Dan White, Co-Founder and CEO of Clean Crop Technologies shared a lesson learned about the importance of selecting legal counsel experienced in startup dynamics when founding a company. Initially, they chose an LLC in Virginia for its simplicity, which later caused complications when they received a term sheet for a significant investment and needed to transition to a Delaware C Corp. This transition incurred low five-figure legal fees. Still, the ongoing issue is persistent tax correspondence from Virginia, highlighting the long-term consequences of not choosing the right legal entity and domicile from the start. Dan recommends founders seek out legal counsel experienced in startup matters when first setting up their company’s legal structure.
VIDEO TRANSCRIPT:
Dan White: Sort of the longest-running headache that I wish we had approached differently was actually an area where we had engaged some legal support, but it wasn’t a lawyer really focused on startup matters. One general piece of advice I have for any founders who are particularly at the front end of the journey when you’re going from that zero to one phase of setting things up for the first time, it’s really important to find counsel that is well versed in startup dynamics. Obviously any contract lawyer is able to help you set up basic governance, but it’s better to be able to help inform you on what kind of legal entity should you be setting up, where should it be domiciled, etc.
For example, when we started Clean Crop Technologies initially, we were bootstrapping the company using a lot of consulting revenue from my co-founder and I to fund our operations. Within the first 12 months, we were looking for the lightest-weight corporate entity that we could find to to operate, and that was setting up an LLC. My co-founder happened to live in Virginia, so we set up the LLC in Virginia. At that point, we hadn’t even been accepted into the MassChallenge Accelerator program. We were still in the early days and had not been really thinking much about serious fundraising from other outside investors at that point. Fast forward six or seven months, and we get a first term sheet for a multi-million dollar investment. It’s pretty clear that this is the path that we’re on, and we need to go back and completely change the corporate entity of Clean Crop. At that point, though, all of the IP and development was owned by this LLC, so we had to find a way to absorb and migrate this Virginia LLC into a Delaware C Corp that was doing business in Massachusetts. It ended up costing us short of low five figures in legal fees, but the bigger headache is that even to this day, five years later, we’re still getting random letters from the Virginia tax authorities because they have records of this LLC entity and claiming that hasn’t paid taxes in a long time. It’s a perpetual drag, and I hear stories like that all the time.
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