How Venture Capitalists Want Your Company to be Formed

Many entrepreneurs and startups are very concerned when they go to start their company because they’re not sure what type of business entity (Corporation, S-Corporation, LLC, etc.) a venture capitalist (VC) would want their company to be formed as, which state they should incorporate in and the types and number of shares.

However, many entrepreneurs and startup advisors believe that this should not be the primary concern. For example, if you incorporate in California when you start out, you can then “re-incorporate” in Delaware later should your investors require this. Or if you don’t authorize enough shares, then you can amend your original articles of incorporation later to reflect more shares, or different classes of shares (common shares vs. preferred shares).

There may be an exception in regards to the LLC – sometimes this entity is more difficult to modify for a venture capitalists needs – VC’s almost always prefer to work with the C-Corporation.

So, in essence, many companies start out in one structure, based in one state and eventually end up being changed considerably later. Instead, it might be advisable to work on working on your product or service, getting the company going in whatever form and then worry about these corporate formalities later – if you are at the point where they are modifying your company, you will probably receiving significant funding and these formalities will be handled by seasoned lawyers.

If you want to do the Delaware option at startup, see how a lawyer would set up a Delaware company now if were a startup. Almost always this is a Delaware C-Corporation.

If you’d like to see some of the typical venture capital agreements or how they typically modify the articles of incorporation, then view these “Model Series Seed Agreements“. This includes documents like Investors Rights and a “Term Sheet”.

Long story short, it’s ultimately up to you how you want to structure your company in the beginning, but the links mentioned above will show how a VC or startup lawyer might eventually structure your corporation.

This entry was posted on Thursday, March 25th, 2010 at 9:21 am and is filed under Incorporation, Starting A Business, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.