Having been a start-up lawyer, entrepreneur, and venture capitalist, I have been asked many of the following questions over the years from entrepreneurs when starting a business. Sometimes there isn’t an easy answer, and as lawyers often like to say, “It depends on the circumstances.” But, here are my short-hand answers to the frequently asked start-up questions, which hopefully will be right 95% of the time.
1. Should I form my company as C corporation, an S corporation, an LLC, a partnership or a sole proprietorship?
Start it as an S corporation, unless you have to issue both common stock and preferred stock; in that case start it as a C corporation. And an S corporation can easily be converted later into a C corporation. LLCs are popular, but can get overly complicated. Partnerships and sole proprietorships are to be avoided because of the potential personal liability to the owners of the business.
2. Where should I incorporate my business?
The standard answer to this is Delaware because of its well developed corporate law. My answer is that it should be the state where the business is located, as this will save you some fees and complexities. You can always reincorporate later in Delaware.
3. How much should I capitalize my business with at the beginning?
As much as you can reasonably afford, and in an amount to at least carry you for 6-9 months with no income. What you will find is that it always takes you longer to get revenues, and that you will experience more expenses than you anticipated.
4. How likely will it be that I can get venture capital financing?
Extremely unlikely. Get a product done, gain some traction, get a good management team, and then consider getting venture financing.
5. Should I require prospective angel or venture capital investors to sign a Non-Disclosure Agreement (NDA) so they don’t steal my idea?
No, don’t waste your time. It will be counterproductive and slow down your fundraising. And many investors will refuse anyway. It’s hard enough to get a meeting with an investor — don’t put another roadblock in the way. For the most part, it’s not the idea that is important, it’s the implementation of the idea and the entrepreneurs behind it.