First Steps: When to Become Incorporated
Personal Liability Considerations
In the event that the corporation is sued, the personal assets of interested parties (i.e. founders, investors and the board etc.) are most likely protected.
Good Fences Make Good Partners
When multiple founders are involved in a startup, forming a corporation is a clean way of delineating ownership of assets. This is particularly true of intellectual property.
Deciding how equity will be split is a major component of the process. This varies significantly from one startup to the next, but however it looks this is the time to iron it out.
It is common for founders to place temporary restrictions on stock issued to founders in order to maintain a common vision and avoid ownership disputes. These restrictions are often lifted according to a vesting schedule. Vesting motivates founders to work together for a certain period of time, and outlines actions should a founder leave before the agreed upon window of time has passed.
Commonly referred to as IP, intellectual property is often the greatest asset of a startup. As such, it is essential that the corporation is able to continue using the property as it sees fit even after the founder or founders responsible for its creation have left the company.
Investors generally expect stock or a security that will convert to stock in exchange for their financial contribution to the startup. Becoming incorporated allows a company to issue stock, and thus accept third party investments.
A key factor in attracting top talent to a startup is the possibility of equity compensation. Becoming incorporated is a fundamental step toward positioning yourself such that you can offer the possibility of great success, which so utterly fuels startups.
Finally, having a polished exterior image for prospective investors and employees is often viewed as essential to making it to the “next level.”