Ever since I found the blog Startup Company Lawyer, I’ve had a high regard for its author, Yokum Taku, a partner at Wilson Sonsini Goodrich & Rosati. Yokum’s posts are always chock-full-of-good-information. His most recent post was on the topic of When do I need to incorporate a company?

I’ve spent some time thinking about this before, and, in fact, had a couple of tweets related to this as well:

Yokum already did an excellent job of laying down the legal considerations. As an extension to my tweets above, I wanted to expand upon some of the reasons behind these tweets. Here is the text of the comment I posted on Yokum’s blog in response to his post. I suggest you read his post first and then read my comment below:

Yokum, thanks for another great post! EAU (Excellent as Usual) as one of my favorite customers used to say!

You provided a great overview of the reasons to incorporate from a legal point of view, I wanted to chime in with some more subtle, but hopefully useful comments:

I maintain that the best time to incorporate is ‘yesterday’ — or as soon as you are 100% sure that you want to give this idea/company a real shot. To me incorporation is a ’show of commitment’. It sets a date and time in stone for the inception of the company, and, it starts the clock running. This has several advantages:
1) If you are going to be bringing on co-founders or employees, the fact that the company has already been incorporated, and is official, can have an impact on how the equity split gets portioned out.
2) Incorporating starts the clock on the corporate history — which can often be useful when dealing with customers. For example, when asked, ‘How long have you been in business?’ you can confidently point to your date of incorporation as the ’start of business.’
3) The same also applies when having valuation discussions with VCs. If the company hasn’t even been incorporated yet, then they are likely to try and push you more on valuation. I’m sure several folks will disagree with this, but I am confident this happens — even if it happens subconsciously.
4) Likewise, the date of incorporation often plays a role in what portion of the founders’ stock is already vested at the time of a venture financing.
5) Incorporating forces you to start maintaining the books (or so I hope!) and also forces you to learn all the administrative details it takes to run a company. While this isn’t something that directly adds value to the company, it is something that needs to be done. The sooner you learn this, the better it is. Doing this from the beginning and keeping things clean will be something you appreciate when you get into due diligence.

There are of course some disadvantages to incorporating as well:
1) Cost — even though most law firms will defer some of the legal costs involved, incorporating through a law firm is still an expensive process (deferring is not the same as not charging!)
2) Administrative overhead — once you incorporate, you are expected to comply with federal and state regulations. So you have to file taxes for the entity every year (Federal Taxes, DE Franchise Tax, California Tax ($800 minimum if I remember right)).

Tip: If you are thinking of incorporating and it’s close to November/December already — WAIT till January! That way you don’t have to file all this paperwork for just a month or two of existence! And you’ll have a full year ahead of you to find an accountant/tax person to help for tax time.

But all in all, I say, incorporate as soon as you are sure you want to give this a real shot. Stop hedging, and just do it!

It was 2:00 AM and I was still sitting in ‘The Cave’ — the name we affectionately gave to the cubicles in the bowels of Wean Hall  at Carnegie Mellon. It was called ‘The Cave’ because it’s all under ground, with no natural light portals whatsoever. The cave was kinda like Vegas — once you enter you lose track of time. Day or night it looked the same, and smelled the same (and not too pleasant at times!).

I was in the cave late that night because I was firefighting. A couple of weekends ago, on a whim to teach myself Java I had written up software for hosting chat rooms. The server was the decrepit little Pentium 200 sitting under my desk. The problem was that the server was crashing under the load of all the people using it. I could just go home and sleep, but the problem was that if the server crashed, I would end up with a ton of email the next day from the disgruntled users. In hindsight, I should have used Moore’s Law to solve the scalability issue. But I was a student and buying machines in 1996 was still expensive.

I was chatting with one of the frequent and loyal users of my site that night and explaining to him how I didn’t have enough resources to keep up with the growth of the service. Running thousands of concurrent users was pushing the limits of what the Java VM could handle on the P200. That’s when he suggested, maybe I should start a company — and start charging for the chat rooms. The bit flipped — I went from being a hacker, to being an entrepreneur.

There is nothing like your users telling you to charge for your service, because they want it and need it. At the time when I started my first company, I had one of the few Java-based chat solutions available, and was one of the first to offer what are now known as embed tags so that people could create their own rooms. SneakerChat, as I called it, had over 20,000 concurrent users with well over 50,000 registered users (registration was optional).

Starting my own company sounded cool. I knew it was something I wanted to do eventually anyway. It’s what I had always considered doing, right from the time that I was building and selling musical doorbells to my parents friends. (That’s a whole other story for another time). But, I knew nothing about starting a company and I knew even less about what it meant to start a company in the United States. I hadn’t grown up here, I was only here as a student and that too on a student visa. And I didn’t have any extra money I could use as capital to start a company with — but when did that ever stop anyone!

I decided I needed to learn about what it meant to start and run a company. Some of my classmates had taken a course on entrepreneurship at the business school across campus. I asked them which class it was and who the professor was. They recommended taking the class appropriately called ‘Entrepreneurship I’ taught by Professor John R. (‘Jack’) Thorne, who was the Director of the Donald H. Jones Center for Entrepreneurship at the business school. In the next couple of days, I walked over to the business school and into the Don Jones Entrepreneurship Center. Jack’s assistant (whose name eludes me right now, but I think it was Suzanne) was great at calming my nerves as I was probably visibly nervous when I walked into my first meeting with Jack.

I told Jack that I wanted to take his class on entrepreneurship. Jack suggested that I take a different class — Technology-based Entrepreneurship, which was offered the following semester. He explained to me that his class was only for students of the business school and on top of that, it was already over-subscribed with a long waiting list. I was somewhat disheartened, but didn’t know what else I could say or do. Though I was despondent, I decided to at least show up for the first lecture for Jack’s class to see what it was like. Later that week, I snuck into Jack’s class and found myself a corner I could stand in without being noticed much. I was at least 5-10 years younger than everyone else in the class, I wasn’t from the business school, and didn’t want to ruffle any feathers.

The first slide Jack put up that day was his definition of entrepreneurship: ‘Insane Perseverance in the Face of Complete Resistance.’ That was it! I was hooked. It took a couple of seconds for it to all come together, but then it just clicked. Jack had just given me the perfect way to get into his class. It was the first test on the way to becoming an entrepreneur. I decided right there, on the first slide of his first lecture, that the only way I could be successful as an entrepreneur was to first convince Jack Thorne that I should take his class!

I scheduled a followup meeting with Jack and in his office. I told Jack that he had already given me what I needed to take his class: Insane Perseverance. I told him that I was not going away. That I would keep showing up to his class and hiding in the back listening in. I wouldn’t ask any questions or say anything so as not to disrupt the class, but I was going to be there for every lecture, and the only way Jack could get rid of me would be to have me thrown out!

Needless to say, Jack relented and he welcomed me into his class. I got to take his class when several other people on the waiting list didn’t. I took every single class Jack Thorne taught at the business school. Entrepreneurship I. Entrepreneurship II. Entrepreneurship Project. Entrepreneurial Management. If it had the word entrepreneur in it, I was there. I wrote the business plan for my company as a class project for Jack’s class. I incorporated my first company, SneakerLabs, Inc., while I was still a student in Jack’s class. I was 20.

Jack Thorne

Jack Thorne passed away last year. He was one of my mentors, without whom, I would have never gotten one of the most important lessons of my entrepreneurial life — Insane Perseverance in the Face of Complete Resistance. Those words were at times the only things to fall back on when things got tough. And while there are lots of other experiences and stories that got me there, that first day in Jack Thorne’s class is the day I started my journey as an entrepreneur — one with Insane Perseverance.

Thanks to my wife and Ron Yeh (@ronyeh) for proofreading the above post.