Hello Matt,

I attended the Santa Clarita Entrepreneur conference and found the investment panel very helpful and liked the way you presented information. I’ve written down a few questions that I was wondering if you could help me out with.

1) Which business structure is most appealing to investors?

**** If by “investors” you mean institutional investors than this is a fairly straightforward answer. A “C” corporation is generally a requirement for investment by institutional investors and, as a general rule, a Delaware C corporation is a good bet. You will also hear arguments for the C corporation of the particular State in which you are doing business but I think the Delaware C gives you the most flexibility and will generally save your company money in the long run as most attorneys, regardless of location, are familiar with Delaware corporate law. The is a long list of reasons why the C is important for any company that could grow to have a large number of investors or which might take institutional investment. This list is probably too long and complicated to deal with here but most corporate attorneys will be familiar with the issues. If you are talking about individual investors they may actually prefer a pass-through corporate structure which allows you to pass through your losses in early years directly to them to write off. If you believe you will never be at a point where you will need institutional investment (or go public) than you can look at these pass-through structures (e.g. partnerships or LLC). It is possible to convert from a pass through to a C corporation later, but in my experience, it is simply cheaper and easier to start off with the right “long term” structure from the beginning given your long term goals for the company. *****
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In response to the blog post on “Venture Capital 101″ we got a question, “What is a typical rate on preferred returns? I had an investor ask for a 130% preferred return plus equity. Is this normal?”.

Returns and the related concept of valuation seem to be a good topic for a blog note so I’m responding here rather than in the comments. I’ll provide some background before answering the specific question. Continue Reading »