Washington vs. Delaware
For Washington-headquartered startup companies, I generally recommend incorporating in Washington for the following reasons:
Washington law is good
- Washington has a well developed and well maintained corporate law
- Although Washington State doesn’t have Chancery Courts (special courts dedicated to handling just corporate disputes), and Washington doesn’t have as long a line of judicial precedent as Delaware, for a startup this isn’t a big deal. Washington courts regularly look to Delaware precedent for persuasive opinion when appropriate. There are nuanced differences between the two state’s laws, but they are substantially similar.
- Some of the world’s most valuable companies are incorporated in Washington.
- Washington, unlike California, is not a review state. If your were in California and trying to decide where to incorporate, California or Delaware, you would choose Delaware to avoid the practice of the California Secretary of State of reviewing and approving filings before they are effective (which can slow down a financing). Washington, like Delaware, is not a state which reviews filings with the Secretary of State before they are effective. The popularity of Delaware as a place to incorporate has a lot to do with the unpopularity of California as a state of incorporation.
Washington is less expensive
- If you are headquartered in Washington, incorporating in Washington will be less expensive than incorporating in Delaware.
- If you incorporate in Delaware but do business in Washington, you will have to:
- first, pay Delaware incorporation fees;
- then pay to obtain a certificate of good standing from Delaware;
- then pay to qualify your Delaware corporation to do business in Washington; and
- then on an ongoing basis you will have to pay Delaware franchise taxes and registered agent fees to a registered agent in Delaware, in addition to ongoing fees you will have to pay to the State of Washington.
- Delaware’s annual franchise fees can be significantly greater than Washington’s annual fee (Washington’s annual fee is less than $100).
- If you want to see how much more Delaware can cost you in annual fees, you can run example calculations here.
Incorporating in Washington won’t hold you back in obtaining venture capital financing.
- Washington corporations regularly receive funding from venture capital firms (as reported in the media). (I have yet to hear in my 12+ year legal career a funding source say they wouldn’t fund a Washington corporation unless it reincorporated in Delaware–but if one did it would not be a big deal to reincorporate.) Microsoft is a Washington corporation (significantly, it reincorporated to Washington from Delaware).
- In fact, if you study the companies reported in the news media that are reported to have raised funds or done M&A deals and look and see on the Washington Secretary of State’s web site where those corporations are formed (http://www.secstate.wa.gov) most Washington-based companies in the news for raising money or doing M&A deals appear to be Washington corporations (with Delaware running a close second from the sampling I’ve done).
- If you subscribe to our Funding Update Newsletter (you can do this by going to the front page of this blog and hitting the button titled, Subscribe to Funding Update, and then sending the email that you are prompted to send), you will see that Washington corporations regularly close angel and venture financings. It is not an impediment at all to be a Washington corporation.
You avoid potential legal costs down the road.
- If you do incorporate in Delaware and happen to run into an issue which is a novel or complex issue under Delaware law in the midst of a transaction, you may have to retain separate Delaware counsel at additional expense for legal opinions. This is a cost that you would avoid if you were incorporated in Washington and working with Washington counsel on your transactions.
Reincorporating in Delaware is not a big deal if you are forced to do so.
- If you do run into an investor who will write you a multi-million dollar size check, but only if you are incorporated in Delaware, it is not a big deal to reincorporate.