If you are a startup then you have heard of a Delaware Corporation (DE C-Corp). For many reasons, DE offers a number of advantages for startups seeking venture capital financing. Here are the step by step instructions for how to form a DE Corporation according to the standards of Silicon Valley.
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- Decide you want to form a Delaware Corporation (“DE Corp”). Check out Choosing Your Legal Entity.
1. Get A Registered Agent
- What is it? Delaware law requires that every business entity have and maintain a registered agent with a physical address in the state that is authorized to do business in Delaware. There are a number of agencies that act as registered agents. Some registered agents offer filing services, a few more bells and whistles and 24hr customer service but most startups do not really use these extra services. KEEP IT SIMPLE.
- What to do? Contact a registered agent or go to their website to signup online. That’s it! You will put the name and address of your registered agent on your Certificate of Incorporation below. Below are a couple that many startups use. Expect to spend $50-$100 a year on a registered agent.
|$99.00/yr||10% UpCounsel Discount Code: MPGA10|
2. Check On Name Availability
- What is it? Your name must be available in DE.
- What to do? Check out the Delaware Entity Search page to see if your name is available.
3. Certificate of Incorporation (“COI”)
- What is it? A document which lays out the primary information and rules of your corporation. It is also referred to as a “charter” for your corporation. Other states refer to this as Article of Incorporation. In order to create a DE Corp you must file a COI with the DE Secretary of State. Most Silicon Valley startups use a specially crafted COI which is different than the sample provided by the DE Secretary of State and any online incorporation service.
- What to do? 1) Create an COI and 2) Fax to DE Secretary of State w/ Required DE Cover Memo and Credit Card information (See DE Fees). Filing can take 1 – 7 days.
- Sample Document: Certificate of Incorporation
4. Check Corporate Status
- What is it? Your DE Corp is not registered with the state until your COI has been processed. Once it has been processed, it will show up on an entity search.
- What to do? Wait 1-7 days for your COI to be processed by the DE Secretary of State. Check the Delaware Entity Search to see if your corporation has been filed properly. If you corporation’s name appears, then your entity has been registered and you can proceed to the steps below.
5. Foreign Corporation Designation
- What is it? Most states require that a company domiciled within their borders, but incorporated in another state, must file a statement declaring that they are a foreign corporation. This so your state can tax you . . . darn taxes. For example, UpCounsel is a DE Corp but our office is in San Francisco, CA. We therefor need to file a Foreign Corporation Designation with the state of California.
- What to do? If following the California example: 1) download and complete a Designation by Foreign Corporation and 2) mail it to the CA Secretary of State. Check you individual state’s filing requirements.
6. Action By Sole Incorporator
- What is it? When you form your Delaware Corporation it will be done by one person who will sign the COI (the sole incorporator). The action by sole incorporator allows the individual to resign as the sole incorporator, appoint the initial directors of the company and adopt the company’s Bylaws (all requirements for a properly formed DE Corp).
- What to do? Draft the action, have the original incorporator sign it and internally file the document in your company’s records. The Bylaws will be an attachment to this document.
- Sample Document: Sample Action By Sole Incorporator
7. Bylaws (Adopted Above)
- What is it? Bylaws are the the rules which govern the operations of the company. Similar to the COI, Silicon Valley law firms have created specifically drafted Bylaws for companies they incorporate in DE, so do not use the standard Bylaws you find on generic sites.
- What to do? Draft and internally file. Contact a lawyer to go over these for you.
- Sample Document: Delaware Bylaws (Available upon request)
8. Decide On Your Equity Structure
- What to do? Check out suggestions for figuring out founder’s equity. Most startups reserve 10-15% of the total common stock for an Equity Incentive Plan.
9. Written Consent In Lieu Of An Organizational Meeting
- What is it? Delaware allows the directors of the newly created corporation to consent in writing to a number of preliminary items vs having a full blown organizational meeting. Some of these items include electing the officers of the company and approving the initial sale of stock to the founders.
- What to do? Draft the consent, have all Board members sign it and internally file. You appointed the Board in the Action by Sole Incorporator above.
- Sample Document: Written Consent In Lieu Of An Organizational Meeting (Available upon request).
10. Get An Employee Identification Number (“EIN”) And Set Up Bank Accounts
- What is it? Your EIN is really your federal tax number and the way the IRS keeps track of you . . . darn taxes!! You need an EIN to open a bank account.
- What to do? Go to the IRS EIN website to get your EIN in less than 5 minutes. It is 100% free so do not pay anyone to do this.
11. Stock Purchase Agreement
- What is it? Now that the Board has approved the sale of stock in the Action by Written Consent In Lieu of an Organizational Meeting, the company can actually sell stock to the founder(s) of the company. A Stock Purchase Agreement is the instrument that allows a founder to purchase shares from the company and lays out the terms governing the purchase.
- What to do? See whether you need to include vesting in your Stock Purchase Agreement. Have each founder who is purchasing stock sign a stock purchase agreement. For any stock purchased, each founder will need to write a check, sign it, scan it, put the scan into the company records. Attach the check to each founder’s stock purchase agreement and file that in the company records. You do not need to deposit the checks (but can if you like). Since the par value with be $0.001 – $0.000001, the checks should be a small dollar amount.
12. All Founders Assign Their Past Intellectual Property Relevant To The Company
- What is it? It is critical that each of the founders assign any IP related to the startup’s business to the company. Not securing your IP can have major implications when you try to go out and raise money. One of the ways to do this is by making any IP partial consideration for founder’s stock – as such this transfer of IP will be contemplated in the Stock Purchase Agreement. There are certain tax complications with selling your IP for stock (See post by Yokum Taku). As such, some attorneys prefer merely assigning the IP to the company for “fair consideration.”
- What to do? If there is IP to be assigned, then place IP Assignment provisions in your Stock Purchase Agreement or create a separate IP Contribution Agreement for the founders who wish to assign IP to the company. You should consult your attorney for putting these into place. Each founder will sign an agreement and a copy will be internally filed with the company.
13. Record Any Assigned Patents and Trademarks With The United State Patent and Trademark Office (if assigned above)
- What is it? Within 3 months of the assignment of a patent or trademark, the owner must make a record of the assignment with the USPTO.
14. All Founders Sign A Confidential Information & Invention Assignment Agreement
- What is it? A CIIA primarily assigns to the company any future intellectual property related to the company developed by an individual founder while that founder is at the company. It is a common practice for all founders, officers, managers, employees and consultants.
- What to do? Each founder will sign an agreement and a copy will be internally filed with the company.
- Example Document: Confidential Information & Invention Assignment Agreement (California)
15. Stock Certificates
- What is it? A Stock Certificate is a physical representation of a stockholder’s shares.
- What to do? This depends on your agreements, but typically, if the shares are subject to vesting, then after the certificates are created they will be kept in escrow by the company. If a founder’s shares are not subject to vesting, then the company should create and present the founder with the Certificate.
16. State Securities Exemption Notice (25102(f) in California)
- What is it? Founders are actually subject to both federal and state security filing exemptions. In California 25102(f) grants exemption from securities qualification for certain limited securities offerings. The startup which sells the shares to the founder MUST FILE A 25102(f) EXEMPTION NOTICE with the California Department of Corporations for an in or out-of-state corporation. Check your individual state’s security filing exemptions.
- What to do? The 25102(f) notice must be filed with the state within 15 calendar days after the first sale of a securities. Startups must file the 25102(f) Limited Offering Exemption Notice electronically, via the California Department of Corporations website. The filing fee for a startup is typically $25.00.
- Link to Form: California 25102(f) Notice
17. 83(b) Elections For Vesting Stock – Within 30 days of stock purchase!!
- What is it? 83(b) elections have several CRITICAL tax implications which you should look into further with your tax professional. Generally, 83(b) elections are used is the cases of founder stock with vesting attached to it.
- What to do? Consult your attorney and tax advisor before proceeding. An 83(b) election must be completed and mailed within 30 days of sale of founder stock. Send by Certified Mailto:
Department of the Treasury Internal Revenue Service Fresno, CA 93888-000
- Example Document: Form of 83(b) Election.
18. Indemnification Agreement for Officers and Directors
- What is it? Indemnification agreements are often provided to a Company’s directors and officers to minimize potential personal liability for actions taken in their capacity as directors and officers.
- What to do? Have your shareholders approve a “Form of Indemnification Agreement.” Once it is approved, complete an Indemnification Agreement for each officer, have them signed, and file the agreements in the company’s file.
19. Get General Business Insurance
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