Why Incorporate in Delaware?
When most people first have a question, they either ask their friends and family or they ask Google. If you are a founder and hang around other founders, it is likely that one or more of your friends have incorporated in Delaware, so you do the same. If you ask Google, you are likely to find thousands of articles on the merits of incorporating in Delaware. Many of these articles are written by companies whose business is selling legal documents, sometimes specializing in the documents of a particular state. Thus, their advice convincing you to incorporate in Delaware is not an unbiased one. If you’re not a true startup, it may not be in your best interest to follow in the footsteps of the companies that are.
If your company is a true startup, that is, one that plans to grow and scale quickly using other people’s money, it is likely that you don’t have a choice but to incorporate in Delaware.
Institutional investors prefer investing in Delaware C-Corps because Delaware corporate law is familiar and favorable to investors. By incorporating as a Delaware C-Corp, signal to investors that you understand startup convention and are ready to accept investment.
As part of a VC’s due diligence, they may ask you whether you have incorporated and in what state. If your answer is not Delaware, you may have to justify your choice to choose a different state. Fair or not, a VC may not take you seriously if you choose your home state over Delaware and you don’t want to give a VC any reason not to fund you, especially one that is so easily prevented. If you’re not incorporated, a VC may make your funding contingent upon your company incorporating in Delaware.
This article is also posted on Medium.
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