Reason Four: Claim your name!
Imagine that you’ve spent close to a year operating under a name, but without incorporating. Suddenly, a company that does something similar to you incorporates. All the publicity, work, and marketing you have put into your name is essentially wasted, as you will probably be forced to change names. This can be a fatal blow for cash-strapped startups.
When you incorporate, you claim the name for your company within the relevant Secretary of State, and won’t be forced to change it. Continuity is important, and this preserves it.
Reason Five: Protect The Company’s Assets.
When you incorporate, it is typical to have a few difficult conversations – for example, (1) how to divide equity in the company to compensate founders, co-founders, and employees, and (2) the intellectual property (IP) ownership.
Whatever the division, stock will almost always vest over four years with a one-year cliff. (Though not set in stone, these terms are the industry convention.) This means that the employee won’t receive any stock unless he stays for one year, at which point he receives ¼ of his total stock. After that point, he will receive 1/48 of his total stock each month, until the four year vesting period ends.
When you incorporate, you protects the ownership of the company and restrict it only to people that have contributed significantly to your company. It also incentivizes people to continue working for you.
Likewise, it is essential for the company to own all relevant IP, otherwise the company opens itself to significant claims for its profits and more. The Social Network, anyone? When you incorporate, you can ensure ownership of IP and protect your company.
Reason Six: Help Obtain Business Visas.
Here are two general truths about San Francisco’s recruiting atmosphere: (1) it is extremely competitive for both employees and companies, and (2) foreign nationals are proving extremely capable, especially in technical capacities.
There are many paths for an alien to gain legal residence, and a business visa such as an H-1B is a popular one – however, they require a business to sponsor them. If you incorporate early, you can be that sponsor and gain a competitive advantage in recruiting non-domestic employees. For an industry that often bemoans the absence of good developers, this can be a significant gain.
It’s true that not every startup has the capital to incorporate immediately. However, the set cost of incorporating is can lead to benefits which can be impossible to quantify and put a price on.