Forming a Coporation in Delaware | Richard Horning

to somebody who's working at Stanford, for example. It's useful, but again, you're tied to somebody else's opportunity. So think about how you're going to solve the problem. Now let's talk about sort of company formation in Silicon Valley. Everybody forms companies in Delaware. Why Delaware? Taxes. Delaware is a very small state known at the moment for— as the home of the former Vice President of the United States, Joe Biden. It's halfway between Washington and New York. You go through on what passes for high-speed rail. In the United States, which isn't very fast. They have basically 3 businesses in Delaware. They have the DuPont Chemical Company, which was formed in Delaware before the Revolutionary War in the 1770s, which employs a lot of people still in Delaware. They have big banks in Delaware, which have back-office facilities in Delaware where they process loans and all the paperwork that's involved in the banking business. Delaware has a light-touch banking supervision law. So banks like to be in Delaware. It's close to New York. It's cheaper than New York. Close to Washington. Again, cheaper than Washington. And they have the Delaware Secretary of State. The Delaware Secretary of State has optimized its business to make it very user-friendly. You want to be incorporated today? Tell me the name and I'll get you incorporated today. How will I get the paperwork there? By email. Can I do that with the state of California? No. In fact, until about 8 years ago, the state of California had never heard of the— this invention that was developed in 1840 called a fax machine. You had to— she had to show up at the Secretary of State's office with a blue ink signature and have somebody take the paper from you and get it stamped. So why do we use Delaware? Because it's easy. They don't spend a lot of time reading the paperwork that you submit, unlike California, where we have people who read it, who want to look at where the commas are, have you done the math right. And so there's a chance that you have to go through this exchange with the Secretary of State back and forth in California, which in Delaware, not very likely. Why do they not worry about this in Delaware? Because they have another institution across the street from the Secretary of State's office called the Delaware Chancery Court that does nothing but business disputes involving Delaware corporations. That's all they do at the Chancery Court. So there's a problem with the paperwork, some investors are unhappy, they go across the street and Delaware has made it very user-friendly. You pay by credit card without a lot of intermediaries. Again, it's— so I haven't formed a California corporation in probably 25 years. Why? Almost all the young companies that are started here that get angel capital or friends, fools, and family, if they've got a lawyer involved or anybody who's thinking about this who's been around the block once or twice, they form the company in Delaware. You can go online and do this. Sometimes it's a good idea if the company that you buy the papers from has been thinking about it and gives you the right papers. And does the incorporator work of forming the company and electing the first board and getting— helping get a tax identification number, which is another problem. But basically you can be in business overnight. There aren't a lot of formalities. We don't need anybody's permission. You don't have to be a resident of the United States to be an officer, director, or shareholder. In fact, nobody knows anything about who owns the company because the records of ownership are not public. The records of the financial activity of this company are not public. The tax returns are not public. Nobody knows anything about this company. There's been some criticism of this in an international setting because some people will compare Delaware and the United States to islands in the Caribbean where the same thing exists. Nobody knows anything about these companies. But that's as it is. So that presents yet another problem for young companies. Assuming you've raised capital— oh, another footnote. Unlike certainly European countries, there's no minimum capital requirement. You can form a Delaware corporation with no capital. It's not a very good idea for 2 reasons. One is you're going to need a bank account. Most banks want to see some money put into the account. So you'll need some capital to put into the account to open a bank account. That's most banks. There are some special programs at Silicon Valley Bank that allow you to open the account without a deposit. But sooner or later, the bank wants to see some money. The second is if you open the company with zero capital, You run the risk down the road of the Immigration Service saying when you apply for an L-1 transfer, where's the money? Where's the money to grow this company? I recently ran into this problem with a Swedish company I was helping. They had raised the equivalent of $13 million in Europe. They decided to set up operations in California. I formed a Delaware corporation for them, opened a bank account for them at Bank of the West. And let me pause for a moment. I happen to be— have been one of the founding shareholders of Silicon Valley Bank. It was luck. The founder of the bank happened to be our banker before he left, the law firm's banker before he left to found Silicon Valley Bank. And he came around and said, I'm starting a bank. Would you guys like to be investors? And we said, of course, we know all about the banking business, which we didn't know anything, but we knew him. So we gave him some money, and it turned out to be a very successful investment. Most of my inbound clients, however, are banked by Bank of the West. Bank of the West is owned by Banque Paribas in Paris. Because of that relationship, they have a group within the bank, about 25 people, who are all former are foreign nationals who are here with various visas and wives and whatever, so they get to stay here. Their business, the business of this section of Bank of the West is to support inbound companies and inbound individuals. That's all they do for a living. So almost all of my inbound clients are banked by Bank of the West. So my Swedish company, they've applied for an L-1 transfer. To send the CEO and the CTO over here. We get them a bank account at Bank of the West, put $10,000 in the bank to open the account. Everybody's happy until we get to the Immigration Service. And they say, how are you going to run this company in the United States with $10,000? To which they answered, we just raised $13 million. It's sitting in our bank account. in Stockholm. Not good enough. The president of the bank had to fly over here to take control of the account, which I opened under my authority, and to move $250,000 into the bank account. So the idea of opening a bank account and setting up a company with zero capital, Don't do it. Don't do it. I had a UK company that did this. I said, you're asking for trouble when it comes to moving somebody from here in the UK to the United States to work in a subsidiary. The Immigration Service is going to say, how can you run the company with zero capital? They said, well, we'll deal with that when the time comes. When the time came, the Immigration Service said, hmm, No capital? Come back when you've got some money in the bank. So 9 months later, they raised the capital, they put it in there, they had the capital all along, they put it in there and they got the L-1 transfer, but it was delayed for 9 months. It was silly. It was silly. Now, let's go back again to the fact That I mentioned before, that no one knows about the ownership of your little company. No one knows about your financial activity. No one can see your financial activity. You don't have to file tax returns that are made public. You don't have to file accounting statements that are made public, unlike most places in Europe. So nobody knows about you. So this presents a problem, and the problem is.