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# Company Internal Setup

## Table of Contents
[TOC]

## Incorporation 101

- **Choose an Entity Type:** The most common entity for startups is a **C-Corp**. Investors will strongly prefer to invest into a C-Corp (while some will be prohibited from any other structures). C-Corps are also significantly more simple to set up and work with for important matters like equity compensation and raising capital.

- C-Corp ownership is split across stock (shares). Founders can ultimately determine the initial share count, which gets codified in the formal **Charter (COI)** filed with the state government.
- C-Corps generally have two types of Share Classes: Common and Preferred
- **Common Stock** represents basic ownership units with voting rights. Common holders are paid last in a liquidation.
- **Preferred Stock** typically sits higher in the cap table (getting paid before common shareholders, but after debtholders) and is granted to investors.
- C-Corps are taxed on both profits of the company/corporation, as well as dividends or distributions made to the owners.

- **Location for Incorporation:** The optimal location for incorporation is **Delaware**. Nevada or Wyoming are also common, but Delaware is widely considered the standard and best option. The State of Incorporation doesn’t dictate where you do business.
- For offshore teams, focusing on common-law based jurisdictions that are preferably tax-neutral is simplest. **Countries like Cayman/BVI, Singapore, UK, and Canada are common alternatives to the United States.**
- Most fund-counsel have contacts in Cayman/BVI, Singapore, UK, and Canada (we can make introductions) and investors are comfortable with these jurisdictions, as they have developed case law and (generally) reasonable court systems where enforcement in event of breach is actually a plausible outcome.
- For teams that may later issue a token and seek to decentralize their governance structure, incorporating the parent (equity) entity in the United States and later the Foundation or entity governing the network offshore is an approach with favorable legal and tax implications.

## Documents for Incorporation

*Your legal counsel and incorporation service will likely handle these matters, but it's worth understanding the process so you can be aware of any discrepancies.*
- **Articles of Incorporation** (AKA Certificate of Formation / Charter): This is your initial charter that is filed with the Secretary of State. Legal counsel should help in drafting and ensuring key items are included:
- **Name:** Pick something unique and meaningful, and *check for trademark or existing registration issues.*
- **Registered Agent:** You need someone physically located in the state to receive your documents. (If you incorporate online, the service you use will likely also have registered agent services).
- **Company Incorporator:** Who is incorporating the startup (often not the Founder). Post Incorporation, the company is transferred to the initial board via an “Action by Incorporator”.
- **Founder Stock Purchase Agreement:** Once the company has been created, (Common) Stock is issued to the initial founders. Importantly, Founders’ Shares must be paid for (and sign a Stock Purchase Agreement alongside a Vesting Schedule). Notably, founders need to pay the same price for the equivalent shares to avoid taxable income.
- It is important to establish some sort of Vesting Schedule (four years is standard) around Founder Shares to ensure internal alignment in the long term, as well as protect against the early departure of one or more founders.
- Unvested Stock can be repurchased by the company if a founder departs.
- **Corporate Employer identification Number (EIN):** An EIN is used by the IRS to identify a business
- **Bylaws:** Bylaws establish the framework for how your company’s board, officers, and stockholders should perform duties and operations. Work with counsel to draft detailed and clear bylaws and company policies around governance. Specifically focus on things like dispute resolution, dissolution proceedings, decision making & countering deadlocks.
- **A Right of First Refusal (ROFR)** is also important alongside **Share Transfer Restrictions** covering permitted transfers and protecting the company from the sale of shares to unknown (or worse) parties.
- **Confidential Information and Inventions Assignment Agreement:** This document confirms the corporate ownership of founders’ and employee’s intellectual property.
- Transfer any IP created prior to incorporation to the Company (even if there is only one founder).
- Ensure prior employers have no claims to any IP the Founders intend to transfer to or create at the new Company.

**409A Valuations:** A 409A valuation is an assessment private companies are required by the IRS to conduct regarding the value of any equity the company issues or offers to employees. A company wants the 409A to be low, so that employees make more off options, but not so low the IRS won’t consider it reasonable. The 409A valuation of employee equity is usually much less than what investors pay for preferred stock. In order to minimize the risk that a 409A valuation is manipulated to the benefit of the company, companies hire independent firms to perform 409A valuations. Startups should obtain a 409A valuation at least once a year or whenever (usually before) there is a significant event, such as a new round of funding or a major milestone that could impact the value of the company.

**83(b) Elections:** This tax document enables founders to pay taxes on their unvested shares immediately rather than waiting until shares vest and are worth significantly more. This ensures the recognition income date matches the date of the purchase of shares and **MUST BE DONE WITHIN 30 DAYS OF THE STOCK PURCHASE**

**Qualified Small Business Stock (QSBS):** Section 1202 of the Internal Revenue Code provides a special tax break for [qualified small business stock](https://www.wealthfront.com/blog/qualified-small-business-stock-2016/) held for more than five years. Currently, this tax break is a 100% exclusion from income for up to $10M in gain. There are also special rules that enable you to rollover gain on qualified small business stock you have held for less than five years. Stock received on the exercise of options can qualify for the Section 1202 stock benefit.

**For further reading:** https://handbooks.clerky.com/

## Back Office Best Practices
- **Checklist:**
- Incorporation
- 409A Valuation (before issuing any common stock options)
- Banking/credit cards
- Equity Management
- Payroll, Vendors, Billing & Expense Systems & Policies
- Compensation and Benefits
- Business Insurance, D&O Insurance
- Lock in a Domain Name and set up Social Media accounts

**Industry-leading Service Providers**

*Ask Archetype team for intros*
| Incorporation Services | Banking/Credit Cards | Equity Management | Bookkeeping/Accounting | Payroll/HR | Benefits | ATS |Legal Counsel | Press | Onchain Infrastructure | Credits | Audit | Smart Contract Audits|
|:--------:|:--------:|:--------:|:-------------:|:---------------:|:--------------------:|:----------:|:----------:|:----------:|:----------:| :----------:| :----------:| :----------:|
| Stripe Atlas | Mercury | Carta | Pilot | Gusto | Gusto | Rippling | Gunderson | CoinDesk | Satsuma | AWS | Cohen | Sherlock |
| Clerky | JPM Chase | Pulley | NetSuite | Rippling | Rippling | Greenhouse | Latham | The Block | Loop Crypto | QuickNode | KPMG | Arbitrary Execution |
| | Morgan Stanley | |QuickBooks | Deel (international hiring) | |BambooHR |Cooley | TechCrunch | | |CBIZ
||Meow|||Sequoia|||LLOY||||Deloitte
||Amex|||||| Homiak
||Brex ||||||Ketsal||
||Ramp

## Token Issuance and DAO Governance Structures
Companies planning to issue a token should consider legal and tax implications for setting up structures for 1) a token issuance/genesis entity 2) DAO governance

Token issuance is usually done through a **subsidiary** or an **orphan structure**,the considerations for such decision should be dictated by current regulatory landscape.

**Subsidiary**

Where the company incorporates a subsidiary should be dictacted by overseas regulatory rules at that time. The most common jurisdiction from whcih to undertake a token issuance is currently the British Virgin Islands (BVI), due to its corporate flexibility and tax neutrality.

**Orphan structure**

An orphan structure is an entity that technically owned by no one and is often used for the purpose of SPVs or holding vehicles. A Cayman foundation company or Panama foundation are both structures commonly used in this context.

**A potential structure:**


## Disclaimer
*This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment or legal matters. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Archetype. This post reflects the current opinions of the authors and is not made on behalf of Archetype or its affiliates and does not necessarily reflect the opinions of Archetype, its affiliates or individuals associated with Archetype. The opinions reflected herein are subject to change without being updated.*