Core Concepts

In normal speech, person is generally synonymous with human. In law, however, a human is only one type of person. The law defines other types of legal people (also referred to as legal persons) that humans (also known as natural people or natural persons) can create.

A corporation is one type of legal person that humans can create. By allowing corporations to be considered legal people, the law makes it possible for them to hold legal rights and obligations separate from their owners.

Each state has its own rules about how to form a corporation. In Delaware, people form corporations by filing a document known as a certificate of incorporation¹ with the Delaware Division of Corporations.² Once the filing has been accepted by the Delaware Division of Corporations, the corporation comes into existence as a legal person.

Any startup attorney, as well as Clerky, can help you file a certificate of incorporation with the Delaware Division of Corporations.

The certificate of incorporation filed with the Delaware Division of Corporations must name a registered agent for the corporation.³

The registered agent of a Delaware corporation must be physically located in Delaware, and is responsible for receiving legal and government communications for the corporation. There are many companies in Delaware that provide registered agent services for a fee. Most startups use one of these registered agent companies.

Although registered agents provide your corporation with an address in Delaware, they typically only allow the address to be used for communications from the Delaware Division of Corporations and court-related notices, and return other mail to the sender. Consequently, startups should have a separate business address and use it exclusively whenever asked for an address (unless asked specifically for the registered agent's address).⁴

Registered agents typically also serve as a filing agent for their customers. Filing agents make filings with government agencies, such as the Delaware Division of Corporations. Registered agents charge a fee for their filing agent services.

Most startup attorneys, as well as Clerky, will automatically select a reliable registered agent for you at a steeply negotiated discount.

When a certificate of incorporation is filed to incorporate a new corporation, the Delaware Division of Corporations requires that it be signed by an incorporator.⁵

With most startups, the incorporator elects the initial board of directors after the certificate of incorporation has been filed. The incorporator can elect him or herself to the initial board of directors. The incorporator typically executes a document called an Action of Incorporator (also called an [Initial] Action by [the] [Sole] Incorporator), in which the incorporator adopts bylaws for the corporation, sets the size of the board of directors, and elects the initial board of directors. The role of the incorporator ends there.

It usually doesn't matter who the incorporator is, primarily because the corporation has no assets at the time of incorporation. If the incorporator elects an initial board of directors that his or her co-founders disagree with, they can simply incorporate a new corporation on their own. For this reason, the incorporator for a startup is typically the founder who is most willing to handle the paperwork. Some law firms have a paralegal or attorney serve as the incorporator.

The board of directors (often referred to as the board) is the governing body of a Delaware corporation. The board of directors has a specific number of seats. There is no minimum number of seats; solo founders are often the only director at company formation. Most startups are set up so that the size of the board can be easily adjusted at any time.⁶ The number of directors can never exceed the size of the board.

The board makes decisions either in board meetings or in writing (referred to as written consent). By default, the board can make decisions with a majority vote of the directors present in a meeting.⁷ Or if the board is making a decision by written consent, unanimous consent of all directors is required. In practice, most board decisions for early-stage startups are made by written consent, due to simplicity.⁸

A quorum is required for any board decisions. Quorum is the minimum number of directors that must be present at a board meeting in order to make decisions.⁹ This is usually a majority of the total number of directors. The board can't make any decisions in a meeting if there aren't enough directors present for quorum. Similarly, the board can't make any decisions by unanimous written consent if the total number of directors doesn't meet quorum.

As mentioned earlier, the initial board of directors is elected by the incorporator. Once a corporation issues stock, the stockholders control who is on the board of directors. For most startups, the board of directors consists solely of founders until the startup's Series A financing. Venture capitalists typically join the board of directors in connection with a Series A financing.

The officers of a Delaware corporation are appointed (and removed) by the board of directors. Officers are in charge of managing the company day-to-day.

Most startups start off with at least a CEO and president, a CFO and treasurer, and a secretary. In an early-stage startup, the CEO and president are often the same person in order to avoid any confusion as to leadership, and because the roles are so similar. The CFO and treasurer are usually the same person as well.

There is no limit to the number of offices one person can hold, nor is there any requirement for offices to be held by different people. Solo founders typically hold all the offices in their startup, for example.

Under Delaware law, corporations are not required to define any particular officer titles.¹⁰ However, most startups will need to register to do business in their home state, which may require the existence of the typical officer positions.

For most early-stage startups, the primary decision is who will be the CEO and President. Other officer titles tend not to have much meaning, since everyone is doing a little bit of everything and roles are constantly changing.

Offices can usually be added through an amendment to the bylaws, or by the board of directors. Typically, an office must be formally created for a corporation before anyone can hold it. For example, if Chief Technology Officer is not an officer position, you can have an employee with Chief Technology Officer as their job title, but they would not be an officer of the corporation.

Ownership of Delaware corporations is represented by shares of stock. Stockholders are the people who own shares, and thus part of the corporation.¹¹ Even though they are the owners of the corporation, stockholders don't control the corporation directly (although stockholder approval is required for certain decisions). Instead, they control who is on the board of directors, which in turn controls the corporation through the corporation's officers.

Startups usually issue either common or preferred stock. Preferred stock has additional rights and privileges that common stock does not have, with respect to liquidation and dividend preferences, at a minimum. Startups typically issue common stock to founders, employees, and consultants, and issue preferred stock only to investors.

A corporation's stock can be organized into classes, which must be defined in the certificate of incorporation. Most startups start off with one class of common stock, conveniently called Common Stock. When they raise venture capital, startups typically amend their certificate of incorporation to create a class of preferred stock, conveniently called Preferred Stock.¹²

The certificate of incorporation can also specify that a class of stock be further divided into different series. It is rare for common stock to be divided into series, but preferred stock is almost always divided into one or more series for each financing. A financing is usually referred to by the series of stock that was created for that financing. For example, if a startup raises money by issuing shares from a new series called Series A Preferred Stock, people would refer to that round of financing as the startup's Series A financing.

A corporation cannot issue stock unless:

1. the board has approved the issuance and
2. there are enough shares available for issuance.

If the stock is of a particular class, then there must be enough shares of that class available for issuance. Similarly, if the stock is of a particular series, there must be enough shares of that series available for issuance.

The first step in determining how many shares are available for issuance is to determine the number of authorized shares. The number of authorized shares is the number of shares the corporation is authorized to issue. It is impossible to issue shares that have not been authorized. The number of authorized shares is set in the certificate of incorporation. If the stock of the corporation is divided into classes or series, the certificate of incorporation must set the number of authorized shares for each class or series, as well as a total number of authorized shares. Most startups authorize 10 million shares of common stock at formation.

Then, to determine how many shares are available for issuance, take the number of authorized shares and subtract shares that have been issued as well as shares that have been reserved for some other purpose (for example, for issuance under a stock plan). On the off-chance the corporation has repurchased any shares, and those shares have not been retired, those shares would be added back in as shares available for issuance.

If a corporation wants to issue shares, but there are not enough shares available for issuance, it must file an amendment to its certificate of incorporation with the Delaware Division of Corporations to increase the number of authorized shares.

Contracts are agreements that create rights and obligations enforceable by law.¹³

When you think of a contract, you probably think about a document that people sign. Many contracts are formed this way. However, contracts do not need to be in writing. You can create a contract simply by talking with someone else. Most attorneys recommend against creating oral contracts because they are unlikely to protect you as well as a contract written by an attorney would. You also don't need to sign a contract in order to be bound by it. For example, two parties can create a contract by coming to an agreement over email.

Corporations rely on humans to enter into contracts. Before someone can enter into a contract on behalf of a corporation, he or she must have the authority to do so. In most startups, the board gives the CEO broad authority to enter into contracts, and empowers the CEO to then delegate that authority to others as they see fit.¹⁴ This is why contracts often ask for your title when you sign on behalf of a corporation. By specifying your title, you are indicating how you (hopefully) have authority to bind the corporation.