Why the Death Star was incorporated in Delaware

As a founder, you must forge ahead even when you’re not ready. Waiting for perfect means missing the opportunity or wasting a whole bunch of effort on something no one wants. The mantra in the startup world is “fail fast” because failing means gaining feedback for learning, revising, and trying again.

Except for legal matters.

This is where it can be worth slowing down just a little bit. Most mistakes a startup makes are recoverable, especially if made sooner rather than later. But a single legal problem has the potential to take down a startup like a fated x-wing pilot taking down the Death Star. (For those not familiar with Star Wars, it means that the startup will be destroyed utterly and the whole galaxy cheers; then the founder will have to construct a new Death Star which hopefully will avoid the same kind of legal defects that allowed for some twerp from a backwater planet to destroy your dream with a one-in-a-million shot…but I digress). Forming a relationship with a law firm early in the life of a startup can help avoid those kinds of problems.

Here’s the most interesting thing I learned last week: why I must incorporate as a Delaware C-Corp.

Some of you may have heard of this kind of corporation before and thought to yourself: why do so many companies incorporate in Delaware? I can confirm that I’ve driven through Wilmington and there are indeed a bunch of stocky office towers with the logos of major banks in bright letters. So what gives?

You might be thinking it has to do with money. You thinking would be right, but not for the reason you might be thinking. Yes, Delaware barely taxes corporations, but that’s not the whole story. Arguably there is one thing companies like more than money: consistency.

When a corporation in Delaware needs to resolve a legal issue, it’s resolved through the courts in Delaware. And because there have been so many legal matters from so many companies, a huge amount of legal precedent has accumulated. Precedent leads to consistency in rulings on legal matters. Consistency leads to predictability which in turn leads to profit. (See: your money thinking was pretty on target.) And the other group of people that likes consistency? Investors. Yep. For a high-growth startup looking to raise capital, there’s basically no other option.

So, my next steps are to interview and establish a relationship with a law firm, incorporate my company in Delaware as a C-Corp, and then have my new lawyer friends help me search my startup for any unshielded exhaust ports.

The second most interesting thing I learned last week is that legal services are even more expensive than I had initially thought. So actually, maybe those exhaust ports will be left alone while we properly incorporate this hunk of metal and make sure it has some working propulsion.

Thanks for following along.

Ben