If you’re in California and considering starting a company, you’ve probably heard by now why investors traditionally prefer the Delaware Corporation over a California Corporation. These reasons include, but are not limited to, a well-established legal precedent that makes disputes easier to resolve and corporate attorneys’ familiarity with Delaware corporate law, making VC deals easier to execute.
(1) A Consistent and Reliable Secretary of State
In my experience, if the Delaware Secretary of State catches a typo, has trouble reading the last four digits on your credit card, or any other matter that may slow up the process, they will email or give you a call and work to fix the problem over the phone.
(2) Only One Director Despite Multiple Shareholders
Under California law, a corporation may only have one director if in fact there is only one shareholder. Once the shareholders expand to two, there must be at least two directors, and once the shareholders expand to three or more, there must be at least three directors (CA Corporations Code 212).
Under Delaware law, there can be multiple shareholders while maintaining a single director board. This gives entrepreneurs maximum control as things get started. It also lowers the burden of finding qualified directors to serve on your board, and removes the risk of a deadlock with two directors, or even worse, the other board members out voting you.
(3) Electing the Board of Directors on Paper
Corporate law requires the shareholders to elect who will serve on the board of directors for the coming year. California permits the company to elect by paper vote only if they receive unanimous written consent from all shareholders (CA Corporations Code 603(d)). There is a big difference in time commitment, and cost, between holding an in person meeting for all shareholders as opposed to obtaining a majority vote with written approval. A shareholder may simply be unavailable and therefore, the company must shoulder the burden of holding an in person meeting because it cannot obtain unanimous written approval.
Delaware, on the other hand, does not require unanimous written approval (DE Corporations Code 228(a)). If less than unanimous consent is obtained, then Delaware must provide notice to those who did not provide their consent, but this notice requirement is much easier to meet than holding an in person meeting.
(4) Open Source Documents to Facilitate Financing
Open source material from YCombinator and Series Seed Documents help facilitate raising money in a Delaware Corporation and have made the financing process much, much easier. This allows lawyers to focus on the necessary vetting of investors, securities exemptions and increases the likelihood of quick legal advice due to familiarity with the documents at hand.
Unfortunately, California has no such open source documents.
There is no one-size-fits-all when it comes to selecting the proper entity for your business, but when making the decision be sure to consider some of the convenience, flexibility and certainty a Delaware Corporation can provide.
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.