Table of Contents
- Startup Corporate Structure
- (1) Entity Choice
- (2) State of Incorporation: Delaware
- (3) Authorized Shares in Charter: 10,000,000 Shares
- (4) Type of Shares: Common Stock
- (5) Par Value of Common: $0.00001
- (6) Initial Founders Issuance: 8,000,000 Shares
- (7) Founders Equity Split
- (8) Vest Founders Shares
- (9) Consideration for Founders Shares
- Need Help
By Sutter Law a San Francisco Business Law Firm
As a San Francisco Business Attorney, I get asked these questions over and over again.
Yet I always have the same answer.
If you are planning on taking accredited investors you generally have to play by the default rules. These are the rules but not the explanations, which are offered in other blog posts.
Startup Corporate Structure
(1) Entity Choice
C Corporation, not an S Corp, LLC, Benefit Corp, or Flexible Purpose.
A C Corporation is the standard corporate structure for U.S. companies.
It is typically chosen by startups due to its beneficial structure that allows for unlimited numbers of shareholders, easy transfer of ownership, and the potential to raise venture capital funding.
Unlike an S Corp, LLC, Benefit Corp, or Flexible Purpose, a C Corporation does not pass its income and losses through to the owners’ personal tax returns.
(2) State of Incorporation: Delaware
Many startups choose to incorporate in Delaware due to its advanced and flexible business laws.
Delaware provides a legal system that is pro-business, protects the interests of the board of directors and shareholders, and promotes fairness and predictability in business matters.
(3) Authorized Shares in Charter: 10,000,000 Shares
Startups often authorize a high number of shares in their corporate charter at inception.
This allows the start-ups to issue shares to founders, employees, and future investors without having to amend their corporate documents.
Here, 10,000,000 shares have been authorized.
(4) Type of Shares: Common Stock
Startups typically issue common stock.
Owners of common stocks essentially hold a claim on part of the company’s assets and earnings.
They also typically have voting rights in the corporation, which may allow them to influence the company’s strategic decisions.
(5) Par Value of Common: $0.00001
Par value is the minimum price per share that a company can issue to shareholders.
The par value of the given common stock is extremely low, set at $0.00001.
This low par value helps minimize legal capital requirements and related costs.
(6) Initial Founders Issuance: 8,000,000 Shares
In the startup’s initial stage, it’s recommended that the majority of shares be allocated to founders.
Here, the founders are issued 8,000,000 shares.
This helps ensure control, maintains motivation, and rewards the founding team for their risk and effort.
(7) Founders Equity Split
The founder will have to divide the shares depending on contribution and work, (keep in mind there should always be a tiebreaker)
The division of equity among founders is an essential part of startup formation.
The shares should be divided based on the founders’ contributions and roles in the company.
A mechanism for breaking ties should also be in place to avoid deadlock in decision-making.
(8) Vest Founders Shares
(Investors almost always require a vesting schedule of “four years with a one-year cliff”
Vesting refers to the mechanism by which founders earn their equity over time.
The investor-preferred schedule is “four years with a one-year cliff”, meaning that no shares vest for the first year. After one year, 25% of the shares vest, and the remaining shares vest monthly over the next three years.
(9) Consideration for Founders Shares
Founders will have to purchase their shares, transfer their intellectual property and invest theirs like.
Founders typically “purchase” their shares through cash, assignment of intellectual property, or services rendered to the company.
This ensures that the founders have made an investment of capital or intellectual property into the company, aligning their interests with the company’s success.
This is the list of the MUST does for scalable startups.
Need Help
If you don’t follow these rules does that mean you will not get investors? Well maybe not, but if you want to have a structure that will pass Venture Capital Due Diligence this is your best bet.
If you need legal advice with your startup structure call Sutter Law a San Francisco Business Attorney Firm for a Free consultation.
