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. Very rarely, I don't think I've ever seen any LLCs that have gone public, so if you're trying to have a massive liquidity event for a startup, or as from an investor's standpoint, you want to make sure that it's a C Corp and not an LLC. Number two is corporate documents. What are corporate documents? Well, these are things like your operating agreement, your by-laws, your corporate ledger. Okay, those are the big ones that you need to have, as well as any employment agreements.
Those are your big ones. Keeping those in an organized structured way, will very much 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. Simple, clean and simple. 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, a web developer, who's a web developer. You've got a hustler, who's more of a sales side of it, or you've got a social media maven. Somebody 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. Frankly 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 have to have those honest candid conversations from day one, before you get wrapped in the product and your finances. You've got to have those conversations, so I absolutely recommend it. By the way, set aside some equity for future employees. Not all founding teams workout. In fact, founding teams with more than three people, 75-80% of the time, one of the founders leaves within the first year.
Anticipate that. Anticipate having to hire people. Having new employees. Essentially what I mean by that is there should be some stock set aside in the treasury, on your corporate ledger for future employees. Especially if you're going to grow your company. You cannot expect to have one or two founders turn it into a billion dollar company. It happens one in a trillion times. It just won't happen. 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, as well as or share rather. As well as having that four year vesting. It encourages and incentivizes them to be part of a long term mission to succeed.
Those are the three things and ways to be structure your company. Things to think about. Have tough conversations early on, it will help you tremendously. If you want to learn about how to build the next billion dollar company, or if you're an investor who wants to be part of that go to angelkings.com/invest. 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. Get in touch. I'd love to help you too. Good luck and God speed. If you want to invest in America's next top startups and future IPOs, go to angelkings.com/invest and reserve your spot today.