Lesson: Incorporating Your Venture with Augie Rakow

Step #3 Delaware: Why Delaware?

There are many different ways to do it. Many, many, many different ways to do it. New ways to do it are being developed every day. Don't run with that too far. Stick with what's tried and tested. You guys are not in the business of publishing the next great thesis on how to do a cooperation in a new and novel way. You're in whatever business you're in, and try to stick with the tried and true plain vanilla boiler plate standard ways of doing these things. They're the safest. They're the cheapest.

There are many, many ways of doing it, and they're being experimented with all the time. What you will hear as long as you are in the tech world, and doing startups, what you will hear people encouraging you to do, is to incorporate what's called a C Corporation and Delaware. It's perfectly fine with me if you don't learn anything about any other possible way of doing it. Any of the hundreds or other ways of doing it. All you need is a Delaware C Corporation for 99 out of a 100% of the cases.

Why does everyone say you should do a Delaware C Corporation? As I've said, you've lots of different options. You can incorporate your company in any state, just like a baby can be born in any hospital, the company can be born in any state, and any state can issue a certificate of incorporation, or articles of incorporation known more generally as a charter, and say, "Here's your birth certificate company. Go for it." Any state can do that. Any country can do that. I have worked with companies that are incorporated in Hawaii. I've worked with companies that are incorporated in Sweden. Companies can be born in any jurisdiction. Cities and counties don't create corporations. It's always a state by state thing or a national thing.

Now, because you're incorporated in Hawaii doesn't mean you have to be in Hawaii. Just because you're born in Hawaii doesn't mean you have to stay in Hawaii. The company can be born in any jurisdiction, and can set up shop in any jurisdiction.

I work with a Delaware company that's based in Brazil, where all the stockholders are in England or the UK. So it can move all around. The reason people pick Delaware to incorporate, there are several reasons. One is because everybody else does, and I don't mean that in a derogatory way. They incorporate in Delaware because everybody else does, and all the major corporations are incorporated there. Every problem that could possibly come up has come up in Delaware, and so you know how these problems are going to get resolved.

If you want to know if a director in this situation is allowed to vote in this way, that situation has probably come up, or something very close to it has come up with a Delaware company in the past, the Delaware statutes. The Delaware state statutes governing the corporation maybe address that. If not, the courts in Delaware have probably addressed that, and if not, there's lots of corporate lawyers who are thinking about these issues, who have a hunch about how this issue would be addressed.

If you instead are incorporated in Wisconsin, I've never worked with a Wisconsin corporation. If you ask me if a director of a Wisconsin corporation is allowed to do such and such, honestly, I don't even know if Wisconsin corporations have directors. I assume they do, but I don't know. I have to go look it up. This becomes inefficient. It becomes very inefficient.

Part of the reason everybody incorporates in Delaware is because everybody else does. Everyone knows the answers and everyone is familiar with how all the different problems play out. That's one reason. Another reason is, and this is a more technical, text book reason, is that this specific rules that have developed in Delaware tend to favor management, they tend to favor the people who are running the company, and you tend not to be as restricted by minority stockholders rights. So less likely to get sued. That's reason number two.

The third reason, and this is not a textbook reason, but this is a reason that people like me who deal with corporate legal issues every day will tell you, is that California is terrible to work with. California is like working with a third world country when it comes to the dealing with the secretary state or department of corporations, which are related.

When you call Delaware and you ask them a question, you get a nice clean answer. You call back, talk to someone else, ask them the same question, you get the same answer. Call back, talk to someone else, you get the same answer. You call California, you ask one question, you get one answer. You call back, talk to someone else, you get a different answer and you're wasting your time. That's a big reason.

It is true that you have slightly smaller annual taxes in California. If you incorporate in Delaware, you have to pay in Delaware and in Californian if you're located in California. It's another 800 bucks a year or something like that. Not worth it. The cost savings is not worth it. Incorporate in Delaware.