Startup Incorporation for Founders: A new handbook

[swampthing]

Hello HN! I'm one of the founders of Clerky :) For the uninitiated, we're one of the most popular ways for startups to incorporate (and get all sorts of other legal paperwork done).

We've written a handbook about startup incorporation and I wanted to share it with all of you :)

There is, of course, a lot of content about startup incorporation out there already. Why did we decide to add to the pile? Honestly, I often wince when I read what's out there, because so much of it is misguided or just plain wrong. A lot of it is people with no legal expertise regurgitating the same (often misguided / wrong) information they've read/heard elsewhere. Basically, the setup for the Gell-Mann amnesia effect, except the culprits are content marketers instead of the media.

We also felt there was a need to have something comprehensive. While there's a lot of bad information out there, there is also a lot of great, accurate information. It's just usually spread across various blogs from startup attorneys, which makes it difficult to get a comprehensive view. With this handbook, our goal was to provide a central resource covering everything you need to know about startup incorporation.

A few content-related notes:

• We mention this in the handbook, but this is all written with US-based startups in mind. We fully recognize a lot of founders are elsewhere, but there's just too much to cover if we were to expand the scope to beyond the US. Sorry about that!

• The word "startup" means different things to different people. We use the word in pretty much the way PG uses it here: http://www.paulgraham.com/growth.html

• As the name implies, this handbook is narrowly focused on startup incorporation. A lot of people don't know this, but there's a lot more to forming a startup than just incorporation, like setting up a board, issuing stock to founders, etc. We previously published a handbook called Legal Concepts for Founders, which touches on those topics: https://handbooks.clerky.com/legal-concepts

On more of a UI-related note, some personal pain points that we tried to address with our handbook design:

• It's easy to jump down to a footnote and jump back up to where you came from (just click on the footnote number).

• Every subheading is link-able, as are any callouts that you might want to link to.

• We've been very generous with linking to glossary terms so that readers can quickly learn what they need to know in order to understand what they're reading. The challenge was that regular link styling would leave the copy way too busy. To solve for this, we made each link look super close to regular text so that the linking isn't distracting. That way readers that are puzzled by a term, who might be looking at it more closely anyways, will be able to click through and learn more, and other readers won't be distracted by the link styling.

I'd love to hear any thoughts or questions about either the content or the UI! I'll be here all day to respond. Also happy to answer random questions related to startup law.

Thanks :)

[jedberg]

> As the name implies, this handbook is narrowly focused on startup incorporation. A lot of people don't know this, but there's a lot more to forming a startup than just incorporation

A product suggestion for you. Something like turbotax for founding a company. Ask a series of relevant questions, then create the formation paperwork, set up the board, issue the stock, automatically sign them up with an insurance partner, payroll partner, etc.

The target audience would be a couple of people who have a really great idea and just want to get down to coding and talking to customers and building, and not dealing with all of the boring muck of legal stuff.

When I was starting companies I really wished there was something like this. Your guides are a good start, but I still have to do a lot of legwork just to get the company going!

And then once you have that, a second product -- the same thing for shutting down.

Shutting down a company is even more difficult than starting one, and there doesn't seem to be a lot of products focusing on that, even though there are almost as many shutdowns as there are startups!

Edit to add: I would gladly pay a few hundred dollars for this service, on top of the normal Clerky fees, as it would save me a ton of time. Also you could probably work out deals with the preferred partners to get some sort of referral fee.

ps. This guide is great, thank you for putting it together!

[LrnByTeach]

I think the following service may match what you are asking for , it is priced at $500 and from a reputable company.

https://www.angellist.com/incorporation

Included with Incorporation

Entity formation in Delaware

State filing fees

IRS Employer Identification Number (EIN tax ID)

Founder stock issuance, custom equity pool and 83(b) filings

Legal templates and founder discounts

1 free year of Delaware registered agent, $100 per year thereafter. Renews automatically

1 free year subscription to Base plan

[trevor-e]

This sounds like https://stripe.com/atlas

The shutting down part is interesting and I'm not sure how/if Atlas handles that.

[swampthing]

Thank you for the kind words and excellent suggestion! Definitely helpful to know you'd pay for it :P

I touched on this in another comment here, but dissolution, counterintuitively, is actually a very different ballgame. There is a lot more variability in how it should be done, depending on the specific circumstances of the company being shut down. That's one of a few reasons why you don't see many products out there for this. But I completely agree it's a pain point for us to solve!

[hobobaggins]

Quick question about Delaware; hasn't Delaware's Court of Chancery historically been on the side of the board over the shareholders in a shareholder dispute?

If so, for most startups, wouldn't the only disputes settled by the Court of Chancery largely be between the founders and the VC's, with the Court of Chancery historically siding with the VC's on the board?

Is this the biggest reason why VC's prefer Delaware before other states?

[swampthing]

Doubtful — in general, company and investor-side counsel alike view Delaware courts as reasonable and fair. From what I've seen, the people that have a gripe with Delaware courts are usually activists of some sort.

The framing of VCs / board versus founders / shareholders doesn't make sense to me because so many startups have founders controlling the board. And VCs are shareholders too, of course.

I think what you may be referring to is that the Delaware courts generally give the company management broad discretion over business decisions. So it's difficult for a random shareholder to successfully sue the company over some bad decision they made. But as a founder, that's what you want, so you can run your startup without having to worry about backseat drivers.

[camhart]

My understanding is VCs prefer Delaware C Corp because it's what they understand and are familiar with. Everything else is "reinventing the wheel". It's the De facto standard.

[wcerfgba]

Have you thought about adding a section on different ownership and control models, such as co-operative models?

[talkingtab]

Upvote. Even just a review of alternative models and some basic implications would be extremely helpful. It seems like worker owned software companies could be very effective.

[swampthing]

Ooh, that's a good idea. I'm a huge fan of co-ops (not for any principled reason, I just think they're cool). They aren't common for startups of the type we're writing about, but I think it does make sense to discuss that topic. Thank you for the suggestion!

[satvikpendem]

For those with experience with the two, how does Clerky compare with Stripe Atlas?

[haarolean]

Oh, was hyped to read it until I realized it’s US-focused. Being a non-US citizen makes the US one of the last countries I’d incorporate in. Yes, there is a lot of services like Stripe Atlas which would be happy to incorporate you for $100-500, but usually they don’t even shed the light at all how you would do taxes. If you’re not a US citizen, that’s gonna be a huge pain in the ass. You either pay a lot of taxes or do shady funneling (like “I pay myself as another corporation in another country and leave $5 taxable in US to buy printer ink”). I’m still looking for viable options to get incorporates somewhere to be able to use Stripe, but the US is a no-go for me.

[swampthing]

Yea, we try to make that clear with a notice at the top of every page. Sorry for the disappointment there. I sympathize — there are a lot of great startups and founders outside of the U.S. Unfortunately, the U.S. is the only place that has enough critical mass in terms of a startup ecosystem for the kind of standardization and resources you see here.

And yes, you are completely correct that taxation is a concern. Our advice to founders from outside of the U.S. is always to consult an attorney. I understand why that's not what people want to hear, but the reality is that's just what it takes to do it correctly. Anything else is just wishful thinking. Kudos to you for realizing what a lot of others don't!

[betimsl]

These lawyers are literally killing us with the mess they invented; making us pay for maintenance of the same.

I know this is a topic in itself. But why are we paying them?

[memefrog]

Nobody is forcing you to form a company. You can operate a business under your own name. Here in NZ it is called a 'sole proprietorship'. I'm sure it has its own name in the United States, but the fact remains. You can form a partnership with your other founders and operate as a partnership without forming a company. That's still how most law firms are structured, I believe. Doesn't require you to file anything or form anything or pay any fees, at least here and I expect also in the US. You want to go a step further, and take advantage of special legal rules. Those rules have a cost: you have to register a company.

Companies are creatures of statute. They do not come from the common law, or from custom. They didn't evolve naturally over time. They were invented. You can choose to form a company if you want the benefits that entails. But forming a company isn't free or completely painless. Still, it's a choice you get to make. Nobody can force you to form a company.

That being said, it does sound like it is a lot more complicated in the United States than it is here in New Zealand. Here the government tells you clearly how to do it, and it's pretty cheap and easy.

https://www.business.govt.nz/getting-started/choosing-the-ri...

[0ct4via]

Have you consider making the "handbook" available as a single file, i.e. a PDF containing the site contents?

Some folk find it easier to scroll through that way (it can still support header links, etc.), rather than having to click through sections of the site as required :)

[hedgehog]

Don't undersell that you have the perspective that comes from doing this for over a decade (YC S11?).

[swampthing]

Excellent point! We are prone to forgetting about things like that :)

[jameslk]

This is a great resource I wish I had before. As a bootstrapped founder, I would love to see more information on how to handle common scenarios bootstrappers face.

For example, one big issue I'm facing is how to handle the legal and tax issue of continuously depositing more and more cash into a business as it comes in from another income stream. This becomes really complicated not just from the perspective of how this affects other equity holders, but also the question of deducting the loss from my income while the company is not yet profitable.

LLCs and S-Corps are touched upon in the handbook but the issues around stock basis seems to really complicate the situation fast without providing much benefit for the deduction part.

I would think this would be a common issue since many founders aren't going to raise money beyond angel/f&f initially and will need to self-fund until they do or until they break even but I have yet to find good compliance resources for bootstrapping.

[jll29]

Thanks for the very useful information.

I agree with the sentiment already expressed that PDF format would be desirable (for me: to use the document in teaching entrepreneurship).

In general, could I suggest working on a flow-chart that embodies incorporation best practices regarding the typical order of things, a sort of "playbook"? Also, it would be fantastic to hear from successful startups which order to things they followed, and where they diverted from orthodoxy (e.g. Google skipped some steps in its IPO process, angering investment banks in the process but coming out of it fine). When you don't know what you are doing and you cannot buy top dollar advice, it's probably best to follow the well-trodden path, but most won't know what that looks like.

Another comment: It would be superb if someone collected similar information for other jurisdictions (London, Paris, Berlin, Talinn, Singapore).

[swampthing]

Thanks! You're right, this would be a good topic for us to cover in a subsequent handbook — in the meantime, if it's helpful, I think the way I've seen it done is pretty casual, where founders will cover expenses and then later have the company reimburse them when it has more funds. But that's more for the scenario where the bootstrapping phase is a relatively short and temporary (or at least the part of bootstrapping where you have to fund from other sources is).

If you think you might be funding from other sources for quite a while (sounds like that might be your situation), then yea, the tax considerations become more relevant and important. Another common approach is to put the money in on a safe or convertible note, though that doesn't help with pass-through taxation.

[pc86]

I'll be honest these all sound like very situation-specific tax questions for an accountant (or even tax attorney), and not something any founder should be wasting their time learning.

[ninepoints]

Such an excellent resource. Makes me wish there was an equivalent geared toward small business as opposed to startup operation

[gkoberger]

Nothing to add, other than that Darby and the team have been wonderful for the past decade or so and I really appreciate them and the product! If you're thinking of incorporating, I haven't had a single issue with Clerky yet. It's incredibly boring, in the best way possible.

[swampthing]

Thanks so much for the kind words Greg!

[wslh]

It's me or it misses the SHA (Shareholder's Agreement) topic? [1]

[1] https://en.wikipedia.org/wiki/Shareholders%27_agreement

[swampthing]

It’s not you — this handbook is purely about incorporation, and doesn’t go into what happens after incorporation. We go into that a bit in a handbook we wrote previously, here: handbooks.clerky.com/legal-concepts/formation#shareholder-agreements

[moltar]

Would love to see some info on minority protections.

E.g. establishing a business with two other founders, who were previously in another business relationship and have a greater bond.

[swampthing]

Good idea — this sounds like a good topic for us to cover in a future handbook, perhaps about the post-incorporation setup process, where you're setting up the board, issuing stock, etc.

[JimtheCoder]

"establishing a business with two other founders, who were previously in another business relationship and have a greater bond."

Especially if this is your first startup and you actually care about the business, just don't...

No handbook needed...

[barbariangrunge]

All the guides I’ve ever found are for American companies. Does anybody know of a good resource for Canadian startups?

[tough]

Submitted on Show HN 8h ago https://www.getsiva.co/

just saw after reading your comment, pretty funny

[DtNZNkLN]

I learned the hard way: Incorporation seems easy but man can it be a huge pain when done poorly. Before I do it again, I'm reading this guide.

One recommendation: Add a section on winding down a corporation. This is difficult and easy to get wrong and can be quite costly when things do go wrong :)

[swampthing]

Thanks for bookmarking :) It sounds like the last section in particular, the one about the types of information that go into a certificate of incorporation, may be particularly of interest in that case.

And yes, you're exactly right about dissolution — it is easy to get wrong! Incorporation lends itself much more to standardization because everyone is starting off from the same place, which is nothing. By contrast, dissolution depends heavily on the current state of the corporation, which of course differs widely. Hopefully we'll be able to add some content to cover the simplest scenarios at some point though.

[Solvency]

Any anecdotes on how wrong incorporation can go and why?

[deepandmeaning]

This looks incredibly useful. Is there a version for models outside of the US coming, perhaps UK? Or any recommendations for an equivalent service folks have used?

[swampthing]

Probably not from us, unfortunately. I hope more resources like this can be put out there by others for other jurisdictions though!

[xyst]

Why is Delaware the go to for startups, and most big companies?

[swampthing]

Ask and ye shall receive: https://handbooks.clerky.com/startup-incorporation/where

:)

[peterhadlaw]

Hello from your old Burlingame neighbor :) (Tesorio)

[swampthing]

Wow, good to hear from you! We were sad to leave — are you all still there, or did you move?

[andromeduck]

How does this compare to capbse?

[swampthing]

I can’t speak to Capbase in particular, but in general, Clerky is pretty unique in that we’re run by startup attorneys. Partially as a result of that, we have a much stronger focus on helping people get paperwork done in a way that will survive legal due diligence (basically, review by investor and acquirer counsel). Also, our software in general is more focused on helping people get legal paperwork done, as opposed to any of the many other aspects of running a startup.