Should I incorporate my project into a company?


4

I am working on a project which just finished its prototype, and will start internal testing soon.

There are 3 of members in my team, and we are considering of start trying AI or participating some programs such as Y-Combinator To be very honest, we have had no experience of approaching capital before, and we are still somewhat more like 3 geeks, who having a great idea and working solution want to show to investors in order to get more resource to make things beefed up.

i think we are in the corner of whether getting incorporated or letting organizations such as Y-combinator to help us incorporating it.(if we are lucky enough)

What is the "prons and corns" of having a company before you start seeking investment, is there any approach that we can follow?

thanks in advance

Funding Incorporation Incubators

asked Dec 6 '10 at 13:03
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D.J
121 points

5 Answers


1

Serious investors will require that you have a corporation in place, so you should form the corporation (and identify it in your Executive Summary) before you start pitching to investors.

Furthermore, by forming a corporation you can limit the extent of your personal liability for the business's obligations.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

answered Dec 7 '10 at 05:08
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Dana Shultz
6,015 points
  • What you say about investors expecting a company to invest in is true in the general case. However, of all the investors out there, Y Combinator is breaking new ground in several ways. One of these is the early stage legal work; Y Combinator often undertakes a larger amount of legal 'clean up work' as part of their investment. http://ycombinator.com/about.htmlJesper Mortensen 9 years ago

1

First a couple of thoughts:

  1. First reach out to a couple of Y Combinator alumni, and ask what they did, and how it worked. I'm not aware of the community here at answers.onstartups having any Y Combinator entrepreneurs. Maybe we have a few, but you should get better answers by seeking out a targeted group of Y Combinator founders.
  2. Try asking the Y Combinator team, and hear their version (if they have time to respond).
  3. When done, please report back here, so that the rest of us may learn too. :-)
Regarding whether to incorporate now or not ... well, it's complicated. IF you get accepted into Y Combinator soon, then maybe it's money out the window. On the other hand, if you don't get accepted, or you're not accepted until next year, then you run a huge risk by not being incorporated.

The process of incorporating tends to be an important stress test for the founders. This is where lots of operational issues including ownership percentages get decided. If there are latent problems in the founding team, then my personal preference would be to learn this as early as possible.

On balance, I think I would push for incorporating right away. But I'll be the first to admit it's a judgment call, swayed by personal preference.

answered Dec 7 '10 at 05:31
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Jesper Mortensen
15,292 points

0

I would suggest the following:

  1. Incorporate
  2. Seek some seed funding from friends and family, and what you can put into it
  3. Create a prototype or proof of concept of your idea
  4. Prove it's viable, do some research
  5. Seek larger funding Angel or Venture Capital to market your product and hire people who can help you grow it faster

It's hard to get a serious investor to give you money just on an idea / pitch. They like to see some blood and sweat already put into it, and know you are committed and serious about the idea. Plus, they will want to know you are actually capable of doing it... and a prototype is a great way to do that.

Good luck

answered Dec 6 '10 at 13:11
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Ryan Doom
5,472 points

0

One thing creating a company helps you to do is clarify roles and ownership. You're clearly looking towards getting more resource, and whether you bootstrap, incubate or go for angel funding it's going to be important to engage clearly with future employees, associates and investors.

Having a company also gives you additional protection and opportunities in engaging with prospective customers. Depending on your solution, a funding route may be that first key customer - and in this case that customer will almost certainly expect to be able to write a contract that protects their interests in the event of problems.

The one piece of specific advice I'd offer is, go for simplicity! Starting your first company, it can be tempting to try and customise everything. Resist that urge, and go with simple arrangements that will be familiar to third parties.

Congratulations on getting to prototype, and good luck with the next stage of the journey.

answered Dec 7 '10 at 03:57
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Jeremy Parsons
5,197 points

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Well - i would think that it's important to confirm that the project is part of a singular entity and protected against any differences of opinion that could arise between three different members. While waiting for a Y-combinator to define an incorporation model is fine, it may be better to do the research behind how they incorporate and follow the pattern rather than wait for a uncertain time when y-combinator will invest.

Having the project belong to an entity brings the important issues up front to all involved parties (ownership, future, fundability, etc.) and allows you to have intelligent conversations with other contributors, investors, projects.

answered Dec 7 '10 at 04:01
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Jim Galley
9,952 points

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