- Forms. The holy grail of cheap legal fees is standardized forms. VCs have their own contract forms for investments in C-Corporations and they want to keep it that way. It is more efficient for them to use their own forms: their lawyers can get through them and the VCs can review them quicker than if they used some unknown forms. Using a different entity would force them to rewrite their forms, which would cost them money. And, VCs are notoriously cheap and demanding of their lawyers. (Not that that has been my experience, of course; every VC I’ve dealt with has been a peach.)
- Standards. Preferred stock preferences, dividends and tax treatment issues are knowable, known and standardized.
- ISOs. Corporations can issue stock options with tax advantages, like incentive stock options. Other entities can’t issue incentive stock options.
- K-1s. If VCs bought equity in LLCs, they would have to deal with all the K-1s. K-1s are the tax year reports issued to owners of pass through entities. People who get K-1s have to integrate them into their tax returns, which costs headaches and tax preparation fees. But, ownership of stock in a
C-Corporation has no impact on the owner’s personal tax return until there is a sale or dividend, which, let’s be honest, the VC controls.
- Exit. A C-Corporation is primed for the IPO. And the VC’s entire business model is built around smooth exits out of the investment.
Anyone disagree or have something to add?