USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters LLP
2. Establishing a New Company, Early-Stage Financing and Venture Capital Financing of a New Technology Company 2.1 Establishing a New Company In the USA, regulation of the formation and oper- ation of business entities is within the purview of the states. Delaware is the most popular state for start-ups in the USA, as it offers various advan- tages that distinguish it from other states. These include: • access to the esteemed Delaware Court of Chancery, which specialises in business law and provides for a large body of case law; and • incorporation or formation at a minimal cost and without needing to satisfy any minimum capital requirement. 2.2 Type of Entity The entities most commonly used for start-ups are: • sole proprietorships; • limited liability companies (LLCs); • general and limited partnerships; and • corporations, which can elect to be treated for US federal income tax purposes as either “C-Corporations” (the most common) or “S-Corporations”, each with different eligibil- ity requirements. Corporations and LLCs are the main entity types used in the USA, and shareholders of a corpo- ration or members of an LLC will generally not be held liable for the liabilities of the respective entity. Although Delaware law discourages it, Delaware courts and courts in other jurisdic- tions may, under certain limited circumstances (eg, fraud or violations of criminal law), disre-
gard the separate legal status of an entity and allow a plaintiff to “pierce the corporate veil” and recover directly from shareholders or members. 2.3 Early-Stage Financing Commonly referred to as the pre-seed and seed rounds, early-stage financing for start-ups typically comes from a wide range of sources, including: • family and friends; • angel investors; • government-sponsored funds; • foreign investors; • accelerators; • seed-stage VC funds; or • micro-VC funds. Angel investors are typically high net worth individuals or investment groups comprised of such individuals that are interested in diversify- ing their investments and maximising the long- term gains potential of early-stage companies. Accelerators are programmes developed to pro- vide services and mentorship to founders, and often have a specific industry focus. Micro-VC funds are typically small venture funds, usually with one general partner, that invest at the seed stages alongside angels. Seed-stage VC funds are larger than micro-VC funds and are typically the first institutional investor in a start-up. Government-sponsored funds are public policy tools that provide financial support to innova- tive start-ups and companies. Foreign investors may include high net worth foreign residents or institutional funds with foreign partners or spon- sors that are seeking lucrative opportunities in the USA.
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