Saturday, March 12, 2016

The Start-Up Formula Becomes Standardized

I was listening to the YC attorneys last night on Wharton School radio and they really summed up in simple terms where my advice has been trending for many years now.  In terms of the entity you use a Delaware C Corp, and, keep the initial financing and structure simple so you can focus on growing your business.

              Why a C Corp?  A C Corp is the only practical vehicle if you are planning to add numerous future shareholders, or ever go public.  S Corps and LLC's are great for businesses that have steady operations and a set number of shareholders and can provide some great tax benefits in the right situations.  However, no sophisticated investor wants to wade into your LLC Operating Agreement or deal with the tax issues lurking in your S Corp.  Bottom line - you will end up reorganizing your business if you do anything other than a C Corp.

              Why Delaware?  Pretty much because that’s what everyone expects.  Delaware is the jurisdiction of the vast majority of the important corporations in the U.S.  Therefore, virtually all corporate attorneys have at least some familiarity with its laws and rules, which are also generally very pro-business.  Delaware has a Court system in which business issues are more easily addressed than say, the Superior Court in downtown Los Angeles or San Francisco (ever been there?  Not a good place to do business).  And it is just easy to set up a corporation in Delaware and to keep it going.

              Simplicity and deferred decisions are the best way to handle initial investors.  Founders can spend so much time debating the capital structure and how much equity to give early investors but really everyone should be focused on growing the business and achieving the important milestones that will get the business to the next level.  Using convertible notes or they SAFE agreements promoted by YC provides a simple way to avoid those time consuming, and often emotionally difficult, decisions.  Read more about it here:

PS - A California Corp. or LLC can be OK if you are going to be operating solely in California and do not expect to engage in multiple rounds of fundraising.

The Tonkovich Law Firm assists clients with Estate Planning, Wills, Trusts, Durable Powers of Attorney, Conservatorship and Contested Probate Procedures and Business and Real Estate Litigation in Irvine, CA as well as El Toro, Aliso Viejo, Lake Forest, Laguna Hills, Tustin, Newport Beach, Santa Ana, Newport Coast, Ladera Ranch, Foothill Ranch, Mission Viejo, Laguna Woods, Corona Del Mar, Silverado, Orange, Laguna Beach, Rancho Santa Margarita amd Fountain Valley in Orange County.

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