What to consider with setting up a new entity before funding

When setting up a new entity before seeking funding, there are several critical considerations to ensure your business is well-positioned for investment and long-term success:

Topics:

• Choice of Entity Type
• Legal and Governance Structure
• Capital Structure and Fundraising Strategy
• Intellectual Property (IP) and Asset Protection
• Financial Infrastructure and Documentation
• Tax Considerations
• Long-Term Vision and Flexibility

Choice of Entity Type

The entity structure (e.g., C-corp, S-corp, LLC) significantly impacts your ability to raise capital. Most venture capitalists and angel investors prefer C-corporations, particularly those incorporated in Delaware, due to favorable investor protections and established legal precedents. LLCs are generally seen as less attractive to institutional investors.

Consider the number of founders, ownership structure, and how profits will be distributed. Early agreement on equity ownership and vesting schedules is crucial to prevent future disputes.

Legal and Governance Structure

Properly register the legal entity in the appropriate jurisdiction, considering factors such as liability protection, tax implications, and regulatory requirements.
Establish robust governance and compliance frameworks from the outset. This includes drafting clear bylaws or operating agreements, setting up a board of directors if applicable, and clarifying decision-making authority.

Ensure all formation documents are complete and accurate, as investors will scrutinize these during due diligence.

Capital Structure and Fundraising Strategy

Determine how much capital you actually need to reach your next milestone and whether you will pursue equity or debt financing. The decision affects both your dilution and control over the company.

Prepare a clear plan for how outside capital will be used-investors want to see a well-defined use of funds.

Understand the implications of different financing structures, such as convertible notes, SAFEs, or direct equity, and ensure compliance with securities laws.

Intellectual Property (IP) and Asset Protection

Secure all IP rights for the company, including assigning founder IP to the entity and ensuring proper documentation. Investors will expect all core IP to be owned by the company, not individuals.

Protect personal assets by choosing an entity type that limits liability, such as a corporation or LLC.

Financial Infrastructure and Documentation

Set up a robust financial infrastructure, including a business bank account, accounting system, and expense management processes.

Maintain clear and thorough documentation for all agreements, including founder agreements, investor agreements, and employment contracts.

Tax Considerations

Evaluate the tax implications of your chosen entity type for both the company and its owners. Some structures offer pass-through taxation, while others may be subject to double taxation.

Consider future plans for equity compensation, as certain structures are more favorable for offering stock options to employees.

Long-Term Vision and Flexibility

Think ahead to your long-term goals, such as future fundraising rounds, potential exits, or offering equity to employees. The initial structure should not create obstacles as the company grows.

Avoid 50/50 founder splits or governance arrangements that could lead to deadlock; plan for dispute resolution and founder departures.

Consulting with experienced legal and financial advisors is highly recommended to tailor these considerations to your specific business model and goals. Proper planning at this stage can prevent costly issues and make your startup more attractive to investors.

Disclaimer: Stoic Bookkeeper is not a licensed CPA firm or accounting service provider authorized to issue audited or certified financial statements. The financial data presented here is based on the provided documents and is for informational purposes only; it is not intended to be used as auditable financials or as a substitute for professional accounting advice.If discrepancies or errors are identified in this report or the source data, StoicBookkeeper LLC cannot be held liable for any resulting decisions or outcomes based on this information.