As an emerging or startup technology company seeking funding, your focus is likely on your product - it is the core of your business. That being said, how you protect your technology and set up the company that owns it can be just as critical as the technology itself.
This article will walk through some of the key areas of diligence that investors will focus on in evaluating startup and emerging technology companies. It will also serve as a checklist for your company to make sure it is prepared to enter the investor diligence phase of funding.
An investor will want to be certain that the entity which owns the underlying technology has been formed properly, and will need to understand who actually owns the entity.
a) Formation of Entity: Investors typically prefer that your entity is set up as a Delaware corporation and often require that your entity is converted to a Delaware corporation as a condition to funding if it was initially set up as a different type of entity. Delaware has a relatively settled body of corporate law, which provides predictability and stability to both investors and companies alike. Additionally, C-Corporations can provide the benefit of 1202 tax treatment, as detailed in this article offering an in-depth discussion of the qualified small business exclusion. You should discuss with your accountant the benefits of a corporation versus another entity, such as a limited liability company (which has its own tax benefits). However,...
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