Delaware incorporation matters for new ventures: evidence from venture capital investment and the going public process

Abstract

In the United States, corporate actors choose their state of incorporation and are subject to the laws of the state in which they are incorporated. Incorporating in Delaware is a common move for most US firms, especially those interested in attracting venture capital, as the state's corporation laws are clearer, more fully defined and business friendly, courts have more experience judging corporate cases, antitakeover laws are less restrictive, and financing or merger deals are more quick and efficient than in most other states. Using a large sample of privately held companies, we empirically investigate the implications of Delaware incorporation and examine its effect on access to VC financing and the process of going public. The results suggest that companies incorporated in Delaware receive more venture financing and attract more involvement from different venture capitalists than entrepreneurial firms incorporated elsewhere. In addition, we find that Delaware incorporated venture-backed firms are more likely to reach the stage of going public, get to that stage faster, and generate more IPO proceeds or higher acquisition values than similar firms incorporated elsewhere. Overall, our study reveals the first empirical evidence about the importance of state laws to privately held, informationally opaque firms seeking venture capital support.