Startups and Series A: Why Your Term Sheet Says 'Delaware C-Corp'

Ask a founder why their company is a Delaware C-corporation and the honest answer is often "because the investors told me to." There is sound logic behind the instruction, even if it is rarely explained, and understanding it helps founders make peace with the paperwork.

Venture investors prefer Delaware corporations for the same reason big companies do: familiarity. The documents that govern a financing — stock purchase agreements, protective provisions, preferred-share terms — are all drafted against the backdrop of Delaware law. A fund can review a Delaware deal quickly because it has reviewed a thousand like it.

The C-corporation structure, meanwhile, accommodates the multiple classes of stock that venture financing requires and positions a company cleanly for later rounds, acquisitions, or a public offering. Alternatives that make sense for a small business become awkward once outside capital and stock options enter the picture.

None of this is free. A Delaware corporation owes franchise taxes and annual filings, and converting an existing entity carries legal costs. But for a company that intends to raise institutional money, the format is less a choice than a prerequisite.