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The Answer is “Delaware C Corp”

Wednesday, April 12, 2017 3:41
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(Before It's News)

Recently, I have seen posts on whether you should start out as an LLC or C Corp.  I was talking to a good friend of mine that has been around venture for almost his entire professional life.  The answer is “Delaware C Corp”.

Always.  I am as certain of this as death and taxes.

If you are going to be a startup business and raise VC money, there is no other choice.  Period.

Entrepreneur, “How should I structure my company?  LLC or C Corp?  Answer:  “Delaware C Corp.”  Entrepreneur, “but I can do a Nevada C-Corp or (fill in the blank state) C Corp.”  Answer: “Delaware C Corp.”

I have invested in both entities.  Early in my investing career we had a knock down drag out fight with an entrepreneur over it post investment.  I was open to listening, but agreed with everyone that said “Delaware C Corp” is the way to go.  I will tell you that it’s a royal pain in the ass to go from LLC to C Corp no matter what all the blogposts say.  Legal expenses are always more than you expect but that’s not the worst of it.

The worst of it is previous investors in the LLC. The entrepreneur has to wrangle them to get them all to agree to the change.  In that change, the new C Corp will establish a company board which is very likely to have the CEO, a venture investor or two, and an independent board member.  It’s highly likely that the LLC investors will not have a seat at the table.  It can rub them the wrong way and even if it’s in the best interest to change to get VC money in the business, they will vote against it.

People will look at shadow tax advantages and choose LLC.  Don’t be fooled.  Don’t fall into this trap.  Those will be eaten up.  If you have already set up as an LLC, don’t fret.  Change it now.  If your attorney advised you to set up as an LLC, get a new attorney.  I know a few here in Chicago that are super sharp.

As far as control of the business, it’s far better to have legal certainty under C Corp law than the wild west of LLC.  Entrepreneurs can still control their businesses either way.  If you are suspicious of an investor, don’t let them invest!  Any investor that comes into a Series Seed or A round of investment and wants to change the management cadre shouldn’t be in the round.  At that stage, they are betting on the entrepreneur that got the business going.  Series B or later, things might change but that all depends.

At Hackathons, in Entrepreneurship classes, at incubators/accelerators, I wish the instructors would just say, “Delaware C Corp” when it came to questions on structure.  It’s sort of like some term sheet clauses.  They are automatic and so should “Delaware C Corp” as the organizational structure of every single startup that wants to raise any investment or venture capital.

If you want to be a cash flow Mom and Pop business, or consulting business it’s a different story.

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