Monday, August 9, 2010

Legal Structure—What does an Angel Investor Look for in a Startup’s Legal Structure?

Most startups use an LLC structure when they form the business. This is okay for starting a company but when it comes time to raise funding, it needs to be converted to a C-Corp. In general, angel investors don’t like LLCs. Tax laws dictate that owners in an LLC must submit a K-1 tax form each year which is a hassle. The other drawback is that there’s typically not a proper board formed in an LLC so the oversight by investors is not as solid it needs to be from the investor’s point of view. S-Corps limit the number of investors and so doesn’t work well in an angel funded company.

The next question is should it be a Texas-based C-Corp or a Delaware C-Corp? If you raise funding only in Texas then a Texas C-Corp is sufficient for most investors. If you plan to raise funding on the West Coast or East Coast, then a Delaware C-Corp is better. For those who are not familiar with company legal structures, Delaware provides the most advantageous legal environment for companies.

I’m not an attorney and so advise you to seek professional counsel on these matters.

Best regards,
Hall T.

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