You have heard it said, “the only way for a startup to go is Delaware C-corp” and there is a reason for this. For the classic rapid growth/massive scale startup (the “next Google”), Delaware has advantages.
Its corporate law is clean and efficient and, by default, removes the clutter that in some states (e.g., California) may afford special protections but that also create legal complications for fast-growth ventures. Hence, in Delaware, by default, there is no cumulative voting for directors and hence no potentially disgruntled minority holders on your board.
By default, there is no class-based voting and hence no ability of holders of the majority of one class of stock to veto important corporate events (e.g., a merger that might wipe out its interests) so long as the holders of the overall majority voting control in the company want something. You can also set up a super-voting class of stock without needing to worry about controlling each other class as well. Quite apart from voting control, you can also set up special classes of stock such as FF preferred that are highly useful and yet disallowed in some states.
Moreover, majority shareholders can always set up a sole-director board if they want, or any similar variation, rather than having to meet minimum-number rules that help ensure minority shareholders will also have a seat. If there are significant information rights, they can be waived more readily and such waivers are more likely to be upheld. If there are control fights, entrenched management has strong tools to defend its position. On top of all this, in terms of pure logistics, Delaware is truly a dream. Corporate filings can be done until late hours.
They can be done electronically. They can be done without fuss and without a lot of staff lawyers poring over them to reject them on bizarre technical grounds. And, once you do your filings, you don’t have a lot of special disclosure requirements to comply with, as happens in other states following a merger, for example. And so on and so on. All of these advantages are real and helpful from a control and efficiency standpoint. Therefore, public companies love Delaware. VCs love Delaware. Lawyers love Delaware. And so too should founders, or at least that is the standard prescription.
So, tighter control, fewer complications, greater efficiencies – what’s not to like?
Though some of it is technical, it is important. Without doubt, the classic fast-growth/massive-scale startup does benefit from these particular rules and efficiencies. If you are on a rocket to success, it helps to minimize the things that can throw you off course. Delaware does that in spades. Therefore, if that is your type of startup, the near-universal *expectation* in today’s world is that you will be a Delaware C-corp. And that, for most founders in such ventures, will be enough.
That said, it is a bit more nuanced for those who take the view that the idea of a startup is not limited to a “next Google”-style venture. While VCs will take the view that, if you are not fast-growth / massive-scale, you are not a startup at all, it is in fact a big world out there and there is extant a much broader view of startups (one that I share) that would also embrace more organic-growth ventures that may or may not scale to the same degree: niche ventures, lifestyle ventures, self-funded (or F&F-funded) ventures that seek to fuel growth through profitability, all of which might make for slower growth and which might also lack allure for VC-funding models but that by no means preclude such ventures from having successful outcomes that can enrich their founders or even from having long gestation periods from which massive scaling may follow.
Such ventures do have the traits of startups as opposed to those of a “small business”: founders often need to earn their equity through vesting, IP rights are involved, technological advantage is sought to disrupt existing ways of doing things, etc. The only thing missing is an immediate aim among the founders to get outside VC funding. Well, it might be noted that an occasional founder may be found who in fact *hates* VCs or, more charitably, who would rather keep control while building value and minimizing dilution even if the long-term goal is to approach VCs when it can be done from a position of greater strength. I for one am happy to call what they are building a “startup” in every true sense of the word. Let us for discussion purposes call them “independent startups.”
An independent startup might easily reject the Delaware C-corp format, at least up front.
Maybe the sort of protections afforded by other states besides Delaware is precisely what the founders want, just for their own protection. For example, the class-based voting afforded by California helps ensure that founders will have at least a veto right over mergers that would simply wipe out their interests. They lose that right in Delaware once they lose overall voting control.
Maybe the goal is to keep it simple up front and choose a home domicile as opposed to a remote one in Delaware. For founders trying to avoid early costs and complications, picking your own state helps do that. You do not need to incur the Delaware expenses and also register as a foreign corporation in your own state with the added tax/administrative expenses involved. A small point? Perhaps. But one that weighs against Delaware if there is no other compelling reason to go Delaware for a particular venture. If your state law gives you all the normal corporate benefits and protections that Delaware does from a founder standpoint (as, e.g., California does), why complicate things unnecessarily if you will not be needing to get near-term VC funding?
And especially so if you can later reincorporate in Delaware if you need to. For such companies, my long-time experience is that, even if they do decide to get VC funding, the VCs will readily fund them if they like them and they will do so without requiring them to reincorporate in Delaware (a few may require this but only a very few and typically not the top-tier VCs).
There are also tax pass-through reasons why some ventures will prefer either a Sub S corporate status or an LLC format. These are definitely not the norm, even in the world of independent startups, but many bootstrappers will elect to start simple with an LLC with a view to converting later if needed. As between the two, Sub S is the more flexible in being able eventually to switch to C corp status without fuss, provided the venture meets the Sub S requirements (single class of stock, no entity shareholders, all shareholders either U.S. citizens or green card holders). LLCs can be useful for specialized ventures but investors do tend to shy away from them as investment vehicles.
So, yes, by all means consider Delaware first but do think it through before making a final decision. Consider the nature of your venture. If you plan to seek outside funding early on, then Delaware is your presumptive choice absent other things in your particular circumstances that weigh against it (costs and complications could be one of them). If you do not, then weigh it all carefully, talk it over with relevant professionals as needed, and choose wisely based on all the factors. For a good number of startups, “why Delaware” should not have a purely automatic answer. Usually, it is Delaware, but not always.