Startup Cheat-Sheet: How to Incorporate Your Company

So, you’re ready to setup the legal structure for your startup.

Arshia Tabrizi’s sketchnotes of a startup law talk, © 2012 Sacha Chua under the Creative Commons Attribution 2.5 Canada licence.

Entity Type

The first step towards company formation is to figure out which type of corporate entity is the best match for your needs. As a U.S.-based company, you have two main choices:

  1. LLC. The easiest of the three entities to setup is a Limited Liability Company. Unlike simpler entities such as a sole proprietorship or general partnership, the LLC personally shields you, the founders, from business liability that could be incurred. It also offers a pass-through taxation regime, meaning the company doesn’t pay corporate tax, but rather “passes through” profit to the owners. Most small businesses are setup this way. But it’s a bad structure for startups who may want to take on outside investment, because venture capitalists usually won’t (and can’t) invest in LLCs due to complications arising from pass-through taxation. (See Joe Wallin’s 12 Reasons For A Startup Not To Be An LLC.)
  2. C Corporation. While more cumbersome to setup and manage than LLCs, the C Corporation is the standard entity for startups because it can take you from conception to IPO, and is the entity of choice for venture capitalists. Unlike LLCs, C-Corps do have to pay corporation tax, but they are much more robust and scalable. Investors expect you to be a C-Corp. If you apply to a startup accelerator as an LLC, they’ll make you convert to a C-Corp before accepting you. You better have a really compelling reason NOT to choose a C-Corp.


Once you’ve chosen an entity type, you then need to consider where to register that entity. In the U.S., LLCs and Corporations can be registered in any of the 50 states plus the District of Columbia. You have three options:

  1. Home State. You might assume that registering your company in your state of residence would be the default option. And if you opt for a LLC, it probably is. But you should think twice before incorporating a C-Corp in your home state. Each state has slightly different laws, and some Secretaries of State are easier to work with than others. Plus, you’ll get a lot of raised eyebrows if you tell a California VC that you’re incorporated in Alabama (which happens to be my state of origin).
  2. Delaware. Most startups are incorporated in Delaware, and that’s where investors expect your company to be incorporated. Why? The tiny state has a long tradition of hosting major U.S. corporations, and has developed a well-defined body of law that’s business-friendly. But the simple reality that Delaware is what everyone (investors, lawyers, accelerators, etc.) is familiar with and expects is reason enough for me. (See Yokum’s What state should I incorporate in? for more.)
  3. Offshore. Attend a startup Q&A session about company formation and inevitably you’ll get some hotshot asking about setting up a holding company in the Caymans. Sure, the tax rate may be lower, but as an early-stage startup, tax rate should be the last thing on your mind. Right now you need to figure out how to build a product and generate revenue. Get to $1 billion first, then worry about tax optimization. An offshore entity almost never makes sense for a U.S.-based startup.

Number of Shares to Authorize

Now that you’ve chosen an entity and jurisdiction, you next need to decide how many shares to authorize. It can be any number, but let me save you the hassle and tell you the best answer: 10 million. Why? Because that’s what everyone else does. (Are you noticing the pattern here?)

Number of Shares to Issue

It’s important to realize the difference between authorizing shares and issuing shares. Authorizing shares is simply deciding how many slices to cut in the pie. Issuing shares is when you actually hand out some of those pie slices. “Authorized but unissued shares” are then the pieces of the pie still on the table. Once you decide how many shares to authorize, the next step is to determine how many shares to issue to the founding team.

Splitting Equity Among Cofounders

At this point, you’re probably planning to authorize 10 million shares and issue a total of 4 to 5 million shares to you and your cofounders. However you decide to split it up between you, there is one very important consideration: vesting periods.

  • 4-year vesting schedule. Your equity vests in 1/48 chuncks every month for 48 months.
  • 1-year cliff. If you leave the company within the first year, you don’t take any equity with you. Instead the first 1/4 of your equity vests on the 1-year anniversary.
  • Single-trigger acceleration. In the event of a company sale, all your unvested equity vests immediately, even if the full four years has not ellapsed.

Making it Happen

Entity, jurisdiction, shares to authorize, shares to issue, founder vesting schedules. Those are the main parameters you need to think about when it comes to incorporating your startup. With those in mind, how do you actually go about incorporating? You have a few options:

Pied Piper’s attorney in the HBO show Silicon Valley.

1. Hire an attorney

In the past most startups have hired a lawyer to handle the incorporation process for them. A good attorney will first walk through the types of decisions we’ve covered above, generate the relevant documents (Certificate of Incorporation, Bylaws, Initial Board Consent, stock purchase agreements, and others), and file your Certificate of Incorporation with Delaware (or other jurisdiction), and often help with other details such as getting an Federal Employer Identification Number (EIN) and arranging a registered agent (a third-party registered within the state who receives correspondence from the state on your behalf).

The skyline of Wilmington, Delaware.

2. Do It Yourslef

If you don’t want to spend a couple grand on attorneys and are willing to roll up your sleeves, it is entirely possible to incorporate on your own. I managed to. But a word of caution: if you screw up your incorporation, it could lead to big problems down the road, or at the very least make you look amateurish, so be extremely careful. Here’s how I did it:

  1. First, apply for your Federal Employer Identification Number (EIN). Easy.
  2. Second, arrange a mandatory “registered agent.” One of the common ones is Harvard Business Services and will cost you $50 per year. They don’t do anything special and are more or less all the same but you’re requried to have one.
  3. Here’s the magical part. You can use Cooley Go’s Delaware Incorporation Generator to create all the documents, free. Cooley is a well-recognized international law firm with a healthy startup practice, so I put alot more faith in their templates than, say, LegalZoom.
  4. Then, you need to file the Certificate of Incorporation (generated by Cooley Go) along with a Filing Memo and fax it to the Delaware Division of Corporations at the number included in the memo. It will cost you $89.

3. Stripe Atlas

If you don’t want to spend $1,000+ on legal fees, but don’t have the wherewithal to DIY, a great third option sprung up just last year: Stripe Atlas. For just $500, Stripe will incorporate your company, arrange the registered agent, create your federal EIN, and even open a bank account for you. It doesn’t get any easier than that. If I were starting a new company today, I would use Stripe Atlas in a heartbeat.

Parting Tip: Get a Mail Service

Prior to incorporating I recommend signing up for a mail service that gives you a dedicated address and scans your mail for you. Why? Over the past 2 years at Crema we have moved offices 4 times. It is a royal pain if you have to update your business address with state and federal governments, banks, etc., each time you move to a different office building. Get a dedicated address right at the beginning and save yourself the trouble (plus having everything scanned rather than cluttering up your desk is a big bonus). I use EarthClassMail and have a San Francisco address.

Congrats, You’re Legit

Now that you know what a “plain vanilla” legal structure looks like and how to pull it off, you’re ready to become a going concern as a Delaware C-Corporation. Onward and upwards!

Other Startup Cheat-Sheets

This is the first post in my Startup Cheat-Sheet series. Here are the others:

  1. How to Incorporate Your Company
  2. How to Close Your First Investor
  3. How to Create a Winning Pitch Deck
  4. How to Hire Employees & Advisors
  5. How to Get Into an Accelerator
  6. How to Run a Crowdfunding Campaign
  7. How to Track the Right Metrics
  8. How to do Cohort Analysis
  9. How to do Inbound Marketing
  10. How to do Outbound Marketing



Product @ Instacart • 2x Founder • Author

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