The main highlights of the discussion revolved around the fact the VC firms will require your startup to be a C corporation incorporated in Delaware, so if you know you will want to tap into VC funding within a two year period you should form your startup as a C corporation, but if you are planning to bootstrap the company and don’t think you will need outside funding, then many people might choose to form as an LLC for the tax benefits. Just be prepared that if you choose to form an LLC, VCs will ask you to convert the entity when you are getting prepared for fundraising rounds.
Another important consideration for VCs is the relationship between the founders of the startup. They will try to gain a good understanding of how stable the relationship is between the founders and often VCs will shy away from single founder entities because in the event that there is a distraction or illness in their life, the whole venture may stumble. That’s why when you are initially getting started with your business, it’s very important to have open discussions about who is contributing what to the venture and you may want to have exit mechanisms in place in case there is a disagreement between founders.
By the time you are ready to approach VCs, they will expect all your founders to be full-time employees so that they know you and your team are dedicating most of your time and energy to the venture. They may also look to supplement the talent of your founding team by suggesting additional people you will need to hire in order for them to consider investing in your startup (i.e. a technical co-founder or developers). It will be very important for the VCs to understand the ownership and control over the source code for your startup, so if one of the founders leave they want to make sure that the business won’t crumble.
VCs will also look to set up a vesting structure for the founders in the term sheet of their investment. The reason the VCs will make you vest is so that they can tie you back to the company and make sure you continue to be dedicated to it. They will also want to check all your employment contracts and make sure you have vesting in place for your employees as well as “work for hire” clauses (the employer owns whatever the employee develops), non-disclosure and non-competes.
Keep a look out for the next Entrepreneur Clinic!