We get this question at least once a week. Answering it provides a great opportunity to talk more about strategic questions for the startup, including whether it will raise money and what kinds of investors it plans to target.
In short, if you plan to raise venture capital, you should plan to incorporate your startup in Delaware. Doing this will likely increase your startup’s access to:
- Robust corporate law
- Experienced legal help
- Standard form documents
- A specialized court system
The main downside is that you’ll pay more in fees than if you just incorporated in your home state. But these fees are modest and well worth it for the advantages gained as we’ll see below.
Access to Capital
Investors, like the rest of us, are creatures of habit. The vast majority of startups they invest in are Delaware corporations. They may be willing to invest in a startup incorporated elsewhere, but it may also cause them to question why the startup didn’t simply go to Delaware. In an ecosystem where the demand for capital is limitless but the supply is limited, giving investors any reason to pass on your startup, no matter how minor, is a risk. This is one reason most startups incorporate in Delaware.
Access to Robust Corporate Law
To be fair to investors, their reasons for investing in Delaware probably aren’t just rooted in habit. For instance, Delaware has a well-established body of corporate law that is widely recognized and respected by investors and other stakeholders. It also tends to be favorable to company management. This can help give investors confidence in your startup and make it easier to attract funding. This is especially significant if the investor will take a seat on your startup’s board of directors, in which case the investor will have fiduciary duties to the company. There is a robust body of law respecting the fiduciary duties of directors, which tends to give investors greater confidence in taking a board seat.
Access to Experienced Legal Help
Because so many startups choose to incorporate in Delaware, there are many experienced startup lawyers who are familiar with Delaware corporate law. This can be especially useful if you have to move your startup to a different state. If it’s a Delaware corporation, you’ll be able to find competent legal help no matter what state you’re in.
Access to Standard Form Documents
More and more these days, there is a standardization movement for startup documents. This has led to things like Y Combinator’s SAFE, Series Seed documents, NVCA documents, and more. All of these documents are structured with the assumption that the startup is a Delaware corporation. That’s not to say they can’t be adapted to work with corporations in other states, but that’s just more legal work that could be avoided by going to Delaware.
Access to a Specialized Court System
Another advantage of incorporating in Delaware is that the state has a specialized court system, called the Delaware Court of Chancery, that handles business disputes. Specialized knowledge of and experience with corporate law is highly valuable. The average judge is a generalist and likely lacks the deep well of corporate knowledge that the Delaware Court of Chancery has. This court has a reputation for being quick and efficient, which can be an advantage for startups that need to resolve legal issues quickly.
What About Other States?
If you’re a venture track startup, just say no to incorporating in California. When your investors want you to convert your California corporation to a Delaware corporation, you’ll realize the mistake you’ve made. California doesn’t allow corporations formed there to use statutory conversion (a relatively streamlined process) to move to Delaware. Instead, you’ll have to reincorporate, which involves much more time and expense than statutory conversion.
Wyoming has become popular as an alternative to Delaware. Many who incorporate in Wyoming cite the privacy benefits from having to disclose less information about the business and its owners, as well as perceived tax advantages. The reality for most venture track startups is that these things probably don’t matter much. It’s true that Wyoming requires little in the way of disclosure, but other states don’t have particularly onerous disclosure requirements. And unless the company is actually doing business in Wyoming, then the tax advantages are probably illusory anyway.
Washington is not a bad alternative to Delaware. Its fees are lower than Delaware and Washington’s corporate law is similar to Delaware. It’s also easy to convert a Washington corporation to a Delaware corporation. Some investors on the West Coast will have invested in Washington companies and may not be bothered by it. With that said, our clients who decided to incorporate in Washington have, almost without exception, been asked at one point or another by investors why they didn’t just incorporate in Delaware (or have been told to convert as a condition of the investor investing).
Startup founders are eager to challenge the status quo. But it’s important to pick the right battles to fight. Your startup’s state of incorporation is probably not the right battle to fight. The risks are too big and the rewards are too small. That’s why Delaware usually wins out.
On the other hand, if you plan to bootstrap your company, it may make sense to incorporate in your home state (or form an LLC rather than a corporation). So context does matter here.