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At first glance, I wanted to say your lawyer is an idiot. But then I took a deep breath and came to my senses. He's not an idiot, but he doesn't know what a startup (in the HN/YC sense) is. Most "small businesses" are never candidates for VC funding, etc. A startup, in my mind, is different than a typical small biz precisely in that it is considered as a potential VC investment from the get-go.

Here's why you do a DE C-corp: it gives you the most flexibility and the most certainty of outcome. Only C corps can have different classes of stock (a necessity for the preferred stock that VCs prefer), and DE is the best because they provide very wide latitude to management and have a great and well-understood corporate legal system with lots of caselaw. This means that everyone knows what the rules of engagement are going in, and the judges in the Chancery Court (if it ever gets that far) know what they're doing.

An example: when I was in VC, we negotiated a term sheet with a non-DE C-corp. The term sheet was accepted, and we drafted the amended and restated articles, investors rights agreement, blah blah. But, when we filed the amended articles with the non-DE Secretary of State, the SOS office rejected them. We had negotiated a voting structure that offended this state's rules for voting vis a vis ownership. This held back closing for months, as we had to re-incorporate in DE, and tens of thousands extra in legal fees. In DE, never would have been a problem. And because in VC, almost everything is DE, it never occurred to us to think that the SOS office would reject the Articles.




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