Starting a Company: Incorporation Decisions

• The text discusses the process of starting a company from the founder's perspective, focusing on incorporation and related decisions
• The main example uses the creation of a juice company to illustrate the various steps and considerations

Initial Considerations

• Starting a business involves numerous decisions, including selecting a business structure
• Raising capital is essential for businesses expecting significant growth

Incorporation Basics

• Incorporation involves creating a corporate shell for the business to operate within
• Several types of entity structures exist in the U.S., each with different tax implications, rules, and regulations
• Common entity types include sole proprietorships, partnerships, S corps, LLCs, and C corps

C Corporations

• C corps are often chosen when a business anticipates needing substantial capital
• C corps allow for an unlimited number of shareholders
• C corps can issue multiple stock classes

Shareholders

• Shareholders are individuals or entities that own shares in a company
• Shareholders in a C corp possess equity and can be international

Stock Classes

• Common stock is a typical class which investors can gain
• Preferred stock offers distinct advantages over common stock

Asset Separation

• C corps provide a clear separation between personal and business assets, offering a layer of protection against personal liability

Delaware C Corps

• Incorporating as a C corp in Delaware is a common practice, especially for venture-backed startups
• Delaware offers a business-friendly legal environment, a specialized chancery court system, and favorable tax advantages, such as no state corporate income tax (only franchise taxes)
• Forming a Delaware C Corp is simplified with services like Stripe Atlas

Incorporation Process

• The incorporation process involves filing a certificate of incorporation with the Delaware Secretary of State
• The state reviews, stamps, and certifies the document, confirming the company's incorporation

Board of Directors

• Delaware C corps must have at least one director
• The "action of incorporator" document establishes the corporate structure and appoints directors
• Directors hold significant power, approving major decisions such as compensation plans, company sales, and dissolutions
• The board can remove a founder if a majority votes in favor

Board Composition

• Startups often begin with co-founders on the board.
• Later, investors may gain a board seat when the company raises significant capital

Corporate Governance

• Corporate governance is a main aspect of being a Delaware company
• They also involve rules around board meetings, meeting minutes, and record-keeping

Stock Issuance

• After forming a C corp, the next step is to issue stock to shareholders
• Issuing stock defines ownership within the corporate entity
• Common stock is issued for insurance purposes
• Authorized and unissued shares are reserved for future use, such as hiring new employees

Stock Value

• Each share must have a price, typically referred to as par value
• A standard par value for initial common stock is $0.001 per share
• Founders must purchase their shares at the par value

83(b) Election

• Founders must file an 83(b) election with the IRS within 30 days of purchasing their shares
• It tells the IRS about the stock transaction and taxable income
• Failure to do so can result in unfavorable tax implications when selling shares later

Vesting

• Vesting is a mechanism to ensure that founders and employees earn their shares over time
• A vesting schedule protects the corporation and prevents early departures from devaluing the company

Vesting Schedule

• A standard vesting schedule is four years with a one-year cliff
• If someone leaves before the cliff, they get nothing
• After the cliff, shares vest quarterly or monthly

Stock Options vs. Founder Shares

• Employees typically receive stock options, which are the option to purchase shares at a later date
• Founders purchase their shares outright but are subject to a vesting schedule

Employee stock option plans (ESOPs_

• They are related to the "strike price"—it's really related to employee stock option plans (ESOPs)
• Third-party valuations determine a discounted price per share, benefiting employees

Exercising Options

• The investors valuation is lower to get a strike price for employees
• Employees has a set time after leaving the company to exercise their options, like a 90 window

Employer Identification Number (EIN)

• The final step in the incorporation process is obtaining an EIN or FEIN
• The EIN is a unique 9-digit code that identifies the company for tax purposes
• An EIN is necessary to hire employees, run payroll, open bank accounts, and pay taxes

Explore the founder's journey of starting a juice company, focusing on incorporation. Learn about business structure selection, raising capital, and understanding entity types like C corps, S corps, and LLCs. Discover the advantages of C corps for businesses needing substantial capital and multiple shareholders.