A question often asked by early-stage startups is whether to incorporate in Delaware. The answer depends on the startups’ long-term goals. If the goal is to receive funding from investors, or take the startup public, the answer is most likely yes. Notably, a startup can incorporate in Delaware and still operate in its home state.
A number of reasons favor a Delaware c-corp. Delaware corporate law as a whole makes the funding process easier and IPO process easier than other states. Investors, and their attorneys, will be most familiar and comfortable with Delaware corporate laws. Delaware permits a single board member where other states typically require at least three. Delaware law has entrenched itself as the preferred law from which startup and funding agreements are based. Delaware corporate law includes gives preferred shareholders certain voting rights where in other states only common shareholders may vote. Delaware corporate law tends to be pro-management. Delaware has a special court of chancery that hears only corporate disputes. Courts around the country look to the Delaware Court of Chancery rulings for legal precedence. Usually, a funding investor will demand a seat or two on the board and management role in exchange for funding. Delaware corporate law makes it more difficult for small investors to bring derivative actions.
Finally, and perhaps the most pragmatic reason, a funding investor is likely to require a non-Delaware startup to reincorporate in Delaware. High growth startups with funding goals will save thousands in duplicate legal fees and avoid potential tax issues by incorporating in Delaware, to begin with. In some cases, the dollar savings in legal fees and taxes can be in the tens of thousands.
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