Legal Basics for Startups
You can't ignore legal. Here's what founders need to know about setting up legally.
Legal matters feel like overhead—paperwork and lawyers instead of building product. But ignoring legal creates problems that get expensive to fix later. A few hours of setup now prevents painful unraveling down the road. Here’s what founders need to know.
Why Legal Matters Early
Preventing Future Problems
Legal issues compound:
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Messy cap table becomes nightmare at fundraise
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Missing contracts create IP disputes
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Informal agreements lead to lawsuits
Problems caught early are cheap. Problems caught late are expensive.
Making Investment Possible
Investors do due diligence:
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Clean corporate records
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Proper IP ownership
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No lurking liabilities
Messy legal kills deals.
Protecting What You’re Building
Without proper structure:
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Personal liability exposure
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IP ownership unclear
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Partnership disputes messy
Legal protection is real protection.
Entity Formation
Choosing an Entity Type
Common options:
LLC (Limited Liability Company):
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Simplest to form
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Pass-through taxation
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Flexible structure
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Not ideal for VC funding
C Corporation:
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Standard for VC-backed startups
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Complex structure
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Enables stock options
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Double taxation (corporate + personal)
S Corporation:
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Pass-through taxation
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Limited to US shareholders
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Max 100 shareholders
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Not suitable for VC
For fundraising: C Corp in Delaware is standard.
Why Delaware?
Most startups incorporate in Delaware:
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Business-friendly courts
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Predictable corporate law
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Investor familiarity
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Easy to administer
You can operate anywhere but incorporate in Delaware.
Formation Basics
To form a corporation:
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Articles of incorporation
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Bylaws
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Board resolutions
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Stock issuance
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83(b) elections for founders
Use a lawyer or reputable service (Stripe Atlas, Clerky, etc.).
Founder Agreements
What to Document
Between founders, formalize:
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Equity splits
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Vesting schedules
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Roles and responsibilities
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Decision-making process
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What happens if someone leaves
Key Documents
Founder’s agreement:
Terms of the partnership.
Stock purchase agreements:
Formal equity issuance.
IP assignment:
Founders transfer IP to company.
Confidentiality:
Protecting company information.
Vesting
All founder equity should vest:
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Standard: 4 years, 1-year cliff
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Protects everyone if someone leaves early
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Investors will require it anyway
The 83(b) Election
Critical tax election:
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Must file within 30 days of receiving stock
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Allows you to pay taxes now at low value
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Saves potentially massive taxes later
Don’t miss the 30-day window.
Intellectual Property
What Needs Protecting
Trade secrets:
Confidential business information.
Trademarks:
Brand names and logos.
Patents:
Inventions and methods.
Copyrights:
Creative works and software.
IP Assignment
All IP should be owned by the company:
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Founders assign existing IP
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Employees assign IP created
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Contractors assign IP created
Ensuring Ownership
For employees:
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Employment agreements with IP assignment
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Confirm no prior IP conflicts
For contractors:
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“Work for hire” agreements
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Explicit IP assignment clauses
Without proper agreements, IP ownership is unclear.
Employment Law
Hiring Basics
When you hire employees:
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Employment agreements
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At-will employment (in most states)
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Non-disclosure agreements
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Non-compete (where enforceable)
Employee vs. Contractor
Important distinction:
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Employees: payroll, benefits, protections
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Contractors: 1099, more flexibility, but rules apply
Misclassification is a legal risk.
Equity Compensation
For stock options:
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Option plan approved by board
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Individual grants documented
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Strike price determined
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Exercise rules clear
ISOs vs. NSOs have different tax treatment.
Contracts
Key Contracts You’ll Need
Customer agreements:
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Terms of service
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Service agreements
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SLAs
Vendor agreements:
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Software licenses
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Service contracts
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Payment terms
Partnership agreements:
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Channel partnerships
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Integrations
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Joint ventures
Contract Basics
Every contract should include:
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Parties identified
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Scope of agreement
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Payment terms
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Term and termination
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Liability limitations
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Governing law
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Dispute resolution
NDAs
Non-disclosure agreements:
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Before sharing sensitive information
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With potential partners, investors, customers
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Mutual or one-way
Standard but important.
Compliance
Basic Compliance
Even early startups must comply with:
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Employment laws
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Tax obligations
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Business licenses
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Industry regulations (if applicable)
Industry-Specific
Some industries have additional requirements:
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Healthcare: HIPAA
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Finance: SOC 2, various regulations
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Education: FERPA
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Children: COPPA
Know your regulatory landscape.
Privacy
If you collect user data:
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Privacy policy required
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GDPR (if European users)
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CCPA (if California users)
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Data handling practices
Privacy is increasingly regulated.
When to Involve Lawyers
DIY vs. Lawyer
DIY is fine for:
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Basic incorporation (through services)
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Standard NDAs
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Simple contracts
Get a lawyer for:
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Fundraising
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Complex IP issues
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Employment disputes
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Regulatory matters
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Any significant contract
Finding Good Startup Lawyers
Look for:
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Startup experience
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Reasonable rates (or deferred fees)
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Responsive communication
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Right fit for your stage
Cost Management
Lawyers are expensive. Manage costs by:
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Using deferred fee arrangements early
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Doing prep work yourself
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Batching questions
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Using templates where appropriate
Common Legal Mistakes
No Founder Agreement
“We trust each other.”
Problem: Disputes arise, nothing documented.
Fix: Paper everything before you need it.
IP Not Properly Assigned
Built things before incorporating or without agreements.
Problem: Unclear who owns what.
Fix: Retroactive assignment, proper agreements going forward.
Informal Promises
Verbal agreements about equity, roles, etc.
Problem: Memories differ, disputes arise.
Fix: Document all material agreements.
Missing 83(b)
Didn’t file within 30 days.
Problem: Potentially massive tax bill later.
Fix: File immediately when receiving restricted stock.
Contractor Misclassification
Treating employees as contractors.
Problem: Back taxes, penalties, lawsuits.
Fix: Proper classification from the start.
Key Takeaways
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Legal matters feel like overhead but prevents expensive problems later
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C Corp in Delaware is standard for VC-backed startups
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All founder equity should vest; file 83(b) within 30 days
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IP must be properly assigned: founders, employees, and contractors
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Document everything: founder agreements, employment, contracts
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Employee vs. contractor classification matters legally
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Privacy compliance is increasingly important (GDPR, CCPA)
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DIY for basics; get lawyers for fundraising, IP, employment, major contracts
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Problems caught early are cheap; problems caught late are expensive
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Find startup lawyers who understand your stage and can work with limited budgets
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