LLC vs. Inc: Which Should You Pick?
Legal Tips On Your New Formed Entity and Limited Liability Corporations vs. C-Corp.
LLC (Limited Liability Company) versus Inc. (C-Corp): Which is better for you?
Number One: You should almost always consider either an Inc. or an LLC. What's the legal entity for you? Well, if you're doing a service, a basic service or a simple product. You want to be a lifestyle business or maybe just have at most two to three partners, for the life span of the company, well you might want to consider an LLC. An LLC equals a Limited Liability Corporation. An LLC is essentially you can create an LLC and convert it into an S Corp, which would then make you essentially an employee of that company. An LLC is essentially for those companies that don't foresee themselves turning into a billion dollar companies and want to keep it simple. That's totally fine. Lifestyle businesses can work.
You can have an Inc, which is also known as a C Corp. An Inc is what I recommend to most startups in the sense that if we invest through Angel Kings in a startup, we want to see a C Corp. A company that could potentially be public. I don't think I've ever seen any LLCs that have gone public. If you're an investor and are trying to have a massive liquidity event for a startup, you want to make sure that it's a C Corp and not an LLC.
Number two is corporate documents. What are corporate documents? The ones you need to know include your operating agreement, your by-laws, your corporate ledger as well as any employment agreements. Those are your big ones. Keeping those in an organized structured way will help your company down the road, especially when it comes to fund raising. If you anticipate raising money at some point, you want to make sure all your corporate documents are in one safe place, in a zip file, you've put together and organized so that when an investor asks to review them, you've got them.
The last thing is thinking about how to structure your startup company. What is equity structure investing? What's a property equity split? You should ask yourself this and the other founders, what's a proper equity split for founders, new employees, therefore the right investing schedule?
How should founders' equity be structured?
In other words if you've got three founding members, you've got to have a tough conversation from the get-go. Figure out what the contributions of each team member are going to be and what they are. Whether they're monetary. Whether they're sweat equity. Whatever, they might be. You've usually got a hacker, who's a web developer. You've got a hustler, who's contributes to the sales side of the company. Or you've got a social media maven, who focuses more on business development. The bottom line is, whatever you want to call yourself, whatever preferred nomenclature, you want to make sure that each of you understand your respective roles.
What it is that you're going to delegate amongst yourselves? What percentage you think you're owed? If you wait too long and you've got several co-founders, you're going to have a problem. If you haven't had the conversation of I would like say 33% of the business and here's why, you're going to have a problem. You have to have those honest candid conversations from day one, before you get wrapped in the product and your finances. Companies should also set aside some equity for future employees. Not all founding teams workout. When founding teams have more than three people, 75-80% of the time one of the founders leaves within the first year.
Anticipate having to hire new employees. If you're planning on growing your company, there should be some stock set aside in the treasury, on your corporate ledger for future employees. You cannot expect to have one or two founders turn it into a billion dollar company. It happens one in a trillion times. Expect to have tough conversations about equity early on, and to have vesting schedules in place. What is a vesting schedule? That means typically in startup columns is a way to grant stock, common stock to founding team members, as well as to employees, depending on how long they've been there.
How do Stock Options Fit into the Founders' Equity and Stock Treasury?
You should never grant the full amount of equity to any founder, co-founder or to an employee from day one. They need to earn it. You all need to earn it. Let's say if you have a new employee that joins your company and asks about stock options. Well you should have, I would recommend having a four year vesting agreement, along with a one year cliff, so that employee will not get any stock vested, until they've been there for one year. They have to have actually been there for 365 days before they get one stock or stock option. Having that four year vesting period encourages and incentivizes people to be part of a long term mission to succeed.
Those are the three things and ways to be structure your company. Have tough conversations early on and it will help you tremendously. My name is Ross Blankenship. I'm the founder of Angel Kings. I'm an investor in top companies and the best selling author of a book called Kings Over Aces. If you want to invest in America's next top startups and future IPOs, go to angelkings.com/invest and reserve your spot today.