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AskTheVC recently addressed the question of what was the best state of incorporation. The short answer is one of 3 preferred states: "Delaware, whatever state the company is in and whatever state(s) the VCs are located in." Obviously, the last is hard to determine if you're going to incorporate before you close financing.

California is notoriously employee-friendly so it should be avoided. Some of those laws may still apply if you are based in California, but if you are elsewhere you should definitely assume those burdens.

New York is also undesirable. It's fairly balanced when it comes to dealing with owners vs. employees, but the one big red flag is Section 630 of the NYS BCL. This section states that the top 10 shareholders are liable for employee wages if the company goes out of business and employees aren't paid. This statute does not apply to foreign companies (i.e., those incorporated in other states) even if they're doing business in New York. Considering the largest shareholders are going to likely be the founders (you) and a VC, it probably makes sense to look elsewhere.

Delaware is the default for good reason.  As Jason said, "Delaware law is well-settled, generally business friendly and most lawyers in the U.S. are adapt at dealing with DE law."  The second point is perhaps the most important point initially, but it's the first point that makes you choose Delaware over another state that is as business friendly. Because Delaware has a well-established body of law, you're not going to pay to litigate those "basic" issues, where you might in a state like North Dakota which may have adopted business-friendly laws but doesn't have the precedent to draw upon.

The last point is important too, but it goes beyond lawyers being "adept" with Delaware law. After incorporation, when the company does any deal that requires legal opinion, part of the opinion will require the lawyer to validate corporate structure (i.e., "Due incorporation and valid existence"). If you're incorporated in New York or California or practically any other state, only a lawyer admitted to that state can make that opinion. If you're in Delaware, every lawyer can opine even if they're not admitted in Delaware.

If you ever want to go public, the bankers are pretty much going to require moving it there before the public offering anyway.


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