I am often asked where one should incorporate their business, for which there are generally three answers: 1) Delaware; 2) your home state (Texas, California, etc.); or 3) off shore (Caymans, BVI, Bermuda). The choice you make depends on your individual business, your investor preferences, and where your customers and investors reside.

Delaware

Delaware is often chosen for many reasons, including: 1) insistence of investors and underwriters; 2) established and efficient corporate law and court system; and 3) favorable protections for directors and officers. These are discussed in more detail below.

There are a few common ways that founders split up equity and ownership of the company:

1.) Equally: each founder get the same amount of equity. For example, with 2 founders each gets 50%, with 3 founders each gets 33.33%, with 4 founders each gets 25%, etc. This method is most often used by first-time entrepreneurs because it seems more “fair” and is easy to get everyone to agree on it at the outset.

High Tech Startup Packages

At the Copeland Law Firm, we love dealing with entrepreneurs and emerging growth companies, it is our passion. We have advised many entrepreneurs on the formation of new companies, capital structures, financing transactions, employment matters, intellectual property matters, as well as provided counseling on day-to-day legal issues that arise in startup companies. Our clients cover a wide range of industries including software, technology, energy, real estate, insurance, healthcare, manufacturing, construction, advertising & marketing, publishing, and retail.

Par Value of Stocks

Par value is the minimum price that a share can be sold for. This is typically the price founders pay for their shares, although sometimes I recommend issuing founder shares at a multiple of par value (i.e. Par Value x 10) in order to avoid problems down the road if the company needs to execute a forward stock split and the value of the shares hasn’t increased much. This avoids the situation where a forward stock split would require the new share price to be below par value, something not allowed.

The Answer

It depends. The number of authorized shares only matters if you plan on issuing stock options to employees, raising outside money from investors, or taking your company public. If you plan on any of these, you need to pay attention to the capital structure of your company from the beginning because if setup correctly, it can save you significant time, effort, and legal fees in the long run. If you do not plan on issuing stock options, raising money from investors, or taking the company public, you can pick any number you want (but pay attention to possible tax and filing fee consequences) and divvy them up between the co-founders accordingly. Otherwise, we recommend authorizing somewhere in the neighborhood of 10M shares, with 8M to 9M set aside for the founders and if necessary, the rest set aside for an option pool.

TEXAS BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER J. DERIVATIVE PROCEEDINGS

Sec. 101.451. DEFINITIONS.

In this subchapter:

(1) “Derivative proceeding” means a civil suit in the right of a domestic limited liability company or, to the extent provided by Section 101.462, in the right of a foreign limited liability company.

(2) “Member” includes a person who beneficially owns a membership interest through a voting trust or a nominee on the person’s behalf.

TEXAS BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER L. SUPPLEMENTAL WINDING UP AND TERMINATION PROVISIONS

Sec. 101.551. PERSONS ELIGIBLE TO WIND UP COMPANY.
After an event requiring the winding up of a limited liability company unless a revocation as provided by Section 11.151 or a cancellation as provided by Section 11.152 occurs, the winding up of the company must be carried out by:
(1) the company’s governing authority or one or more persons, including a governing person, designated by the governing authority, the members, or the governing documents;
(2) if the event requiring the winding up of the company is the termination of the continued membership of the last remaining member of the company, the legal representative or successor of the last remaining member or one or more persons designated by the legal representative or successor; or
(3) a person appointed by the court to carry out the winding up of the company under Section 11.054, 11.405, 11.409, or 11.410.

TEXAS BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER K. SUPPLEMENTAL RECORDKEEPING REQUIREMENTS

Sec. 101.501. SUPPLEMENTAL RECORDS REQUIRED FOR LIMITED LIABILITY COMPANIES.

(a) In addition to the books and records required to be kept under Section 3.151, a limited liability company shall keep at its principal office in the United States, or make available to a person at its principal office in the United States not later than the fifth day after the date the person submits a written request to examine the books and records of the company under Section 3.152(a) or 101.502:

TEXAS BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER I. MODIFICATION OF DUTIES; INDEMNIFICATION

Sec. 101.401. EXPANSION OR RESTRICTION OF DUTIES AND LIABILITIES.
The company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company.

TEXAS BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER H. MEETINGS AND VOTING

Sec. 101.351. APPLICABILITY OF SUBCHAPTER.
This subchapter applies only to a meeting of and voting by:
(1) the governing authority of a limited liability company;
(2) the members of a limited liability company if the members do not constitute the governing authority of the company; and
(3) a committee of the governing authority of a limited liability company.