Comment by swampthing | Hacker News Reader

Comment by swampthing | Hacker News Reader

Parent Full thread

Entity conversion isn't going to be the most complicated or costly part, but it could actually be the most time-consuming depending on the state you're converting from and a bunch of other factors. I've seen it take months - you can imagine the founders weren't happy (wasn't CA though).

I think you need to consider the target audience of the presentation - it's for people who want to start high-growth tech companies that will raise venture capital. If that's your goal, then the simplest option by far is to incorporate as a Delaware C-corporation. On the other hand, if a larger goal for you is to save a few hundred bucks a year on the extra franchise tax, then yea - maybe you want to incorporate in your home state. But then you're not the intended audience for this presentation or the advice contained in it.

I'd also just point out that telling people to just incorporate in their state of residence is no less boilerplate advice than telling people to incorporate in Delaware :)

> I think you need to consider the target audience of the presentation - it's for people who want to start high-growth tech companies that will raise venture capital.

Correction: it's for people who have been convinced (or are in the process of being convinced) that they're starting high-growth tech companies that will raise venture capital.

Just because you immerse yourself in Silicon Valley culture and create a "startup" does not mean you actually have a high-growth business, or that you're going to raise capital from institutional investors. The vast majority of "startups" never achieve high growth, and venture firms reject far more companies than they fund. If you have a great business worth funding, no institutional investor is going to walk because you may need to revisit entity selection.

> I'd also just point out that telling people to just incorporate in their state of residence is no less boilerplate advice than telling people to incorporate in Delaware :)

I didn't advise that founders incorporate in their state of residence. I stated that this is the simplest option. And it is. That doesn't mean there aren't situations in which the simplest option is not the best option, but if you're going to rule out the simplest option, you should understand why doing so makes sense.

1. No VC will not give you a term sheet - probably true (so long as you don't tell them about all the time / money you spent trying to optimize your legal structure for what they would consider to be the failure case). But there's this concept called "deal risk" - the longer it takes to get a deal done, the greater likelihood something will come up that blows it up.

2. Incorporating a Delaware C-corporation is by far the simplest option for high-growth tech startups. As an attorney in Silicon Valley, I cringed every time I had to deal with some other type of entity because it just wasted a lot of time (and thus the client's money) figuring out stuff that is muscle memory for Delaware C-corporations. And it always is painful to see the horror stories, like the one mentioned in the lecture. It's experiences like that that lead startup lawyers to advocate just going with the beaten path. All the extra headache is just not worth the few hundred dollars you save in franchise taxes. Penny wise, pound foolish.

> Incorporating a Delaware C-corporation is by far the simplest option for high-growth tech startups. As an attorney in Silicon Valley, I cringed every time I had to deal with some other type of entity because it just wasted a lot of time (and thus the client's money) figuring out stuff that is muscle memory for Delaware C-corporations.

No offense, but this says more about your experience than it does about California corporate law. When you have a hammer, everything is a nail. Just because you worked at a full-service law firm that primarily deals with companies incorporated in Delaware doesn't mean that your experience represents all attorneys.

Maintaining a California corporation is not rocket science. There are plenty of competent, experienced attorneys in California who have "muscle memory" when it comes to California law.

Let me put it to you this way - if you are building a high-growth tech company, you want lawyers who specialize in high-growth tech companies.

Since most high-growth tech companies, at least in the US, are Delaware C-corporations, the lawyers that specialize in those companies are going to be most familiar with Delaware C-corporations.

Do these lawyers have to be at large law firms? Nope, as you mentioned, there are plenty that are out on their own or are at smaller firms.

As I suggested above, the problem is that just about everybody in Silicon Valley is convinced they're starting a "high-growth" tech company, even when they have little more than an idea on a napkin.

The number of companies that actually achieve high growth and have high-growth company legal needs is small, as is the number of startups that raise institutional capital. Heck, lots of companies struggle and fail to raise any funding at all. Of those that raise seed funding from angels, the majority will not be able to secure a real Series A.

Structuring your entity and selecting an attorney on the assumption that you're starting a high-growth enterprise before you are anywhere close to having one is like spending all of your time and money trying to architect a web application that can support a billion users before you even have your first 100. It's premature optimization plain and simple.

On that point, I have never met an entrepreneur who failed because he or she didn't incorporate in Delaware or retain a "startup attorney" with a fancy office on Page Mill Road. I have met plenty of entrepreneurs who have failed in part because they took on certain expenses prematurely based on misguided assumptions and rosy projections.

Everything you're saying would make a lot of sense... except that incorporating as a Delaware C-corporation basically takes the same amount of time and money, if not less. It's not that complicated.

You don't have to get an attorney with a fancy office on Page Mill Road. But even if you did some big law firm, you would probably get a fee deferral that covers formation, so you're not out of pocket anything anyways.

Totally unrelated but wanted to say that I love your comments on HN. Always insightful and straight to the point.

Know your anonymous on HN but would love to hear your thoughts on emerging startup tech company funding models and which, if any, you like? Revenue-based financing as one example.

Ping me at asanwal(at)cbinsights(dot)com if interested and we can set up time to chat.

Thanks again for all the great contrarian (for HN) comments.

Reply on news.ycombinator.com