How do I setup an investor-friendly (Angel or VC) corporate structure?
I've set up two LLC's and an S-corp myself before for companies that I own and run; but this new idea I have is bigger and I will be pursuing investor involvement for it.
I'm trying to keep my startup costs as low as possible, so I was planning on just starting up an S-Corp (for now) in Massachusetts where I live. My co-founder is in Rhode Island, but we believed that just being incorporated in MA is probably better for a tech startup (yes, I know many incorporate in delaware due to corporate taxes but MA from what I know makes us pay here as well).
My question is; if we want to pursue funding eventually, are there things I need to consider that I hadn't before in the other businesses where funding was never really on the table? Do I need to set aside more shares; or should I start with C-corp instead of an S-corp?
One of the values I would expect to get from a lawyer would be connections to investors... but I'm just not sure I can afford the lawyer at this point. I can save close to $1k by doing it myself and I'd rather put that into product development and other licencing fees I need to cover as part of our startup idea.
Funding Corporate Structure Corporate
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Take a look at venture hacks for their advice on this. I think YC recommends Delaware C corp. – Tim J 13 years ago
2 Answers
I would start it the way you are planning with an S-Corp. Eventually, when you find investors, they may insist on a C-Corp, but I sure wouldn't waste the money and effort on it in the early stages.
Good luck.
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How much more money or difficult is a C corp? Seems like they are essentially the same in terms of start up. – Tim J 13 years ago
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Legally, the C Corp provides the minority owners with more protections from the majority owners. As for the tax differences... An S Corp is a pass-through entity which allows partners to claim the corporation's profits or losses on their personal tax forms. A C Corp on the other hand forces the company to pay taxes at the corporate rate AND then when dividends are distributed, the recipient must again pay taxes on the dividends received. So where the profits of a C Corp are taxed twice, the profits of a S Corp are only taxed one. – Dave Feyereisen 13 years ago
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I know the differences - but typically there ARE NO PROFITS for a while for the corporation anyway. I was asking what wasted money early on - same with the effort. There is no increase in effort or money to set up or run. Unless I am wrong. – Tim J 13 years ago
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@Tim - In my experience, lawyers have charged more to set up C Corps, and accountants have charged more to do the taxes for C Corps - but I'm not sure if this is the exception or the rule. But then again if you expect to lose money for a while you may not have much need for lawyers or accountants. Take care, – Dave Feyereisen 13 years ago
Forget about the type of corporation you need at this point because it's very easy to change into a different type of corp, and forget about your lawyer introducing you to investors... most investors that are coming through attorneys are looking for startup companies that have already generated revenue to the tune of at least $3 million so what you're going to be looking for are "angel" investors and a lot of those are not committing millions, they're committing in the low thousands (i.e., $50,000 or less). Do as much as you can to develop the idea/product/service and start talking to everyone you know about it to see whether you have any family/friends who know of people who might be willing to put up some money for the further development. Also, you have to have some "skin in the game" because if you don't have your own money in the game and a significant portion, no VC is going to take you seriously. They don't pay for ideas, they pay for visionaries who are willing to put their money where their mouth is.
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Sure, you can always just deal with it later, but there must be some constructive steps that a DIY incorporator can take up-front to avoid painting himself into a corner. – Brandon King 13 years ago
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Actually, the laws for various states might make a difference for investors. They may prefer one locale over another. This is something I overlooked... – Tim J 13 years ago
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I'd like to know what you mean.. does the state matter? I'd really rather not pay 2x the yearly fees for setting it up in DE but if no one wants to invest in a MA corp then I would be willing to change my mind. – Nick 13 years ago
