The considerations in forming a tech business are the same as considerations in forming any other small business. It usually comes down to owner’s liability protection from business creditors, but more importantly, protection from your own business partners. As a practical matter, the greatest threat to your business is internal: your partners. They are much more likely to cause the destruction of your business than outside creditors.
Three quarters of new businesses formed are LLCs, and only about one quarter are corporations. There is a reason for this: the LLC is better.
You may have seen the movie The Social Network or read about Facebook’s origin. If Facebook had used a well-written Delaware LLC Operating Agreement from the beginning, most of those lawsuits could have been avoided entirely. The film is really a parable of the problems that can result from the “Do-It-Yourself” mentality when it comes to creating reliable business agreements.
The main advantage to forming an LLC in Delaware for your tech business would be that the LLC Operating Agreement governing the company is enforced by the courts as written, even if unfair to your business partners. So even harsh remedies, such as loss of business interest for failing to make subsequent capital contributions or the requirement that your business partners who leave your business to go work for Google get whipsawed in the buyout by only getting book value, those provisions will be enforced as written. These are just a few examples of provisions you can put into your Operating Agreement that will be honored by a business court in Delaware.
Statistically, companies that incorporate in Delaware can expect about 10% additional market cap because of protections built into their internal organizational structure. Because of this, 80% of the new IPOs are Delaware companies while 66% percent of the Fortune 500 are Delaware companies. Smart business owners want this desirable protection if you are going to be creating the next “unicorn” tech startup.
Small startups should generally avoid forming a corporation because that type of business has more built-in complications when it comes to operating properly. Additionally, most do not have built-in shareholder agreements.
After you incorporate, it is well-advised to establish Assignment of Intellectual Property Agreements with your business partners, as well as Non-Disclosure Agreements to help keep company trade secrets and ideas owned by the company.
If partners are added or you want to provide incentives for key staff, that can be accomplished through amending and restating your LLC operating agreement in the future. The Delaware LLC is great protection and very flexible when drafting thanks to these provisions, making it a great commodity for startups looking to incorporate.
About the author
John Legaré Williams, Esquire practices business law through The Williams Law Firm, P.A. (www.TrustWilliams.com). He is also President of Agents and Corporations, Inc. (www.IncNow.com), a family owned and operated incorporation service that provides filing and registered agent services in Delaware to business owners from around the world. Nationally, Mr. Williams is a frequent speaker nationally on the topic of Delaware LLCs and in particular the Delaware Series LLC, the most cutting-edge entity on the market.