Lawyer Jared Brubaker explains why startups need to incorporate and what makes corporations work: limited liability, transferable ownership, and centralized management. He warns against non-Silicon Valley lawyers and recommends Clerky for formation.
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So the overall philosophy for all of this is to follow the norms and stay simple. And the reason for this is that you're— with the companies that you guys found, there's so much going on and there's so many innovative things that you're doing with your products and your markets that it doesn't make sense to also innovate here unless there's a really good need to. Many, many of the most successful companies have the capital structure that I'm discussing here and have done very well, made a lot of money for their founders and for their investors. So this is— so in general, stay simple. Part of that is using standard Silicon Valley documents. There is a normal way of doing things that's evolved through through decades of push and pull between investors and entrepreneurs and have evolved over this period of time to handle all the standard things that happen. So it's really in your interest to use these standard documents. From a practical perspective, the cheapest and quickest method we've found for corporate formation is to use a site called Clerky. It was founded a year and a half ago or 2 years or so by a couple of couple of corporate lawyers from Oric who realized that formation and a few of these other things were very form-driven, like a lot of them were the same. And so it really didn't make sense to have a lawyer, to spend time to have a lawyer fill in the blanks when a website can do it just fine. If you decide to hire your own lawyers, make sure that they're familiar with Silicon Valley norms. This is important. Some of the companies that I've dealt with have used their— a lawyer that their family is comfortable with. That's fine, but there is the risk that if you— when you go and raise money, the investor will go like, what the hell is this, and you have to clean up everything and replace it with Silicon Valley standard documents and that's very expensive. So go on to talking about the norms. Just the basic background here, a corporation is an entity created by a state. So for example, the state of California or the state of Delaware or the state of New York. And it has 3 major attributes. One is limited liability for its owners. This means that if an investor invests in a company, Say that there's a company that sounds really exciting, doing a lot of interesting things called WorldCom, and you decide to invest in it. It turns out later that there was all kinds of fraud. They defrauded the holders of their debts. They defrauded their customers and whatnot. The only thing that you lose is what you put in to begin with. to the company. The stockholders can't be sued for— to collect on the other debts of the company. So this is very important. Transferability of ownership interest. So this means that an entrepreneur can build a company and can cash out, which is key, quite obviously, instead of having to continue to run the business or or be involved with the business to continue to get the benefits. And then the third is centralized management. There's typically not ambiguity as to who's running the company.
