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This is a nice do-it-yourself guide to how to file a certificate of incorporation in Delaware. A few observations from the dark side (I am a business lawyer):

by grellas 16y ago

This is a nice do-it-yourself guide to how to file a certificate of incorporation in Delaware. A few observations from the dark side (I am a business lawyer): 1. Filing the certificate is only the first of several steps you need to take to complete an incorporation (you also need to set up its management structure, capitalize it, enter into any shareholder agreements as are appropriate, adopt bylaws, and comply with securities laws, among other things, or else your corporation is only half-baked). 2. Even if you complete an incorporation, you still need to do this in a distinctive way for a startup as opposed to what you would do if you were incorporating a typical small business - meaning, the process leaves the founders vulnerable to a fair number of legal risks unless they take pains to put strings on the stock issuances in case someone bolts without earning his piece, to assign IP rights into the company to make sure no individual founder later claims such rights as his own, to enter into work-for-hire arrangements to make sure that the rights to any continuing work done on the company's technology will belong to the company and not to any individual founder, etc. (summarized in more detail here: http://grellas.com/faq_business_startup_001.html http://grellas.com/faq_business_startup_001.html). 3. There are also issues about which entity might be best for your situation (corporation or LLC) and which state (Delaware or other). I don't want to be misunderstood here. I have never discouraged clients from taking any self-help steps they see as helpful to them and I will refer them to resources that help them in this. And often an initial bare-bones corporate or LLC setup makes infinitely more sense for founders than does anything more elaborate and more expensive. But such steps must always be understood for what they are. If you have an inexpensive method for filing a Delaware certificate of incorporation at the hand, that is helpful and broadens your options as a founder in getting your entity technically formed on the cheap. Just don't forget that it is at that stage only an incomplete formation. Just as lighting the stove in only step one in cooking your dish, so filing the charter document does not really make you "incorporated" until you have done the rest of it as well. Nor does it necessarily mean that you have made your entity choice in the right way. Forgive me if this sounds like self-promotion (I have assiduously tried to avoid this in my HN comments) but it does pay normally to at least meet with a skilled attorney to get some strategic advice on how to do your setup. The cost of doing an initial meeting is usually nominal and will at least let you make the choices you do make with open eyes on what the trade-offs are. It is commendable to conserve cash. It is not commendable to do so in a way that leaves you potentially flying blind on important choices affecting your startup.

tptacek 16y ago
It feels like he's got the minimum number of steps required to invoice a Fortune 500 company, to get a 7-figure insurance policy, and to deliver buggy code to that company without worrying about losing his house in a subsequent lawsuit. Is there any advantage to waiting to get to that step until after speaking to an attorney, or should people just go ahead and at least get minimally covered? Might it depend on whether equity distribution is a major concern (you want your company to survive the first dispute among its principals) versus actually transacting business?
- grellas 16y ago
  These are excellent questions, and they come up all the time with founders. Here is the basic trade-off: On the one hand, it is a drain to have to pay lawyers or to have to comply with pure legal formalities when you need to focus your energies and resources on building a business. On the other, if you skate along, and then something goes wrong which you have not covered legally, you get into a potentially tricky situation that can easily become more expensive to deal with than would otherwise have been the case had you invested some money and effort into covering the formalities in the first place. My rules of thumb for founders on this are: 1. If you are a sole founder, you normally can take the "minimum steps" to get a bare-bones entity in place and defer more complex items until later. In that situation, you don't need to worry about what I have called "strings on stock" (i.e., restricted stock) or about IP formalities because these areas tend only to lead to problems when you have multiple founders and the risk exists that one or more of them may act opportunistically in the absence of clearly defined legal rights. 2. If you are a team, and you have a high level of trust among each other, you can also sometimes go with a bare-bones setup while you remain in, say, an early development phase (or otherwise are not actually transacting real business) and nothing of too high value is yet involved in your venture. In such cases, as you build varying degrees of value into the business, you do take some legal risk that someone will act opportunistically but this is normally an acceptable level of risk, both because it is remote and because the fallout from a worst case is not likely to be major. Hence, you can often wait before taking the more formal steps. Of course, all of this changes once you have built something that already has high value or excellent prospects of acquiring value. At that point, in my view, it is imprudent to rely on too informal of a setup. While you can wait in such cases, it still helps, in my view, to speak to an attorney preliminarily up front just to get a strategic perspective on your options. Having done that, founders can usually make good judgments about whether or not to take other immediate legal steps or to defer them. The point is that they can then do so in an informed way (assuming the attorney is knowledgeable, which is not always the case unfortunately). Concerning legal formalities associated with equity distribution, I have had lots of founders over the years come in having done a half-baked job on this when set something up themselves (a "quickie LLC" or some such thing) and it normally is no significant problem either completing or correcting this sort of thing as long as the founders remain in harmony. So, founders can take their own cut at this sort of thing and often come out OK but this often is as much dumb luck as anything else. Again, if any sort of value is involved, I think that founders should try to do things right at the stage when they do their key stock grants (or start doing real business).

by grellas 16y ago

tptacek 16y ago

It feels like he's got the minimum number of steps required to invoice a Fortune 500 company, to get a 7-figure insurance policy, and to deliver buggy code to that company without worrying about losing his house in a subsequent lawsuit. Is there any advantage to waiting to get to that step until after speaking to an attorney, or should people just go ahead and at least get minimally covered? Might it depend on whether equity distribution is a major concern (you want your company to survive the first dispute among its principals) versus actually transacting business?

grellas 16y ago
These are excellent questions, and they come up all the time with founders. Here is the basic trade-off: On the one hand, it is a drain to have to pay lawyers or to have to comply with pure legal formalities when you need to focus your energies and resources on building a business. On the other, if you skate along, and then something goes wrong which you have not covered legally, you get into a potentially tricky situation that can easily become more expensive to deal with than would otherwise have been the case had you invested some money and effort into covering the formalities in the first place. My rules of thumb for founders on this are: 1. If you are a sole founder, you normally can take the "minimum steps" to get a bare-bones entity in place and defer more complex items until later. In that situation, you don't need to worry about what I have called "strings on stock" (i.e., restricted stock) or about IP formalities because these areas tend only to lead to problems when you have multiple founders and the risk exists that one or more of them may act opportunistically in the absence of clearly defined legal rights. 2. If you are a team, and you have a high level of trust among each other, you can also sometimes go with a bare-bones setup while you remain in, say, an early development phase (or otherwise are not actually transacting real business) and nothing of too high value is yet involved in your venture. In such cases, as you build varying degrees of value into the business, you do take some legal risk that someone will act opportunistically but this is normally an acceptable level of risk, both because it is remote and because the fallout from a worst case is not likely to be major. Hence, you can often wait before taking the more formal steps. Of course, all of this changes once you have built something that already has high value or excellent prospects of acquiring value. At that point, in my view, it is imprudent to rely on too informal of a setup. While you can wait in such cases, it still helps, in my view, to speak to an attorney preliminarily up front just to get a strategic perspective on your options. Having done that, founders can usually make good judgments about whether or not to take other immediate legal steps or to defer them. The point is that they can then do so in an informed way (assuming the attorney is knowledgeable, which is not always the case unfortunately). Concerning legal formalities associated with equity distribution, I have had lots of founders over the years come in having done a half-baked job on this when set something up themselves (a "quickie LLC" or some such thing) and it normally is no significant problem either completing or correcting this sort of thing as long as the founders remain in harmony. So, founders can take their own cut at this sort of thing and often come out OK but this often is as much dumb luck as anything else. Again, if any sort of value is involved, I think that founders should try to do things right at the stage when they do their key stock grants (or start doing real business).