Lecture 18: Legal and Accounting Basics for Startups
The first slide is ironic. "Keep it simple" by forming a Delaware corporation is advice constantly repeated in some circles and it's simply asinine.The simplest option for founders is to incorporate in the state in which they reside/plan to conduct business as they are going to have to file as a foreign entity in that state anyway.The retort is "But investors won't invest in my California LLC!" The first fact this argument overlooks is the that most companies are never able to raise institutional capital. So incorporating in another state for investors you don't have is entity selection's form of premature optimization. Investors look to invest in promising businesses; they aren't seeking out investments in Delaware companies.The second problem with this argument is that it pretends entity selection can't be easily revisited. It can. As I have pointed out before[1], converting to a Delaware corporation is generally a straightforward process. If you have a California LLC, for instance, and need to convert to a Delaware C corporation, it is unlikely to be anywhere near the most complicated or costly part of a financing.Telling founders they don't need to understand legal and accounting nitty gritty and that they should just follow boilerplate advice ("form a Delaware C corp") is in my opinion bad advice. Understanding the details and why you're doing something won't guarantee that you build a great business, but it can save a great business from legal, tax and accounting mistakes that can be fatal.[1] https://news.ycombinator.com/item?id=8393109