Today, we’re peeling back another layer of the Venture Capital onion. Spoiler alert: it stinks. Let’s talk about why Venture Capitalism demands you have a corporation. Yep, if you’re a dreamer hoping to score VC funding, you better have a corporation ready to go. Because the worst thing that can happen is to get asked, “How many SAFEs is the offer?” and you stare back like a deer in headlights, with no clue what a SAFE is and no shares to offer.
So, what’s the play here? For the United States, the magic formula that VCs “expect” is a C Corporation registered in Delaware with 10 million shares. Why Delaware? Because it’s like the Las Vegas of corporate law – what happens there, stays there, and everyone loves a good time. Plus, Delaware’s corporate law is friendly to businesses, offering flexibility and favorable legal precedents.
Now, you could try to file all this paperwork yourself, but unless you’re a masochist with a love for legal forms, go with a service like Gust Launch. Gust will organize all the necessary paperwork, make it available digitally, and handle the Cap Table. They’ve also got a sweet partnership with Brex Banking, which will fast-track you into getting a business bank account for your corporation. Think of it as getting VIP access without having to bribe the bouncer.
The Offer: Playing the VC Game
So, what about the “offer” for the VCs? Don’t fool yourself into thinking this is anything other than a game to them. VCs know you need funding, and they hold all the cards. Remember the 80/20 rule: most of their investments will crash and burn, so they’re always hunting for the best possible deal. But let’s get real – the standard offer you’ll see is:
- 18-month SAFE (Simple Agreement for Future Equity): This is a popular tool because it’s flexible and delays the valuation of the company until a later date. It’s like saying, “I’ll pay you back when I’m rich – promise!” But it’s not without its quirks. SAFEs convert to equity in the next priced round, usually at a discount, making them attractive to investors.
- 20% Discount: This means the investor gets to buy future shares at a 20% discount during the next round of funding. It’s like getting a coupon for your startup’s success. This discount rewards early believers who took the risk when your idea was just a glimmer in your eye.
- 3% Interest: While SAFEs typically don’t accrue interest, some deals include a nominal interest rate. This is basically just a little sweetener for the investor’s patience. It’s like, “Hey, thanks for waiting – here’s a little something extra.”
Why Incorporate as a C Corporation in Delaware?
Incorporating as a C Corporation in Delaware isn’t just about impressing VCs; it’s about laying a solid foundation for growth. Here’s why it’s the gold standard:
- Legal Flexibility: Delaware offers robust legal precedents and flexibility in corporate governance. This means fewer headaches down the road when you’re trying to issue shares, handle disputes, or attract more investors.
- Investor Confidence: VCs are familiar with Delaware C Corporations. This familiarity breeds confidence, making them more likely to invest. It’s like showing up to a poker game with a full deck – they know you’re playing for real.
- Scalability: Delaware’s laws are designed to accommodate businesses of all sizes, making it easier to scale as your startup grows. Whether you’re a scrappy startup or on your way to becoming a unicorn, Delaware can handle it.
Setting Up with Gust Launch
Using a service like Gust Launch simplifies the incorporation process. Here’s a quick rundown of why it’s a smart move:
- Paperwork Management: Gust handles all the incorporation paperwork, ensuring everything is filed correctly and promptly. This reduces the risk of errors that could delay your startup’s progress.
- Digital Access: All documents are stored digitally, making them easy to access and share with potential investors. No more digging through filing cabinets or rifling through stacks of paper.
- Cap Table Management: Gust helps maintain a clear and accurate Cap Table, detailing who owns what percentage of the company. This transparency is crucial when negotiating with investors.
- Brex Banking Partnership: Gust’s partnership with Brex Banking means you can quickly set up a business bank account, essential for managing funds and expenses.
Don’t get your hopes up
In the cutthroat world of Venture Capital, having a solid corporate structure isn’t just beneficial – it’s essential. By incorporating as a C Corporation in Delaware, you’re signaling to investors that you’re serious and ready to play their game. Use tools like Gust Launch to streamline the process, and you’ll be well on your way to securing that coveted VC funding. Just remember, it’s a jungle out there – so arm yourself with the best tools and knowledge to survive and thrive.
