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I am launching a startup (who isnt :) ) and while I am not planning on looking for outside funding, I'd like to leave the option on the table in the event that I catch a tiger by the tail (meaning that I have proof of market and cash flow) and need money to scale. I've been involved with a startup incubator and they work with a high end law firm, and have contacts at a few others, but I'm wondering if it makes sense. As I see it, my three options are:

1) Inc with a 'name' firm, who is familiar with ensuring that my cap table / structure is conducive to funding (I know the basics, like don't hand out preferred stock, etc).

2) Inc with a 'middle of the road' firm, who is competent and has relevent experience with startups but doesn't have the 'brand recognition'.

3) Inc myself, with LegalZoom, etc - IMHO not really an option. I've done this before and I don't have good guidance on how to ensure that all of my records are proper, my financials are in Excel spreadsheets, and in general if I stick everything under this my homegrown recordkeeping might not be conducive to getting funding (debt or equity), etc.

Related to #3, in general I'm looking to get reasonably priced, but competent legal and accounting help. Any advice would be greatly appreciated!

-e-

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How big will this startup be at initially and what sizing plans do you have? In your planning is how many employees to start? Plan on having a bennefits package? Do you have an exit strategy or one in the works (meaning is this a business you will sustain or build and sell?) – John Bogrand Jun 18 '10 at 19:11
Thanks for the thoughts. MY plan is to be reasonably small, but since it is in a 'growth' sector if I find that I can grow readily with an infusion of outside capital I would be inclined to do that. -e- – Ev Conrad Jun 21 '10 at 4:01

4 Answers

up vote 4 down vote accepted

Leaving the option of outside financing on the table isn't doing you much good, unless you systematically pursue outside financing. At least experienced financing such as VC, high-caliber Angel etc rarely if ever drops into your hat just by happenstance.

If you're not really pushing for outside investment: Then my inclination would be to go with a small firm which is specialized in startups, and has the brains to recognize how to market to startups -- i.e. people who write good blog posts, contribute good answers here, and good responses/articles on other sites that cater to startups. These people a) understand how startup entrepreneurs think, and b) in our circle they have a reputation to uphold, i.e. they're more invested in startups than a mid-sized generic corporate lawfirm is.

If you are working on obtaining outside investment: If you're going for professional outside investment, then a often repeated advice is that you should go with the big name-brand firm, because they may have valuable contacts elsewhere that could help you later on.

But there could be a better way. Consider programmes like Y Combinator, TechStars and others. Part of the deal from these investors is/can be making you 'clean' for VC investment, i.e. some programmes incorporate you for free, perform due diligence on your IP assignments etc, and fix any issues that might surface.

Edit: I think OP is right on about using a law firm, at least if he plans to grow the company beyond a 1 or 2 employee operation. There are too many issues to consider for a layman -- see this 2 part series here and here. On top of that, certain things such as vesting can have important tax implications.

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Thanks for the great insights. I do expect that if I'm at all successful I'll have some employees. My expectation is that I will not look for outside financing unless I'm already cash flow positive and an outside infusion will help me ramp up more quickly. – Ev Conrad Jun 21 '10 at 4:12
BTW - I was actually involved with an incubator (Founder Institute), but my original plan currently has a lot of competition and a five step business model, and was not approved to move forward. I was invited to return back next term. I learned a lot there - Adeo has a lot of really smart mentors and founders in his program, and I'm looking forward to going back. And the program does have a relationship with a great law firm (Cooley) that sets up your corporation (you are free to choose another law firm, however). – Ev Conrad Jun 21 '10 at 4:12
up vote 2 down vote

In Michigan, you can create an LLC for $50 in about 5 minutes.

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1  
Thanks. I already have a C corp that I've created; I just don't want to cut corners by trying to do it myself and finding out later I've omitted something. – Ev Conrad Jun 21 '10 at 3:59
Fair enough, it is always smart to chat with an attorney before any decision. In many cases, the issues are the Operating Agreements (multiple partners) or for single owners - you want to make sure that you are not being taxed twice. (which may be the case in the C corp) – Jeff Epstein Jun 21 '10 at 13:16
up vote 2 down vote

The post Why (not) incorporate online? (and some of the other posts on my blog) may be helpful.

An alternative that is not on your list: Retaining a solo attorney or small firm that specializes in startup and early-stage companies.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

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up vote 1 down vote

I suggest do it yourself LLC.

Same protections as incorporating. In MN and I believe many other states paperwork is pretty easy. Can convert over to inc if shares need to be sent out later. Low startup costs and easy to find base paperwork to complete.

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+1. The type of company you form does not matter when you're raising money because they'll just convert the company form before investing. That's never a barrier to investment. – Jason Jun 20 '10 at 14:41

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