The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
News correspondent Chuck Todd, host of NBC’s Daily Rundown, recently interviewed Delaware’s Governor Jack Markell, discussing why Delaware is renowned as a friend to corporations.
Governor Markell explained why over a million businesses, including more than half of all Fortune 500 companies, find Delaware the best place to incorporate a business. While all states work hard in order to attract big business, Delaware has developed a three pronged approach that is just what most CEOs want. First, Delaware’s corporate law and judicial precedents go back a hundred years, respecting the good faith decisions of the Board of Directors. Second, the Delaware Division of Corporations is an efficient department which is known for its expedited service, and third, Delaware’s Court of Chancery has a world-class reputation for fair and fast decisions when a company faces litigation, especially litigation from shareholders.
In writing this article I am assuming that most or all of you that are reading this have a Facebook page. Most likely you’re shaking your head yes, since there are over 900 million people that use Facebook and log in at least once a month. Facebook is the world’s most definitive social network and is a Delaware Corporation.
TheFacebook, Inc. was incorporated here in Delaware on July 29, 2004 with 10,000,000 authorized shares of stock @ 0.0001 par value. It was founded by Mark Zuckerberg in his messy Harvard University dorm room. The site was created to help Harvard University students and later other college students connect with one another online.
When I was first introduced to Facebook I honestly did not care for it nor did I think it was a company that was going to survive. However, I was completely wrong and last year alone their revenue was $3.7 Billion and in the first quarter of 2012 it was more than $1 Billion. In a USA Today article it said, “At 28, Zuckerberg is exactly half the age of the average S&P 500 CEO, according to executive search firm Spencer Stuart.”
Zuckerberg is a very smart entrepreneur and over the years as his site grew rapidly and caught the eye of big media and rival internet companies, he has consistently rebuffed mouth-watering buyout offers, including those from Google Inc. and Yahoo! Inc. also both Delaware Corporations.
Simply put: we don’t build services to make money; we make money to build better services, “Zuckerberg wrote in his letter to prospective shareholders. “And we think this a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.”
Facebook, Inc. as it is now known since it filed a Name Amendment in September 2005 has filed 11 Stock Amendments since being incorporated in Delaware. What is interesting about this is as you probably know Facebook is making its IPO (Initial Public Offering) on May 18th and is expected to be valued at nearly $100 billion, making it worth more than Disney, Ford and Kraft Foods also all Delaware Corporations.
Now, you are probably wondering since they are selling stock, doesn’t that mean Zuckerberg is giving up his position as the majority Shareholder in the company. Actually, Facebook did one of the smartest things I have seen and in fact I did not know you could do this, but they have two classes of Common Stock, both class A and B have 4, 141,000,000 authorized shares of stock at a .000006 par value.
Along with Common Stock, they have 569,001,400 authorized Preferred Shares of stock at a .000006 par value. So even though Zuckerberg is offering 30.2 million shares he still is going to be the majority stockholder in the company. The USA Today reported that Facebook is expecting to sell their stock between $34 and $38 per share. If you have a Delaware Corporation you know that you can sell your shares for whatever the market will bear.
While Facebook’s public offering is going be the largest and perhaps the most highly anticipated internet deal in history. Many people believe Facebook is staring down some potentially unnerving obstacles when it comes to key areas of monetization and growth: public distrust and display advertising apathy. We shall see how it all plays out.
Here are some great articles on Facebook leading up to its IPO date:
Over the last six months I have written two articles Baseball and Delaware Law and Baseball and Delaware Law Part II regarding the unfortunate saga of the Los Angeles Dodgers and their owner Frank McCourt. Every baseball fan, including myself, was curious to see how this would play out as the Dodgers are one of the most historic teams in Major League Baseball and the franchise was expected to sell for somewhere between $800 Million and $1.2 Billion.
Well, if you were as curious as I was then you would have been just as shocked as I was when I heard just after midnight on March 28th that Earvin “Magic” Johnson and the Guggenheim Partners made the winning bid of $2 Billion of which $1,587,798,000 would be paid in cash and making Magic Johnson the first African-American to own a Major League Baseball team. This is the highest price any sports team has ever sold for – by a wide margin, according to Forbes Magazine.
Now, I want you to follow me on how well Frank McCourt made out on this deal. In 2004 Frank McCourt bought the Los Angeles Dodgers for $430 Million, by selling the team for $2 Billion that is an $860 Million profit. I guess losing six houses and $131 Million to his ex-wife Jaime McCourt in their divorce settlement is not so bad after all.
While I said on March 28th they announced the winning bid of $2 Billion you knew that someone was going to object to this sale from going through. On April 10th, 2012 both Fox and Major League Baseball objected to the proposed sale of the Dodgers in U.S. Bankruptcy Court here in Delaware.
Fox says the incoming ownership group that includes Magic Johnson has not disclosed whether Time Warner Cable is involved in the purchase. Fox spokesman Chris Bellitti said, “Our filing today was a routine administrative filing to ensure our rights are protected.” Fox is the Dodgers current broadcaster and has an exclusive 45-day period starting in October to try to negotiate a new contract with the team. The current contract also prohibits the Dodgers from talking to other potential buyers of the media rights before Nov. 30th and gives Fox a limited right of first refusal on competing offers received after that date.
Major League Baseball said not enough money had been set aside to satisfy what is owed by the Dodgers. While the Dodgers have put aside $322,065 for MLB’s claims, the league said it was owed at least $8 Million as of Feb. 22nd. Major League Baseball also had separate concerns about the financing of the deal. Guggenheim has not disclosed whether funds from insurance companies it controls are being used, an MLB is worried such funds have the potential to subject the team to state regulators.
While Guggenheim Baseball declined comment on both matters the hearing to confirm the sale agreement was scheduled for April 13th before U.S. Bankruptcy Judge Kevin Gross. In a two part morning and evening hearing the Judge called a “doubleheader” The bankruptcy court judge here in Delaware gave his approval to the Los Angeles Dodgers plan to sell the team for $2 Billion to Earvin “Magic” Johnson and the Guggenheim Partners.
To read the complete Forbes Magazine article click here: http://www.forbes.com/sites/briansolomon/2012/03/29/2-billion-dodgers-sale-tops-list-of-most-expensive-sports-team-purchases-ever/
To read the complete ESPN articles click here:
Delaware's attractiveness as a corporate haven is largely because of its business-friendly corporation law. But there’s much more to this area that Thomas Jefferson called a “jewel” among the states, thus giving it one of its nicknames, “The Diamond State.”
Did you know?
Delaware is the second smallest state, with a land area of 1,948 sq. miles. (Rhode Island is the smallest.) Delaware is, however, the least populated state in America.
Delaware is the lowest state, with an average altitude of 60 ft. above sea level. It is ninety-five miles long and between nine and thirty-five miles wide. Its highest point, near the Pennsylvania line, is 442 ft. above sea level.
Delaware has the fewest counties of any state (3).
Neighboring states know Delaware as the “Home of Tax Free Shopping,” and it is one of only five states without sales tax. Other states are Alaska, Oregon, Montana and New Hampshire.
Delaware’s official state name is “The First State” because it was the first of the thirteen original colonies to ratify the Constitution in 1787, thus becoming the first state in the nation. Because of this, Delaware is given the first position in congressional votes and national events, such as Presidential Inaugurations.
Delaware’s state bird is the Blue Hen, and the state is also known as the “Blue Hen State.” This nickname was because of the highly-esteemed Blue Hen cocks soldiers carried for cock fight entertainment during the Revolutionary War.
The state’s economic and industrial development was, for over a century, closely tied to the DuPont family, founders of one of the world’s largest chemical companies and the parent company of General Motors Corporation from 1933 until the 1950s. Gunpowder was an early product.
Delaware ranks second in scientists and engineers as a percent of the workforce, and has the highest number of patent awards per person.
Delaware is home to Dover International Speedway, also known as the “Monster Mile,” which hosts two NASCAR races each year. Dover Downs is also a popular harness-racing facility.
Tourism is a major industry, with Rehoboth Beach nicknamed “The Nation’s Summer Capital” due to the number of people from Washington D.C. who come to enjoy the Atlantic’s sandy shore as a vacation destination.
Delaware remained in the Union during the Civil War. The Governor said that his state was the first to join the Union by ratifying the constitution, and would be the last to leave it.
The State Tree is the American Holly.
Over the past few weeks we’ve created a timeline of sorts for raising capital for your entrepreneurial business, from friends and family to crowdfunders and on to angel investors. If you have successfully completed an angel round—or you hope to do so in the future—but find yourself in need of additional funding, then venture capital is your next step.
Like angel investors, venture capitalists (VCs) invest money into early stage businesses in exchange for an ownership stake and will usually exert some influence over those businesses after becoming shareholders. But there are a few important differences between VCs and angels. While angels typically invest their own funds, VCs usually invest on behalf of a pool of investors that could include pension funds, foundations, sovereign nations, corporate investors and high net worth individuals. Generally speaking, VCs can provide substantially larger amounts of capital, and take a much more active role in managing the company as well as prescribing the long-term strategies. Typically, VC firms will demand one or more seats on the company’s Board of Directors as a control factor and take a prime chunk of the common stock, one whole series of preferred stock, and lots of options and warrants. In fact, many VCs firms wind up controlling, or at least shaping the board of directors, so you need to be prepared to give up a significant amount of control if you accept venture capital.
Speaking of money, venture capital is a big business, with nearly 500 active firms in the U.S., which invested about $22 billion into more than 2,700 companies in 2010. VC firms are looking for young companies with excellent growth potential and truly innovative products. While technology companies have always been their favorites, recent years have seen a lot of interest in the renewable/alternative energy solutions. But venture capitalists will also invest in firms in a variety of more traditional industries from financial services to consumer products. The common theme they are looking for, no matter the industry or nature of the product or service seems to boil down to growth prospects, innovation, capable management and a strong intellectual property position.
If you own an innovative high-growth business and you want to attract venture capital, the first area you’ll want to focus on is your management team. You may have your team already in place. If you’ve hired senior personnel who have successfully built companies in the past, you’ll have an advantage when seeking VC funding. At the very least you’re going to need to show that you have an experienced, focused, and flexible team of senior managers. Flexibility is your biggest challenge because VCs may require you to make significant changes to your company’s management structure. This may mean that one or more of your favorite early-stage associates will get pushed aside. It may even mean you’ll get pushed aside, as Apple’s Board once did to Steve Jobs. It happens.
While you will be giving up a great deal of control, you’ll be getting a lot more than just money in return. VCs are professionals in the field of making successful major companies out of start-ups. As experienced business-builders, venture capitalists take a hands-on approach to helping their companies with everything from research and development, to sales and marketing, to building connections with other leaders in related fields. In addition, VCs will typically make multiple rounds of investments in their portfolio companies, assuming that the companies meet agreed upon milestones when it is time for a fresh round of financing. VCs will also openly plan an exit strategy so that they can realize a gain on their investments and move on to new opportunities. The question is, where will you be then?
If it sounds like venture capital might be a good match for your business, you’ll need to do some research to find out which VC firms are most likely to be interested in a firm of your size and in your industry. And it should go without saying by now, but if you do get a meeting with a venture capitalist, you need to be ready to demonstrate a rock-solid business plan, a unique competitive advantage, and a realistic path for high growth and the ultimate exit of your VC partner.
A great majority of VCs predominantly use Delaware Companies as the legal structure for their portfolio companies. If you’re just starting out, and want to look really smart, incorporate in Delaware with one class of common stock and one class of “Delaware Blank Check Preferred” stock. For more information on this topic, simply request our White Paper Report “Delaware Blank Check Preferred Stock,” by calling or emailing us. There is no charge for this research report if you request it right away.