When you enter someone else's territory, there are aspects in which it is really important to play by the rules. It is especially important to comply with the rules where it is of high importance, namely in legal matters, in which, moreover, the founders often lack savvy. And as we all know, the rules should be broken only when you really know them. So there are things in which you should trust the opinion of experts.
Silicon Valley is a place with a lot of well-established norms, observing which you can avoid unnecessary questions and incidents, and be more understandable for investors.
We are publishing a short article by Leonard Grayver, Principal at Drayver Law Group, P. C., which we hope will be really useful for you.
"Over the past few days, a number of founders have contacted me with questions about authorizing more shares in the Delaware Corporation. I have been structuring startups with 10 million authorized shares for centuries. Why I do this is the way it is accepted in Silicon Valley. And, as I tell all Russian-speaking startups, you need to be like all other startups in Silicon Valley. Let your technology be different, but all the legal aspects - here creativity will only interfere.
To which they answer: 10 million authorized shares will entail a huge tax in Delaware. Complete nonsense!
In Delaware, there are two ways to calculate the deductible tax. The first method is based on the number of shares. If less than 5000 shares - $175/year. If from 5000 to 10,000 - $250/year.
The second method uses a complex formula with three variables. This second method is used in the vast majority of startups. The main variable here is the valuation of the company's assets. The more the assets are worth , the more the franchise tax will be. With 10 million authorized shares and $1 million in assets, the deductible tax will be $400/year. And about $400 extra for each additional $1M of assets.
Yes-the franchise tax will be higher than if you authorize 10,000 shares, but while the startup's assets will be above $1M-God forbid to live! This usually happens in Round A, and when you have $10M in the bank, you will definitely not worry about an extra $600/year. But on the other hand, you don't have to explain to investors that you decided to structure the company not according to the established standards of Silicon Valley in order to save $600/year (3 years after incorporation).
In the excel application, a table where you can calculate the franchise tax (downloaded from the website of the Delaware Corporation department).
Download XLS • 30KB
Clarification: Assets are an accounting concept that usually does not correlate at all with the company's valuation. Usually, when a startup's assets are estimated at $1 million, the valuation is already well over $25 million. So startups start paying a franchise tax of > $1,000 / year already at a very late stage of development - when it's just ridiculous money."