This is advice you hear time and time again. If you’re going to incorporate, do it in
Delaware even if you’re located in California. As a generalization, it’s not a bad idea for reasons I’ll explore shortly. After all, the majority of Fortune 500 companies have been incorporated in Delaware, and there are more corporate entities than people.
However, it’s not the right move for everyone. Since when does any problem have a one size fits all answer?
Reason #1: Delaware’s corporate laws
One of the original English colonies, Delaware has been around for awhile. Delaware’s corporate laws have also been around for awhile, and have been accumulating a serious amount of precedents since the 1800’s. In contrast, California joined the United States in 1850.
Delaware’s corporate laws were notably progressive for the 1800’s, and continue to be drafted as such. This is to the benefit of corporations, as they are able to operate under modern and predictable conditions, that adapt with each new wrinkle technology and progress brings.
In addition to the progressive nature of Delaware corporate law, they have also been drafted to be favorable and flexible to the shareholders and directors of a corporation. They provide flexibility in corporate structure, and allocation of the rights of shareholders and directors.
Reason #2: The Court of Chancery
In Delaware, the majority of disputes surrounding corporations take place in the Court of Chancery. This is a forum that is special to Delaware, and whose sole purpose is to adjudicate on corporate law issues. There are also no juries, just judges who specialize in corporate law.
What’s the significance here?
- Predictability – with the amount of precedents in Delaware corporate law and Delaware case law, most outcomes from the Court of Chancery are relatively predictable. This is clearly important for a VC to protect his investment.
- Speed – deep industry knowledge of judges + no juries + Delaware case law = fast outcomes.
The bottom line
When your company is on the line, you want as much certainty as you can get. Delaware laws that have been interpreted, challenged, and reshaped by hundreds of cases are going to provide more of that than a California law that only has ten previous case precedents.