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Comment by tptacek | Hacker News Reader

All this stuff suggests to me (someone shoot me down) that it's an especially good idea to be incorporated in Delaware. This is the level of drama associated with something as mundane as who has physical possession of stock certificates!

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I think this angle is under appreciated. People think you incorporate in Delaware for the taxes, but the "real reason" is the large body of established case law.

The physical holding of a stock certificate is a dangerous thing. If you are an investor in a company that gets sold or goes public (and you have to surrender your shares) and misplace them, it is an expensive mess, even in Delaware.

I played this game. It wasn't expensive, but it sure was annoying sending affidavits back and forth to be signed and countersigned and so forth. For bonus hilarity, we got to do it several times because the number of shares was wrong, then the date the stock was lost was wrong, then the date of the affidavit was wrong.

In my case, I think everybody was at least motivated in the same direction. But if they had decided to put up a fight? Good heavens.

Thus the existence of companies like eShares that do away with this very problem for privately-held companies by issuing stock electronically and providing transparency (audit trails) to stockholders that paper certificates suck at.

Full disclosure: I work there.

eShares is an interesting solution but with so many parties involved (company, lawyers, several investor groups) how do you get one person to drive the solution? My experience is that something like that may be rocking the boat a little bit too hard.

Apologies for the late reply. Most of the time, the company is the driver, since they are the ones with the highest motivation to actually get a clean cap table. Law firms also drive – smart lawyers and paralegals will recognize they can use something like eShares to cut down on work and free up time for more valuable work.

Sure, there are a few companies that it takes a while for everyone to agree on the facts (example: prior CEO raised a bunch of angel capital on bridge notes, but some notes are missing, incomplete, or not executed...) but we have a lot more companies with near 100% acceptance rate of their outstanding cap.

Brokers used to keep physical certificates in their own vaults. I had physical stock certificates in the vaults of a broker than went out of business. It took a few weeks and a lot of phone calls and legal threats to get them back. But they did come back.

OTOH the whole appraisal process is a Delaware thing (and arguably encourages nuisance lawsuits) - by incorporating in another state you could avoid the process entirely.

There is a benefit to the appraisal process in that it is well-defined and somewhat predictable and rational. In a state with less clear process or case law, a dissenting shareholder's path of recourse against a transaction they disagreed with is shareholder litigation, which is costly and may result in a jury trial with very unpredictable results. The DE appraisal process means both sides know what will happen if a shareholder dissents to a transaction, and there is generally confidence that the DE appraisal process is rational. That mitigates some of the risk of shareholder litigation with unpredictable cost and outcome. If you are a shareholder in a company going through a transaction in which there might be other shareholders that dissent, you definitely prefer the predictability of DE.

The issue with incorporating elsewhere is that Delaware law is understood. It is the baseline.

If you go with some rarely incorporated state's Corporate law you don't even know what traps are there, and there are a lot fewer experts. Also it is perfectly possible that no one will have done what you want to do.

This is why some states more or less slavishly copy Delaware corporate law. Of course the weird and complex case law isn't there, but often it is sort of "ported over".

At least the drama is well understood

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