So, you’ve taken the plunge and decided to incorporate your startup. Congrats on taking the first step of your entrepreneurial journey. Now that you’ve gotten your certificate of incorporation stamped and approved, here are the next steps you will likely need to take as you finish setting up your company and prepare to raise money from investors.
- Finish the process for issuing founder shares. Soon after incorporating, the founders will sign common stock purchase agreements to purchase their shares from the company. Then, they will finalize the process by paying for their shares. If the company doesn’t have a bank account set up already, you can just write a check out to the company to document proof of payment. It is important to do this as soon as possible after incorporation since, under IRS rules, startup stock cannot be sold at less than the fair market value at the time of the equity award. When a company first incorporates, the fair market value of the company equity is close to zero, which enables founders to purchase substantial chunks of the company in equity at a very low price.
- File 83(b) elections with the IRS. If any of the founders are receiving shares that are subject to vesting, then it is very likely that founders will want to file an 83(b) election with the IRS. This form must be filed within 30 days of when the shares are purchased; there are no exceptions to this rule. The 83(b) election notifies the IRS of the time, date and price of the founder’s share purchase; this information will be used to calculate whether the proceeds from any future sale of shares will be taxed as income or long-term capital gains. Unlike other IRS forms, the 83(b) election must be wet-ink signed and dated, then sent by physical mail to the IRS. Learn more about how 83(b) elections work.
- Set up a document room. The document room is used to store all legal agreements your startup is party to. You can use Dropbox or Google Drive as an ad hoc solution to start off. When you raise money from startup investors or VCs, they will typically ask to review the company’s legal documentation, including any contracts involving the issuance of equity in the company. Capbase helps startups breeze through diligence by automatically organizing the company document room as founders issue equity to advisors and employees or raise money from investors. Learn more about what types of materials investors will ask for as part of the due diligence process.
- Apply for an EIN. The Employee Identification Number or EIN is a number assigned to corporate entities by the IRS. The EIN is required to open a bank account, hire employees and file your annual corporate income tax returns. Learn more about getting an EIN for your startup.
- Open a bank account. It is important to separate your personal and business finances by setting up a business bank account for your startup. This will avoid any issues where you, your co-founders or company shareholders are exposed to personal liability for any liabilities the business incurs. Founders can self-fund their own companies but it is important to do this cleanly and maintain proper documentation to avoid problems down the road. Learn more about how to invest your own money into your startup.
- Qualify to do business in your home state. Most startups incorporate as C Corporations in Delaware. However, most founders don’t live in Delaware—in fact, Delaware has more corporations registered there than human residents. Typically, startups registered in Delaware will have to register their Delaware corporation to do business in their home state(s). Learn more about foreign corporation registration requirements for startup companies and registering to do business in California (known as a "foreign agent qualification").
- Create a capitalization table or cap table. A cap table is a list of a company’s stock and who owns the stock. A startup’s cap table is essentially a ledger for tracking the ownership structure of the company. When you first start out, your cap table will typically contain only the company’s founders and any advisors or consultants that you issue shares to. Learn more about how cap tables work at early stage startups. You will often need to provide a copy of the company’s cap table to investors when raising your first checks. Capbase helps you maintain a 100% accurate cap table in real-time by automating updates to the cap table as you issue equity to employees or raise money from investors.
- Take care of accounting and bookkeeping. Every startup has different accounting and bookkeeping requirements and these will only grow as the company scales. Typically, you can divide up your accounting needs into two phases. In the initial phase right after incorporation, you will typically not need to do much more than track expenses and pay an accountant to prepare annual income tax returns to file with state tax authorities and the IRS. Once a startup starts earning substantial revenue or paying full-time employees, the company will typically engage an outside accounting service to help keep track of their books and, as needed, file quarterly tax returns with estimated tax payments. Capbase partners with accounting and bookkeeping services such as Pilot and Bench to help startup founders take care of their accounting needs.
- Get business insurance. There are a few common triggers for when startups typically get business insurance, such as taking paying customers, hiring their first W-2 employees, leasing an office space, or taking on an external board member as part of a priced financing round. Capbase makes it easy to get business insurance for your startup by partnering with insurance providers that specialize in startups, such as Vouch and Embroker. Learn more about the different types of business insurance your startup may need.
This is by no means an exhaustive list, but it covers some of the most important steps founders will need to take to get their startup set up to do business. We built Capbase to simplify the process of incorporating a startup, issuing equity and keeping your company compliant with state and federal laws.