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Why Should You Incorporate Your Startup In Delaware?

Startup Series: Why Delaware?

Why should you incorporate your startup in Delaware, even if you’ve never been there?*

A whole lot of companies in the US are incorporated in Delaware, even if the company doesn’t actually exist there. One Month, for example, is incorporated in Delaware, even though we’re headquartered in New York (and we’ve never been to Delaware)!

The reason? There’s a body of law in Delaware where many court cases have already been tried, so companies and potential investors have more certainty about how different legal disputes will turn out. It’s riskier to incorporate your startup in a state where the outcomes for legal problems don’t have any legal precedent, and it’s unclear what would happen if a case were to go to court.

For investors, it’s also more attractive for them if they know you’re incorporated in Delaware, because this gives them more certainty. If your business has a legal question and it needs to be figured out in the court system, investors prefer the certainty of knowing that previous cases have established precedent (known as case law) in this state.

*Of course, for questions specific to your particular situation, it’s best to seek the advice of an attorney or accountant.

Key Takeaways:

  • Ideally, you’ll be incorporated in Delaware (you don’t have to live there to incorporate there) because many of the laws and cases have already been figured out
  • The steps to incorporating a business are fairly simple, and there are people who can do it for you.
  • If you try to do it the manual way, it can be more complicated, but still do-able.

More Links:

Startups + Fundraising Series:

If You’re Not Embarrassed By Your Startup, You Launched Too Late

“If you’re not embarrassed by the first version of your product, you’ve launched too late.” — Reid Hoffman

If your startup is successful, no one will remember how ugly your product looked the day you launched. (And if it’s not successful, no one will care.)

When we think about successful companies like Google, Facebook, and Twitter, we tend to forget the modest beginnings from which they came. As Paul Graham recently wrote, “Think of some successful startups. How many of their launches do you remember?”

In celebration of modest beginnings, here’s a dose of reality: I recently came across the landing pages of some of the most successful companies we know. This is something everyone should see.

The moral of the story: don’t name your company BackRub. Also, don’t worry about making something pretty, worry about making something people love. As Reid Hoffman (the founder of LinkedIn) once said, “If you are not embarrassed by the first version of your product, you’ve launched too late.”

It’s easy to say “have a growth mindset,” and “follow lean startup principles.” It’s a lot harder in reality, when you have to launch quickly, and put out versions of your product that feel unfinished, raw, or even ugly. Take a look at the startups below, and how they launched their first product — and maybe you can launch a little earlier. Or a lot earlier.

(Credit goes to Phil Pickering for finding these.)

Twitter’s first landing page:

Early Facebook screenshot:

Early Google homepage (from 1997):

The precursor to Google, BackRub:

An even earlier Google homepage:

Yahoo!’s homepage in 1994:

Early tumblr dashboard screenshot:

Early Amazon homepage screenshot:

Apple circa 1997:

AuctionWeb before it became eBay:

Burbn (a Foursquare clone) before it pivoted to… Instagram:

The first ever prototype of Foursquare (shown at SXSW in 2009):

Reid Hoffman’s original LinkedIn:

And finally… Reddit (some things never change):

What stands out to you? How would you have designed things differently?

It’s easy to think that you need to have a great design and get everything polished before you release it to the world. In reality, you should launch things as soon as you can, as quickly as you can, to get validated learning. The Lean Startup talks about this as validated learning — getting immediate feedback from users as to what they actually want, not assuming you know all the answers.

How can you launch a beta version earlier? Why is getting feedback on a somewhat-shitty design more valuable than perfecting a design that no one wants? Post your thoughts in the comments below.

What Are Convertible Notes and Why Use Them?

Throughout our previous entries on raising funds as a startup, we’ve been talking about raising money for your company by sharing equity with venture funds.

When you’re a company in its early days, sharing equity is difficult. Moving equity from your company to another requires a lot of time to hash out an agreement everyone can live with and it requires lawyers to work out the actual contracts. The whole process can cost upwards of $50-$100K, which is a lot of money for a company still looking for its first round of seed money.

Rather than dealing with the hassle of transferring equity, a lot of venture funds find it better to offer funding to startups using convertible notes.

Convertible notes are debts that convert into equity when a startup raises an actual equity round of funding. In essence, the venture fund offers to give you a loan of whatever amount, but instead of paying them back in actual money, the startup agrees to pay them in preferred equity. The venture fund gets the same agreement as whoever has invested in the series A round, with a bit of a discount as a good faith offer for investing earlier.

Early investing venture funds often find working with convertible notes preferrable to working with equity transfer for a few reasons:

For one, issuing a convertible note is easier. It can take weeks of discussion to transfer equity, but you can really issue a convertible note in only a couple of days. They also make it easier for the venture fund to work out the valuation of the startup by putting the discussion off until the series A round, when there is actual data to base their valuation on (rather than just a hunch). That considerably lowers the risk of their investment.

For startups, the convertible note also simplifies things. Convertible note agreements are short, maybe ten pages at most, and they can often be found online and modified according to the template.

Instead of the high cost of hiring a lawyer to transfer equity, the documents for a convertible note can often be found online. As a result, they can help generate quick funding in exchange for onle a few hundred to a thousand dollars. For a company that has limited time and financial resources, that is a tremendous advantage over complicated agreements.

Key Takeaways:

  • Convertible note are a form of debt taken on during seed funding that converts into equity when a startup begins an actual equity round of funding (usually in series A).
  • Convertible notes are preferrable to startups because they are quicker, easier, and cheaper to issue than equity. They are better for venture funds because they make valuation more flexible.
  • You can find a lot of online templates for convertible notes that you can use. Usually a lawyer is only needed in a limited capacity when working out a convertible note agreement.

Links

Why You Shouldn’t Care About Competitors

One of the more overwhelming entrepreneurial challenges is seeing someone else, someone better funded, better equipped, or with better name recognition than you, tackling the same idea you have. But imposing competition should never immediately discourage you from pursuing your startup. You need to be realistic about the challenges you face in relation to your competition, but bear a few things in mind to make sure you never psych yourself out.

No One Succeeds By Default

Just because a competitor has a lot of funding or name recognition does not mean that they automatically beat you. From the Wright Brothers to Amazon Local, funding and support is never the deciding factor. They certainly help, and it’s scary to think you might be going up against Amazon — but it’s not enough of a reason to simply give up before you get started. There are countless examples of underdogs absolutely crushing their competition, based on the amount of superior effort, belief, and more thoughtful approaches they put in. You can look at Simon Sinek’s Ted Talk on the Wright Brothers, or Malcolm Gladwell’s book on the subject for a series of case studies.

Fight On The Beaches

Where startups succeed or fail is, ultimately, in the execution. Whether it’s approaching the problem in the wrong way, going after the wrong segment of the market, wasteful spending, or simply lack of forethought, there are any number of ways a large, well-funded, secure-seeming team can fail. In any one of these ways, you can improve and innovate on what other people are doing, and that will give you an edge. So, if you take away nothing else from today, remember this: don’t give up before you put in the hard work.

Dr. Do-Your-Due-Diligence

But that hard work takes several forms. There’s actually running your startup, producing a product, or developing an app. Before even that stage, you need to do some research. The one hurdle that’s very difficult to overcome is when a well established company already has a very strong presence in the space you want to inhabit. If you have an idea for something, for goodness sake investigate what might directly or indirectly be addressing it. It’s highly likely someone else has or is already trying your idea. The fact that you haven’t heard of them is probably a good thing — it means they have broken through to get your attention.

Everything Is Not What It Seems

Remember, too, when you’re assessing competition. that you’re on the outside looking in. The way that a company appears to you is never the full story of how they’re doing. Companies can look incredibly successful one day and be gone the next. A big name shouldn’t necessarily scare you. What should, is if someone has figured out a viable business model and has a lot of traction. This, again, is where research comes into play. Take the time of doing a full critique of a company that failed to attack your idea, or has stayed pretty small-time. There might be a reason for it that has nothing to do with you or any other company. It might be the health of that particular market, or the viability of that particular idea. You need to figure out who’s already competing and what challenges, if any, are holding them back. Because those are going to be the challenges you need to overcome.

The Only Thing To Fear Is… Well, You Know

The point of all of this is that never let yourself become intimidated without hard facts and a firm understanding of your competition and their market conditions. Don’t let your fear of getting beaten prevent you from doing something that you believe is a good idea. That conviction — that your startup idea is worth doing — can carry you through the challenges which may cow bigger name or better funded players, not to mention all the incredibly hard work of getting a company off the ground. The game’s not over until it’s over. Just make sure you have a good idea of what you’re getting into, and what strategies you can develop or refine to help you succeed where others have failed.

Exit Strategies for Startups

Wait — you just started a company, why do you need an exit strategy?

The nature of being the head of a venture-backed startup is that you have to grow your company quickly, you have to grow it huge, and then you have to get out.

Even though most people might want to keep their company small and private for as long as possible, for investors, this is a losing scenario. Investors want to put in their money for a limited amount of time and then get a return on their investment.

Let’s look at it from the investor’s perspective:

About 90% of all companies investors put money into will go bankrupt. This means that investing money in your startup comes with a pretty substantial amount of risk. The odds are ever against their favor. The only way investing is worth it to the investors, then, is if the remaining 10% of companies that survive give them a return of ten, twenty, even fifty times their investments.

From the perspective of an investor, a ten-million dollar company isn’t worth a whole lot, so that leaves startups with a profound need to grow — and then exit. An exit is the term for when an investor gets a return on their investment in a venture-backed startup.

There are two basic exit strategies all startups follow:

A Buyout:

A buy out is exactly what it sounds like. A larger company, usually one that is well established and has interest in the product the startup has created, will offer a substantial amount of money to purchase the startup. In this case, investors receive a chunk of their initial purchase equal to their equity back. The startup might then be collapsed into the larger company, or it might run as a subsidiary of the original.

An IPO:

IPO stands for Initial Public Offering. This refers to the startup turning from a privately owned company into a publically traded one. In this case, the investors won’t necessarily get out immediately, but they at least now have the option to sell and trade their stocks on the open market.

Notice that the exit in these cases aren’t necessarily an exit for the founders of the company.

When we talk about exit strategies, we’re talking about a way for the investors to get their money back, but the founders of the company can still work with and grow the company as they see fit. Facebook, for example, put up its IPO back in 2012, but Mark Zuckerberg is still running the company. The exit just gave his investors a way to reclaim their investment.

The point in each case is that investors don’t want to invest in a company that eventually goes bankrupt, and they don’t want to own stock in a private company that leaves them with no opportunity to sell. No matter how much they love your company, investors want to see a huge return, so it is essential to know your exit strategy and aim to get big and get out when you start your company.

Key Takeaways

  • When we talk about “exits” we’re talking about ways for investors to get a return on their investments.
  • Investors are looking for a return of 10–100 times their original investment. A $10 million company may seem impressive, but to investors, it’s not.
  • You either need to aim for a buyout or an IPO; a buyout sells your startup to a larger company, while an IPO trades your company publicly.
  • Grow your startup fast, grow it huge, and then get out.

Additional Resources: