In a previous blog, we described the five questions that you should ask yourself, as an individual business owner, to help determine if you are ready to join a business acceleration program. Perhaps you can answer all five questions with a resounding “Yes!” If so, great! But is your company ready too?
You might be highly talented, or have a terrific idea, or be the best salesperson ever. Nevertheless, the good folks who are doing the preliminary screening at an accelerator are going to be looking to see if you have taken some important first steps in creating a solid company. These steps will be examined in a series of blogs on this topic.
Part 1: Incorporation and Bylaws
Incorporate in Delaware
What? Incorporate? Delaware? Why?
The primary reason for incorporation is really quite simple. Forming a corporation protects you. MoneyTalksNews offers seven reasons to incorporate:
1. Put a firewall between your business and personal life
2. Protect personal assets
3. Raise money
4. Add some polish
5. Compete for more contracts
6. Entice and hold employees with stock options
7. Establish credit in your business’s name
Some business owners are under the impression that their company should start life as an LLC (Limited Liability Corporation). However, an LLC is not the best choice if you are looking to attract startup investors. Many experts in startup circles believe that a Delaware C-Corporation is the best option.
Advantages of a Delaware C-Corporation
Daniel DeWolf at Mintz Levin says,
“Incorporating as a C-Corporation in Delaware is the gold standard for high growth startups. It provides limited liability, ease of use, ease of setup, the ability to issue stock options, and tax benefits upon sale for many qualified small businesses.”
The advantages of a Delaware C-Corporation are many and varied. The bottom line, however, for many startups is this: many venture capitalists and angel investors will not put their money into a business if it is not a Delaware C.
Do not worry if you live in a state other than Delaware. The Delaware state government has an information page regarding C-Corporations. Additionally, Gust, which describes itself as “the world’s largest startup network,” has a program to help startups incorporate as a C-Corporation.
Establish Your Bylaws
Don’t make the mistake of thinking that bylaws are only for big corporations. If you don’t have bylaws in place, State laws will control how your business is run. Think of bylaws as being analogous to an individual having a will or trust. If you don’t have one or the other, State law will determine how your assets are distributed, and that might not be the best thing for your survivors.
Corporate bylaws provide details about how the corporation will operate on a daily basis, as well as how specific situations will be handled. The bylaws are separate from the articles of incorporation, and are for internal use. Be prepared, however, to have investors ask to see your bylaws.
According to Fundera, your bylaws should include the following information:
Business name and address.
Legal structure of your business.
The responsibilities of each member of the corporation, including how members are chosen, their voting rights, and different categories of members (for example, voting and nonvoting shareholders).
How stock is issued and distributed, including the total number of shares, how stock can be transferred or sold, and what happens to a member’s stock if he or she leaves the company.
Organization of the board of directors, including how board members are chosen and replaced, any qualifications for being on the board, how long board members remain in the role, and any specific roles on the board (like Treasurer or Secretary).
Who is authorized to take certain actions on behalf of the corporation, such as entering into a contract or loan.
Procedures for corporate record-keeping.
Identify the fiscal year and accounting method of the corporation.
Provide information about financial audits, particularly for publicly traded corporations.
Organization of annual meetings, such as for directors, shareholders or committees. This should cover how often meetings are held, how attendees are notified and how many members are needed to obtain a quorum — that is, the minimum number of members needed to cast a vote.
How to handle conflicts of interest. Suppose your business is competing for a contract, and one of the people choosing the vendor is a member of your board of directors. Your bylaws should explain how to handle obvious conflicts of interest such as this.
Provisions for amending the corporate bylaws. Bylaws may need to change as your business grows, so be sure that your corporate bylaws specify how revisions to the bylaws should be proposed and voted on.
Last but not least, publicly traded corporations need to include some specific provisions in their bylaws to comply with securities and exchange laws. Samples of corporate bylaws are available online, but before you adapt any boilerplate list of rules, be sure to run it by your startup lawyer.