I have finished my business plan and am looking to begin developing an
advisory committee to give me some additional credibility when I go
for funding. I have decided on a C-corp legal structure and was
wondering

1. If I need to have the actual corporation in place before I can hand
out shares to the advisors (to entice them to come on board).
2. As for the corporate board seats- can temporary "fillers" be put in
the seats?
3. How many shares should I give out to advisors and ultimately to
angel investors?

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Request for Question Clarification by weisstho-ga on 06 Jul 2002 17:04 PDT

In what state are you located, and in what state do you intend to incorporate?
thanks, weisstho-ga

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Clarification of Question by mhugo-ga on 06 Jul 2002 21:30 PDT

I am located in Texas. I will be doing business in Texas & California
in Year 1 and in a myriad of other cities in Year 2+. I plan on
incorporating in either Delaware, Nevada or Texas. Any
recommendations?

Let me please make a couple of comments to your questions:
1.  Setting up a corporation is easy, as you may know. In many cases
it can be accomplished in a single day, probably for as little as
$300-600, depending upon who does it, what supplies you want and
receive, and the state filing fees.

However, the state that you choose to incorporate in can be an issue.
Some investors and some lenders, for example, will insist that the
company be incorporated in Delaware, the reason being that they are
familiar with the legal footing in Delaware and have become familiar
with the corporate finance and taxation implications of companies that
are incorporated in that state.

Delaware is not the only state of preferance, however. I understand
that some investors prefer California. I have heard of Nevada as a
preference as well. Others voice no preference and your home state may
suffice very nicely.

Handing out the shares as an enticement is probably not a good idea.
Firstly, it will dilute the value of shares available to potential
investments or dilute your interest, that is a certainty. What is
uncertain is whether there is a necessary need to make such
distributions. Secondly, there may be legal and tax implications, or
limitations, that would caution against such a move. Advice of an
attorney and tax advisor would be necessary to get to the root of this
question.

2.  Many would recommend against temporary "fillers" simply because
displacing those individuals with other people at a later time can be
a tricky procedure. Is it possible, of course.

3.  The magic question. The ultimate question. The question without an
immediate answer. Assuming that an entrepreneur is fortunate enough to
have more than one potential source of venture capital, one of the key
ingredients to the decision is what amount of equity or quasi-equity
is necessary to award/sell to the investor.

4.  Having a business plan available to support your product or
service, some might suggest that you begin the process of discussing
your plan with potential investors. Please remember this: it is the
rare businessperson who finds an investor right out of the box;
indeed, the ultimate source of capital is many times someone you never
heard of at the beginning of the search.

Good luck!!  I hope these comments are found to be useful.
weisstho-ga