legal-structure
Why do startups incorporate as Delaware C-corps?
Delaware C-corps are the standard for VC-backed startups because of Delaware's established corporate law, investor familiarity, and the ability to issue multiple classes of stock.
If you're raising venture capital, you almost certainly need to be a Delaware C-corporation. This is the standard — not a suggestion.
Why Delaware specifically? Delaware has the most developed and predictable body of corporate law in the US. Decades of case law means most corporate governance disputes have clear precedent. Delaware's Court of Chancery is a specialized business court with no juries — cases are decided by expert judges quickly. Nearly 70% of Fortune 500 companies are incorporated in Delaware for the same reasons.
Why C-corp (not S-corp or LLC)? VCs can't invest in S-corps (S-corps have restrictions on shareholder types that disqualify most institutional investors). LLCs can work but are far less common and create tax complexity. C-corps allow multiple classes of stock (common, preferred), which is essential for VC deal structures. Stock options for employees are straightforward in a C-corp structure.
When to incorporate: Ideally before raising any money or onboarding co-founders. Incorporating early establishes clean equity ownership from day one.
The double-taxation issue: C-corps are taxed at the corporate level and again when dividends are distributed to shareholders. But since VC-backed startups rarely pay dividends (returns come from exits), this is rarely an issue in practice.
Related glossary terms
Related questions
What is a cap table?
A cap table (capitalization table) is a spreadsheet or document that shows who owns what percentage of a company — founders, employees, investors — accounting for all shares, options, and convertible instruments.
What is vesting and a cliff in startup equity?
Vesting is the schedule by which you earn your equity over time. A cliff is a minimum tenure required before any equity vests — typically 1 year.
What is a term sheet?
A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.