the legal structure for
your startup.

Y oull need to choose between entity types such as a C Corporation

or LLC and select a jurisdiction such as your state of residence or
Delaware. Youll also need to think about how many shares to autho-
rize in your new company, and how to split the initial equity among
the founders. And then theres the matter of actually generating all the
documents and getting them filed, which may or may not involve
lawyers.

As entrepreneurs we want to innovate, do things better and in new

ways. But when it comes to forming your company, you want to be as
plain-vanilla as possible. Dont innovate your legal structure. Save
your creativity for building your product and tackling your market.

Now comes the part where I remind you that I am in no way qualified
to oer legal advice. And Im not including that disclaimer just to be
litigiously cautiousas a founder whos been through the incorpora-
tion process before, I know just enough about such legal matters to get
by. But as a founder yourself, thats probably exactly what youre look-
 ing for anyway. So, heres a cheat-sheet for incorporating your
company.

Arshia Tabrizis sketchnotes of a startup law talk, 2012 Sacha Chua under the Creative Commons Attribution 2.5 Canada licence.

Entity Type
The first step towards company formation is to figure out which type of
corporate entity is the best match for your needs. As a U.S.-based com-
pany, you have two main choices:

1. LLC. The easiest of the three entities to setup is a Limited Liability

Company. Unlike simpler entities such as a sole proprietorship or
general partnership, the LLC personally shields you, the founders,
from business liability that could be incurred. It also oers a pass-
through taxation regime, meaning the company doesnt pay corpo-
rate tax, but rather passes through profit to the owners. Most
small businesses are setup this way. But its a bad structure for
startups who may want to take on outside investment, because
venture capitalists usually wont (and cant) invest in LLCs due to
complications arising from pass-through taxation. (See Joe
Wallins 12 Reasons For A Startup Not To Be An LLC.)
 2. C Corporation. While more cumbersome to setup and manage
than LLCs, the C Corporation is the standard entity for startups be-
cause it can take you from conception to IPO, and is the entity of
choice for venture capitalists. Unlike LLCs, C-Corps do have to pay
corporation tax, but they are much more robust and scalable. In-
vestors expect you to be a C-Corp. If you apply to a startup accel-
erator as an LLC, theyll make you convert to a C-Corp before
accepting you. You better have a really compelling reason NOT to
choose a C-Corp.

When it comes to choosing an entity type for your company, 99% of

U.S.-based startups should opt for a C-Corporation. The only exception
to the rule is if you dont plan to ever raise money from outside in-
vestors and dont aspire to ever IPO, in which case the simpler LLC
could still be an option.

Jurisdiction
Once youve chosen an entity type, you then need to consider where to
register that entity. In the U.S., LLCs and Corporations can be regis-
tered in any of the 50 states plus the District of Columbia. You have
three options:

1. Home State. You might assume that registering your company in

your state of residence would be the default option. And if you opt
for a LLC, it probably is. But you should think twice before incor-
porating a C-Corp in your home state. Each state has slightly dif-
ferent laws, and some Secretaries of State are easier to work with
than others. Plus, youll get a lot of raised eyebrows if you tell a
California VC that youre incorporated in Alabama (which happens
to be my state of origin).

2. Delaware. Most startups are incorporated in Delaware, and thats

where investors expect your company to be incorporated. Why?
The tiny state has a long tradition of hosting major U.S. corpora-
tions, and has developed a well-defined body of law thats busi-
ness-friendly. But the simple reality that Delaware is what
everyone (investors, lawyers, accelerators, etc.) is familiar with
and expects is reason enough for me. (See Yokums What state
should I incorporate in? for more.)

3. Oshore. Attend a startup Q&A session about company formation

and inevitably youll get some hotshot asking about setting up a
holding company in the Caymans. Sure, the tax rate may be lower,
but as an early-stage startup, tax rate should be the last thing on
 your mind. Right now you need to figure out how to build a prod-
uct and generate revenue. Get to $1 billion first, then worry about
tax optimization. An oshore entity almost never makes sense for
a U.S.-based startup.

If youre setting out to create a high-growth startup, you cant go wrong

with a Delaware C-Corporation.

Number of Shares to Authorize

Now that youve chosen an entity and jurisdiction, you next need to de-
cide how many shares to authorize. It can be any number, but let me
save you the hassle and tell you the best answer: 10 million. Why? Be-
cause thats what everyone else does. (Are you noticing the pattern
here?)

Beyond that simple reason, 10 million is an easily divisble number. Its a

big enough number that when you give an employee 10,000 stock op-
tions, it psychologically feels like a lot (even though its only 0.1% of
the company). Its also a convenient number for dealing with the price
per shareif your company has a $10 million valuation, each share
would be worth $1. But more than anything, authorize 10 million
shares because thats the norm for startups.

Number of Shares to Issue

Its important to realize the dierence between authorizing shares and
issuing shares. Authorizing shares is simply deciding how many slices to
cut in the pie. Issuing shares is when you actually hand out some of
those pie slices. Authorized but unissued shares are then the pieces of
the pie still on the table. Once you decide how many shares to autho-
rize, the next step is to determine how many shares to issue to the
founding team.

The advice out there on this particular topic is more divergent than the
other aspects weve covered so far, but I suggest allocating roughly half
of the authorized shares to you and your cofounders. This should give
you enough headroom to make it through your Series A financing with-
out having to authorize additional shares.

Heres an example scenario. Lets say we issued 4 million shares to the

founding team, and set aside 1 million shares into an option pool for fu-
ture hires. Weve now carved out 5 million shares. In order to get to a
Series A funding round, many startups are now raising at least two
prior rounds (call it pre-seed and seed), and a rule of thumb is that
well need to give away 20%-30% of our company each round. So if we
start out with 5 million shares and are diluted 25% over three consecu-
tive funding rounds, were still within our 10 million authorized shares:

5,000,000 1.25 = 6,250,000

6,250,000 1.25 = 7,812,500
7,812,500 1.25 = 9,765,625

Splitting Equity Among Cofounders

At this point, youre probably planning to authorize 10 million shares
and issue a total of 4 to 5 million shares to you and your cofounders.
However you decide to split it up between you, there is one very impor-
tant consideration: vesting periods.

It is highly recommended that you and your cofounders all agree on a

vesting schedule for your founders stock. Recommended terms are:

4-year vesting schedule. Your equity vests in 1/48 chuncks every

month for 48 months.

1-year cli. If you leave the company within the first year, you
dont take any equity with you. Instead the first 1/4 of your equity
vests on the 1-year anniversary.

Single-trigger acceleration. In the event of a company sale, all

your unvested equity vests immediately, even if the full four years
has not ellapsed.

Why would you, a founder, put such restrictions on yourself? To protect

your cofounders andsince theyll be signing the same agreementto
protect you in case one of them leaves the company early. At this
point your cofounders are probably close friends, but four years is a
long time and startups are stressful. Cofounders leave. The last thing
you want is to fall out with a cofounder a month after the company is
formed and have them walk away with half of the company. A huge
number of company blowups are the result of cofounder fights. Protect
yourself. See Cooley Gos Founder Basics for more on this.

(If you do opt for a vesting period, theres a document called the Sec-
tion 83(b) election that you really, really need to file with the IRS
within 30 days to avoid being potential hit with a sizeable tax bill later.
Its a hard deadlineso do it right away before you forget.)
Making it Happen
Entity, jurisdiction, shares to authorize, shares to issue, founder vesting
schedules. Those are the main parameters you need to think about
when it comes to incorporating your startup. With those in mind, how
do you actually go about incorporating? You have a few options:

Pied Pipers attorney in the HBO show Silicon Valley.

1. Hire an attorney
In the past most startups have hired a lawyer to handle the incorpora-
tion process for them. A good attorney will first walk through the types
of decisions weve covered above, generate the relevant documents
(Certificate of Incorporation, Bylaws, Initial Board Consent, stock pur-
chase agreements, and others), and file your Certificate of Incorpora-
tion with Delaware (or other jurisdiction), and often help with other
details such as getting an Federal Employer Identification Number
(EIN) and arranging a registered agent (a third-party registered within
the state who receives correspondence from the state on your behalf).

I recommend using UpCounsel to hire an attorney to help you with

company formation, where you can expect to pay $1,00o to $2,000.
Higher-end law firms often charge north of $5,000 for formation.
 The skyline of Wilmington, Delaware.

2. Do It Yourslef
If you dont want to spend a couple grand on attorneys and are willing
to roll up your sleeves, it is entirely possible to incorporate on your
own. I managed to. But a word of caution: if you screw up your incor-
poration, it could lead to big problems down the road, or at the very
least make you look amateurish, so be extremely careful. Heres how I
did it:

1. First, apply for your Federal Employer Identification Number

(EIN). Easy.

2. Second, arrange a mandatory registered agent. One of the com-

mon ones is Harvard Business Services and will cost you $50 per
year. They dont do anything special and are more or less all the
same but youre requried to have one.

3. Heres the magical part. You can use Cooley Gos Delaware Incor-
poration Generator to create all the documents, free. Cooley is a
well-recognized international law firm with a healthy startup prac-
tice, so I put alot more faith in their templates than, say,
LegalZoom.

4. Then, you need to file the Certificate of Incorporation (generated

by Cooley Go) along with a Filing Memo and fax it to the Del-
aware Division of Corporations at the number included in the
memo. It will cost you $89.

So for $139 and a bit of DIY elbow grease, youre now a Delaware C-
Corporation. However, before you actually file with Delaware, I recom-
mend that you get someonean advisor, another founder, an attorney
to help you double check that everything is as it should be.
3. Stripe Atlas
If you dont want to spend $1,000+ on legal fees, but dont have the
wherewithal to DIY, a great third option sprung up just last year: Stripe
Atlas. For just $500, Stripe will incorporate your company, arrange the
registered agent, create your federal EIN, and even open a bank ac-
count for you. It doesnt get any easier than that. If I were starting a
new company today, I would use Stripe Atlas in a heartbeat.

Parting Tip: Get a Mail Service

Prior to incorporating I recommend signing up for a mail service that
gives you a dedicated address and scans your mail for you. Why? Over
the past 2 years at Crema we have moved oces 4 times. It is a royal
pain if you have to update your business address with state and federal
governments, banks, etc., each time you move to a dierent oce
building. Get a dedicated address right at the beginning and save your-
self the trouble (plus having everything scanned rather than cluttering
up your desk is a big bonus). I use EarthClassMail and have a San Fran-
cisco address.

Congrats, Youre Legit

Now that you know what a plain vanilla legal structure looks like and
how to pull it o, youre ready to become a going concern as a Del-
aware C-Corporation. Onward and upwards!
This is the first how-to in my series, The Startup Cheat-Sheet.