Why incorporating your Texas startup is cheaper in Delaware (than in Texas).

Background:  When incorporating your Texas-based startup, one of the first questions you’ll have to ask yourself is: Should I incorporate in Texas or in Delaware? While it’s well-known that a startup intending to raise professional venture capital should eventually be a Delaware corporation, conventional wisdom is that it’s cheaper (by maybe $1-2K) to incorporate in Texas because of a few fees that Delaware entities have to pay for being “foreign” entities.  You’ll end up paying more later on to convert into a Delaware corporation in connection with a financing, but if your startup never reaches that stage, you’ve saved some $ on fees – or so the thought goes.

While it’s true that you will pay fewer state fees by incorporating in Texas, this argument fails to account for the differences in legal fees associated with a Delaware v. a Texas corporation.

  • Typical legal fees for a basic startup formation (incorporating, issuing stock with vesting, IP assignment by founders) will run around $2,500-3,500 if you rely on a competent, but efficient startup lawyer.  Many firms charge twice that or more.
  • As I’ve written before, quality automated startup formations can be done for ~$500.
  • But an automated (Clerky) formation is available only for Delaware corporations, not Texas.
  • Therefore, for an automated formation, you can save ~$2K+ on legal fees by going with Delaware, more than making up for the state fees.

Yes, I’m a lawyer, and I’m telling you that you should prefer paying fees to a state government over paying them to a lawyer: because the state is at least delivering something you can’t get elsewhere for less money.

This, of course, assumes you go with an automated formation, which may not be appropriate if you have some unique circumstances that can’t fit into standard formation terms.  But it’s important to keep in mind that post-formation legal documentation for Delaware corporations (option plans, seed round, random startup transactions) also tends to be far more standardized than it is for Texas corps, simply because of the volume of Delaware startups that are formed. So being a Delaware corp. will also save legal fees down the road because less drafting will be required.

Nutshell: Conventional wisdom is that incorporating your Texas startup in Texas (instead of Delaware), will save you some money.  But when you account for the legal fees that it takes to properly form your startup, Delaware will almost always come out cheaper (if you do an automated formation).  Even for a non-automated formation, the legal fee savings likely make it a wash.