Why Do So Many Startups Incorporate In Delaware - And Should I?

Most emerging growth and publicly-traded companies in the United States are organized as Delaware corporations. While Delaware isn’t the best choice for all business incorporations, there are a number of very good reasons to incorporate a high growth startup in Delaware. Below are a few of the key benefits:

  • Efficiency. In the United States, each of the 50 states has its own set of corporate laws. For businesses with national reach, it is impracticable for stakeholders and their legal or other advisors to learn the laws a new state. Delaware has become a kind of de factor “national” corporate law jurisdiction to solve this problem. Investors and other stakeholders and their advisors tend to be well-versed in Delaware corporate law, and widely-used legal forms and precedent are based on Delaware law. All of this facilitates negotiation, increases efficiency, and reduces cost.

  • Flexibility. Delaware’s general orientation in corporate law is to respect the decisions of the principals forming the company. California, by contrast, takes a more paternalistic approach, imposing requirements by statute that Delaware leaves up to the parties themselves. For example, a Delaware corporation with 3 or more shareholders can have a single director on its board, whereas the same corporation formed in California must have at least 3 directors. California mandates class-based shareholder votes in certain circumstances, whereas Delaware generally allows the parties to determine when such votes are required. Delaware’s more deferential approach provides founders and other stakeholders with more protection and flexibility to negotiate terms that make sense for the business.

  • Deference. All states require corporate directors and officers to manage companies consistent with the fiduciary duties of care and loyalty. But Delaware’s interpretation of these fiduciary standards is generally more deferential to management, reducing legal risks.

  • Predictability. As businesses grow in complexity, clarity in the legal rules governing their operation become essential. Delaware has a well-developed body of corporate law providing corporate directors and officers unparalleled guidance in understanding and discharging their obligations and navigating complex governance matters, like takeover defensive measures, acquisitions, executive compensation, proxy issues, interested party transactions, shareholder voting matters, and so forth. Delaware law is also widely studied and written about by academics and practitioners, providing even more guidance and clarity.

  • Administration. The Delaware Secretary of State, which handles the administration of corporate filings, is responsive, flexible and highly skilled. It’s possible to have a business filing returned from the Delaware Secretary of State within an hour, to give a trivial example that turns out to be really helpful amidst critical business transactions. (California’s Secretary of State, by contrast, is bureaucratic and unresponsive.) Further, Delaware has dedicated courts charged with the administration of its corporate laws, providing a reliable adjudicatory body with deep expertise in corporate matters to preside over business disputes.

  • Taxation. In the U.S., business taxes are mostly based on a company’s physical location, not its state of incorporation, so contrary to a popular misconception, incorporation in Delaware will not, for example, help California-based business avoid California state income taxes. But Delaware does take a hands-off approach to state-level taxation that is helpful to businesses incorporating there.

Is Delaware Right For My Startup?

Naturally, the decision in the case of any particular business should be based on individual considerations in consultation with your legal and tax advisors.

That said, Delaware is a good choice if you are building a growth company that will seek funding from an institutional or geographically-broad base of investors, have a larger number of shareholders with varying interests, and/or involve operations and stakeholders in many jurisdictions.

If that is not the planned trajectory of the business, or if it’s not yet clear, incorporating in your home state may be the right choice, at least for the time being. If necessary, it is possible to convert your company into a Delaware entity at a later time, though doing so can becomes more arduous once a company has grown in complexity.


Francesco Barbera

Francesco Barbera is a corporate attorney representing emerging growth companies in a wide range of industries, including software, technology, digital, fashion, health care, retail and e-commerce.

He counsels entrepreneurs, investors and established companies on the full range of their business activities, from formation through raising capital, growth and acquisition. He has special expertise in the representation of mission-driven organizations and social enterprises. 

Throughout his career, he has represented the National Broadcasting Corporation, the Grammy Museum, Ares Capital Management, Credit Suisse First Boston, as well as privately held businesses in internet, media and technology, mobile applications, consumer products, professional sports, film and television production, among others over the course of his career. 

Francesco began his legal career at two large, international law firms in Los Angeles, where he represented large and small enterprises in a broad range of transactions, from mergers and acquisitions to public and private securities offerings to the formation of partnerships and joint ventures.

Francesco is also the Co-Chairman of the Los Angeles chapter of Conscious Capitalism, Inc.A lifelong student of psychology and personal development, Francesco holds a Master’s Degree in Spiritual Psychology from the University of Santa Monica and has been trained and mentored by numerous leaders in the personal development arena, including Steve Chandler, Byron Katie and George and Linda Pransky. 

Francesco has also founded and represented non-profit initiatives.

He has served as outside counsel to the Los Angeles Leadership Academy, a charter school dedicated to training the next generation of social and political leaders, and he is the founder and former Executive Director of SpiritWalk, a non-profit fundraiser created to benefit the University of Santa Monica.  

Francesco’s writing has appeared in The American LawyerCalifornia LawyerSlate, and others. He served as the Supreme Court columnist and Executive Editor of the Harvard Law Record and was the founder and editor-in-chief of the Penn History Review, the first Ivy League journal in the country dedicated to the publication of undergraduate historical research.

Francesco is an honors graduate of Harvard Law School, cum laude, and the University of Pennsylvania, summa cum laude and Phi Beta Kappa.