Although there has been substantial discussion on differences in state corporate law driving incorporation choices, not as much attention has been paid to cost differentiation between the states. As many know, Delaware charges smaller public companies organized as corporations up to $200,000 annually. Large filers pay Delaware a flat $250,000 annually. But not every company will benefit from Delaware’s premium subscription plan.

Carliss Chatman and I wrote a response to Professor Bainbridge’s thoughtful DExit Drivers piece that was published in the Journal of Corporation Law. Our response, entitled DExit for Dollars, explores a complementary angle on the Delaware franchise tax and how it may be more material than previously appreciated for some smaller companies. Instead of focusing on the companies that have left Delaware to see what drove them—or at least what they put in the proxy, we consider the annual financial costs paid by companies that opt to remain. I also covered some of the cost considerations in a recent podcast with the Council of Institutional Investors.

One of our main contributions is to suggest that companies should look at becoming subject to Delaware’s annual franchise tax or escaping Delaware’s annual franchise tax as something akin to a perpetuity. A company paying $200,000 annually for the privilege of operating as a Delaware entity should consider the value that being a Delaware entity provides relative to other options in the market and whether swapping to some other jurisdiction would be beneficial when taking into account the cost to move or to attempt a move. For example, companies with substantial Texas operations pay an unavoidable activities-based tax to Texas every year. If the Texas Business Court now offers a suitable local forum, the question becomes whether Delaware’s additional cost offers benefits worth the recurring fee.

Calculating the value of avoiding Delaware’s franchise tax depends on picking an appropriate discount rate. At a higher 20% rate, avoiding a $200,000 annual fee is worth about $1 million. A 10% discount rate gives a $2 million figure.

Companies and investors must pick a discount rate that makes the most sense for their situation. A company expecting to be acquired in the next year or two might select a very high discount rate. In contrast, a stable company with long-term plans may warrant a lower discount rate.

Some aspects of this are hard to put a number on. How do you value access to the Court of Chancery? How much value does the corporation get from the comfort and confidence stockholders may take in knowing that Delaware’s vigorous plaintiffs’ bar will investigate and police possible misconduct when it is profitable for them to do so?

Other options also exist to mitigate Delaware’s annual franchise tax cost. We explore how companies have amended their charters to reduce authorized shares for a lower fee burden from Delaware’s annual franchise tax. But this “remain and reduce” approach comes with some risks. The company may not be well-positioned to raise capital quickly if it will require another charter amendment to authorize more shares for issuance. And, if retail stockholding increases, the company may struggle to secure enough votes to authorize a later amendment.

At least one company has simultaneously proposed a reincorporation alongside a reduction in authorized shares as an alternative. The attorney fees and other costs involved in a reincorporation or charter amendment must still make financial sense for a company to pursue it. For example, a small public company that shifts to Nevada might lower its annual fee burden to about $1,000 a year. This saves it $199,000 the first year and every year after that. If it will cost about $350,000 to pursue a reincorporation, the company must consider the odds its effort will succeed and whether the result will be financially beneficial over time. Companies with controlling or other large stockholders may face reduced risk as to whether they can get the votes. They might also prefer reincorporation for other reasons, but the cost benefits remain real.

There may also be options for law firms to defer fees in some circumstances for clients with cash-flow challenges. For example, a firm might do the work and then split the surplus generated over the next four or five years to make the move immediately cash-flow positive for the client. This would also give the law firm some payment risk.

To be clear, the franchise tax likely won’t matter to many of the largest public companies that make headlines, but it may matter more to smaller entities. Nevada has long served the smaller company market and constrained governance costs in a way that may generate value for smaller firms.

And there are a significant number of smaller public companies incorporated in Delaware today. There are about 520 Delaware-incorporated nanocaps with market caps under $50 million. There are roughly 540 Delaware-incorporated microcaps with market caps between $50 million and $300 million. And there are about 740 Delaware-incorporated small-cap companies with market capitalizations between $300 million and $2 billion. Roughly 1,200 public companies with market capitalizations under $500 million now operate as Delaware corporations.

The proxy disclosures around Delaware’s fees for this market segment are not always the best. Smaller companies looking at a move should break these figures out clearly and present the compounding benefits and costs over time to help investors understand how it matters–whether they are coming or going.