Your entity decides how you’re taxed, who can invest and what you can sell later. It’s the question we’re asked most, and it’s much easier to get right at the start.
LLC
C corporation
Taxes
Pass-through: profits and losses flow to the owners’ returns on K-1s.
Taxed at the company level; owners are taxed on dividends and on a sale.
Ownership
Flexible membership interests set by the operating agreement.
Common and preferred stock, with no limit on the number or type of shareholders.
Venture capital
Difficult. Many venture funds won’t invest in LLCs.
The standard for angel and venture investment.
Employee equity
Profits interests or unit grants.
Stock options, including tax-favored incentive stock options.
Often right for
Cash-flow businesses, holding companies, real estate and SPVs.
Startups that plan to raise from angels and venture funds.
Why investors want a C corporation
01
Preferred stock
Investors get their own class of stock, with a liquidation preference, protective provisions and conversion rights ahead of common.
02
Clean taxes for funds
No pass-through income or K-1s, which many funds and their tax-exempt and foreign investors need to avoid.
03
QSBS
Qualifying C-corp stock can shelter much or all of the gain on a sale from federal tax under Section 1202.
04
Options and a clear path to exit
Stock options for the team, and the governance buyers and public markets expect.
Special purpose vehicles
One entity, many investors, one line on the cap table.
An SPV lets a lead investor pool several backers into a single entity, usually an LLC, that makes one investment. The company deals with one investor and one signature. The backers share the economics under one operating agreement.
SPVs are generally limited to accredited investors and, in the most common structure, to 100 investors.
What we handle
Forming the SPV and its manager
Operating agreement, management fee and carried interest
Subscription documents and investor eligibility
Form D and state securities notice filings
Side letters, information rights and distributions
Contracts we draft and negotiate
Founder agreements
Equity splits, vesting and assignment of inventions and IP to the company.
Raising capital
SAFEs, convertible notes and priced preferred-stock rounds, from term sheet to closing.
Governing documents
Operating agreements, bylaws, and shareholder and voting agreements.
Technology agreements
SaaS, software development, licensing and data agreements.
Commercial contracts
Customer, vendor, reseller and services agreements.
Partnerships
Joint ventures, strategic partnerships and advisor agreements.
Key terms
The vocabulary of a financing.
Plain-English definitions of the terms founders and investors ask about most.
Entities
C corporation
A company taxed separately from its owners that can issue multiple classes of stock. The standard for venture-backed startups.
LLC
A flexible entity taxed as a pass-through by default. Owners report its profits and losses on their own returns.
SPV
A single-purpose entity that pools several investors into one investment.
QSBS
Section 1202 tax exclusion for qualifying C-corp stock. For stock issued after July 4, 2025: 50% of gain after three years, 75% after four and 100% after five, up to $15 million per company or 10 times basis.
Investment terms
Preferred stock
The class of stock investors receive, with rights ahead of common stock.
Liquidation preference
The right to be paid back, usually 1x the investment, before common stockholders in a sale or wind-down.
SAFE
A simple agreement for future equity. It converts into stock at the next priced round, usually with a valuation cap, a discount or both.
Convertible note
A loan that converts into stock at a later round, with interest and a maturity date.
Pro rata rights
An investor’s right to buy into later rounds to keep its ownership percentage.
Founder equity
Vesting
Earning shares over time, commonly four years with a one-year cliff.
83(b) election
An IRS filing made within 30 days of receiving restricted stock, so tax is based on today’s value instead of the value as shares vest.
Option pool
Shares reserved for employee equity, often sized before a financing.
Cap table
The record of who owns what, on a fully diluted basis.
Carried interest
An SPV or fund manager’s share of the profits, commonly up to 20%.
