A question we often hear from entrepreneurs and founders of startup companies is, “When should I incorporate?” In typical lawyerly fashion, the answer is, “It depends.” While there is no perfect answer that applies to every situation out there, we generally counsel people to incorporate when: 1) they are ready to get serious about the business; 2) they have multiple business parters; or 3) they are ready to contract with an outside party. For a more detailed discussion, below are some additional factors that should also be taken into account when deciding when to incorporate. If you are in a situation where one or more of these conditions exists with your business, then you should seriously consider incorporating sooner rather than later so that you can get the ball rolling and save yourself time and money in the long run.

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.

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.