One of the initial decisions a startup founder must make is whether they establish a corporation in Delaware or opt to incorporate in their home state. For the reasons below, Delaware continues to be the preferred choice when a startup intends on raising external sources of capital to finance growth.
The following factors highlight why startups gravitate towards incorporating in Delaware:
- Investors' Prefer Delaware Corporations: Venture capital firms, angel investors, and startup accelerators frequently prefer, and sometimes mandate, that startups incorporate in Delaware before considering investment. The reasons behind this preference, discussed below, make Delaware incorporation a significant factor in securing equity financing from professional or institutional investors.
- Familiarity with Delaware Law: The widespread understanding of Delaware corporate law among investors and legal professionals translates into streamlined interactions and reduced costs. Delaware's founder-friendly legal environment, coupled with existing legal templates tailored to the state's laws, enhances fundraising efficiency, which is crucial as business transactions extend across state lines.
- Specialized Court of Chancery: Delaware's Court of Chancery focused exclusively on corporate law, stands in stark contrast to other states where judges handle diverse legal areas. This specialization, paired with a rich body of case law, facilitates informed decision-making and dispute resolution.
- Enhanced Privacy in Delaware: Delaware's laws regarding shareholder access to a corporation's books and records are more stringent than those in many other states. Requests by shareholders must be made within the state, discouraging unwarranted actions to obtain corporate records. Delaware also stands out by not requiring corporations to publicly disclose directors and officers in state filings available on public websites.
- Efficiency in Delaware: Delaware's swift processing of company filings expedites financings and other transactions, offering convenience and efficiency.
While choosing another state for incorporation doesn't necessarily preclude a business from obtaining outside capital, and changing the jurisdiction of domicile if requested by an investor is straightforward, the decision to incorporate in Delaware at inception of the corporation will streamline the future capital raising process.
Incorporating in Delaware provides startups with numerous advantages, including investor preference, familiarity with Delaware law, a specialized court system, enhanced privacy, and administrative efficiency, making it a compelling choice for investor capitalized companies.
For more information, contact Frank Vito at or 908-964-2446.
