By: José Padilla
For decades, Delaware has reigned supreme as the gold standard for startups raising venture capital. Over 68% of Fortune 500 companies and nearly 80% of U.S. IPOs called Delaware home. But cracks are forming in its dominance.
Texas is now out to challenge Delaware’s dominance in startup incorporation. Tesla, SpaceX, and Neuralink have already moved. Meta, Dropbox, and TripAdvisor are considering the move to reincorporate in Texas. Investors are raising concerns about Delaware’s courts and tax system. The shift hinges on legal frameworks, tax efficiency, and investor preferences.
Why State of Incorporation Matters for Startups and Investors
State of Incorporation isn’t about where a company does business—it’s about which state’s laws apply for internal governance disputes. A startup can incorporate in Texas but operate anywhere; it doesn’t need an office or employees in the state. Incorporation determines shareholder rights, board rules, and investor protections.
Venture capitalists prefer all startup portfolio companies to be incorporated in the same state to reduce legal costs and risks. Investors fund dozens of companies and want them governed by the same legal system. Delaware became the standard because of its established courts and corporate governance rules. But if Texas offers a better legal environment, this may push founders to incorporate there instead.
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Delaware’s Reputational Crisis: “Activist Courts” and Shareholder Backlash
Delaware built its reputation on judicial restraint, but recent rulings suggest a shift.
The most striking case? A Delaware judge ruled against Elon Musk’s $56 billion pay package from Tesla declaring it unfair to shareholders. This decision came despite 72% of shareholders approving it twice. At the same time, the judge approved as being “fair” to the other shareholders over $176 million in legal fees (equivalent to over $18,000 an hour) for the lawyers who challenged Musk.
Musk responded: “Never incorporate your company in the state of Delaware.” He led Tesla’s re-incorporation in Texas after an X poll drew 1.1 million votes, with 87% backing the move. SpaceX and Neuralink soon followed.
Tech investors took notice. Paul Graham, co-founder of Y Combinator, warned startups to avoid Delaware, calling its courts “activist.”
Musk’s moves have begun a “Dexit” of corporations exiting Delaware to re-incorporate in other states with Texas as the top choice.
Texas With Open Arms: Business Courts and Financial Incentives
Texas is capitalizing on Delaware’s missteps. In 2024, the state launched a dedicated Business Court to handle corporate disputes. While Texas does not have the same level of established case law as Delaware, the state and its judges are driven by this competition to deliver impartial, consistent decisions that foster a business-friendly legal environment.
In addition to the new Business Court, Texas also offers additional tangible advantages for venture-backed startups incorporating in Texas:
- Pro-Business Climate: Texas legislature has long taken a business-first attitude and prioritizes management autonomy and minimal judicial interference.
- Lower Taxes: No franchise taxes until revenue exceeds $2.47 million. Delaware taxes startups immediately.
- Incentives: Texas provides various state and local-level incentives and economic development programs that often outshine those of other states.
- Investor Implications: Given the above, the size of Texas, existing familiarity and recent events, investors may become more open to invest in a company incorporated in Texas instead of Delaware.
Conclusion: Investors Hold the Key
The rise of Texas as a viable incorporation hub isn’t just about legal rulings or tax incentives—it’s about where investors choose to put their money. If venture capitalists find Texas has a better legal and tax environment, incorporation trends will follow.
As an investor, the main reasons to require Delaware was the trust in its legal consistency and lowering legal costs by only having to keep up with one jurisdiction. With recent rulings and the fact that Texas attorneys are generally less expensive than those on the East Coast, these assumptions are up for grabs.
As a founder, one could incorporate in Texas and enjoy the lack of a franchise tax while pre-revenue and then see if investors will require re-incorporation in Delaware.
Delaware’s dominance won’t disappear overnight, but Texas is getting investors to reconsider. If the momentum continues, the next generation of billion-dollar startups may no longer call Delaware home.