Mistake #2: Choosing the Wrong Jurisdiction of Incorporation
This is the second in a series of posts on common costly legal mistakes made by founders of early-stage companies. If you missed it, read Mistake #1 here.
Many entrepreneurs form entities in their state of residence without considering whether its laws will be advantageous to the company. If you plan to raise money from outside investors like VCs, incorporate in Delaware. Delaware’s corporate laws are understood by sophisticated investors and strong protections for officers and directors.
But Mick (you say), I hear that states like Nevada have developed corporate laws that are the same or even better than Delaware. Why shouldn’t I just go with one of those? Uh, because only the lawyers in Nevada know those rules. Your investors don’t. The future acquirer of your company doesn’t. And so on.
Also, did you know that Delaware has a set of judges that only hear cases about Delaware corporate law? Seriously—that’s all they do. In other states, your corporate law case might be heard by a judge who was ruling on a divorce case earlier in the day! Yikes. If my company was ever in court due to a shareholder or director action, I’d much rather have a judge who understood the rules—at least then I could better predict how he or she would rule on my case. (And that’s why your investors and directors prefer you to be in Delaware, too.)
Mistake #3 coming up soon...