Legal Basics for New Startups Founders: What You Need to Know

This quick guide gives founders a pragmatic roadmap to set up a company while you build product and talk to investors.

Focus on the high-impact steps that matter now: choose a Delaware C Corporation if you aim for VC, authorize ~10,000,000 shares, and set a 10–15% equity incentive pool.

Buy founder stock at fair market value, file 83(b) elections within 30 days, keep cap tables tidy with Carta or Pulley, and get a 409A before issuing options.

Secure IP ownership: have every employee, contractor, and consultant sign PIIAA/CIIAA or present-tense assignment clauses. Use clickwrap Terms of Service for self-serve products and an MSA for negotiated deals.

Match your privacy policy to real data practices, and handle SAFEs versus priced rounds carefully—SAFEs save time but can complicate dilution. Pay Delaware franchise tax and maintain EIN, banking, and necessary registrations to avoid penalties.

Keep records, obtain board approvals, and document contracts so your company scales smoothly into future financing without messy re-papering.

Key Takeaways

• Prioritize a Delaware C Corp and reserve 10–15% for an option pool.
• File 83(b) quickly, track equity with cap table software, and get a 409A before grants.
• Lock down IP with signed assignments for all team members and contractors.
• Use clickwrap TOS for self-serve and MSAs for negotiated sales; focus on indemnity and IP.
• Keep privacy policies accurate and follow securities rules for SAFEs and priced rounds.

Why legal should be light-touch but high-impact at the start

Focus on a few high-impact steps that protect your company while you iterate on product and go to market.

Make sure you hedge major risks so the team can spend more time on customers and velocity. Cover entity registration, clean stock issuance, IP assignments for employees and contractors, privacy alignment, and core agreements. These items prevent costly delays with investors later.

Hedging the biggest risks while you build

Do the safe DIY work: vanilla Delaware C‑Corp formation via Clerky, basic founder stock purchases at par, and standard PIIAA/CIIAA forms. Use Carta or Pulley to keep cap tables tidy and file 83(b) elections quickly.

When DIY works and when you’ll need a lawyer

Hire a lawyer when stakes rise: financings, messy IP chains, bespoke contract terms, securities issues, or employment disputes. A timely review prevents hidden liabilities and builds trust with investors.

• Prioritize time: board consents, 83(b), clean cap entries.
• Calibrate spend: clickwrap terms for self-serve, balanced MSA for sales-led deals.
• Stage operational work: templates and policies grow with the company.

Bottom line: a just‑enough approach protects core rights, keeps the company moving, and saves time. Automate and document work early so growth doesn’t get slowed by sloppy paperwork.

Choosing your business entity and state of registration

Decide on an entity and state early so your capital plan, taxes, and paperwork match how you will hire and raise money.

LLC vs C‑Corp when you pursue VC

LLCs use pass-through taxation. That can create K‑1 headaches for investors and limit standard stock mechanics.

C‑Corporations centralize tax at the company level and support typical equity grants. VC-track businesses usually pick a Delaware C‑Corp.

Why Delaware is the default

Delaware offers predictable corporate law, the Court of Chancery, and investor familiarity. That reduces friction in financings and exits.

When a home-state registration makes sense

If you are purely local and foreign qualification is costly, incorporate at home. But expect investor questions about perception and exit readiness.

Costs, foreign qualification, and capital basics

• Foreign qualify where you hire or have offices; maintain a registered agent and pay fees.
• Converting an LLC to a C‑Corp can cost ~$3–5k in simple cases; delay increases complexity.
• Start with ~10,000,000 authorized shares and a 10–15% option pool. Monitor Delaware franchise tax and choose the best calculation method.

Formation checklist: documents and first decisions

Day‑one documents set governance, stock math, and the workflow you’ll use to grant equity. Gather the basic set to record who owns the company and how decisions get made.

Core paperwork you’ll need

Start with: Certificate of Incorporation (authorized shares and registered agent), Bylaws, Statement of Incorporator, and Initial Board Resolutions. Add Founder Stock Purchase Agreements and a living cap table tool.

Shares, par value, and the option pool

Decide on authorized shares early—Delaware’s gold standard is 10,000,000 at $0.00001 par with a 10–15% option pool. Track issued vs authorized shares so ownership and fully diluted math stay accurate.

• Capture board approvals for all equity issuances and keep signed agreements and proof of payment.
• Lock your company name, check trademarks, and consider a DBA to avoid rebrand time later.
• Stand up admin: obtain an EIN, open a bank account (Mercury works remotely), and set a mail scanning address.
• Use Clerky for formation workflows and implement Carta or Pulley for cap table accuracy.
• Have founders and early employees sign PIIAA/CIIAA to secure intellectual property and rights.

Equity issuance fundamentals: FMV, par value, and paying for stock

Establish fair market value (FMV) at incorporation so the company can justify initial pricing of shares. If you have no revenue, assets, or term sheets, FMV typically equals the par value in the Certificate of Incorporation. The board should formally document that determination with a resolution.

How initial stock purchases should work

Have each purchaser sign a stock purchase agreement, deliver cash consideration, and record the sale in the cap table. Keep a scanned receipt and bank proof tied to the agreement.

Tax pitfalls of issuing below FMV

Issuing shares below FMV can trigger imputed income. The IRS may treat the discount as taxable compensation, creating tax liability for the recipient and questions for the company.

• Timing: get board approval before any issuance and ensure certificates and receipts match records.
• When FMV rises: term sheets, revenue, or material assets push FMV up and change pricing for later grants.
• Later grants: use a 409A valuation to set option strike prices at or above FMV to avoid Section 409A risk.

Coordinate with your accountant and counsel to confirm valuation, tax treatment, and compliance under corporate and tax law. Consistent paperwork is your best defense during diligence or audits.

Vesting and the 83(b) election timeline

A clear vesting schedule plus a prompt 83(b) filing keeps equity aligned and avoids surprise taxes.

Restricted Stock Purchase Agreements and the 30‑day rule

Founders usually buy restricted stock under a purchase agreement that creates a vesting schedule. Vesting ties equity to continued work and aligns incentives with the company.

Critical point: the 30‑day 83(b) clock starts on the board approval that authorizes the grant, not the signature date on the agreement. Meet that deadline.

What happens if you miss the 83(b) window

If you miss the window, the election is irrevocable and the recipient may face ordinary income events as shares vest. That creates bigger tax bills later when value rises.

• How to file: complete the 83(b) form, mail to the IRS address, send a copy to the company, and keep stamped receipts with your corporate documents.
• Best practice: add 83(b) review to the closing checklist and get board consent and execution on the same day to avoid timing confusion.
• Note: options don’t require 83(b), but early exercised options with vesting may.

Tip: use a tracked service like file83b.com to get confirmations and reduce filing errors.

Cap table accuracy, 409A valuation, and software to stay organized

Before a term sheet lands, run a cap table audit to confirm every grant is documented, approved, and paid.

Conducting a cap table tie‑out before term sheets

Define a tie‑out: a systematic check that every share, option, and grant has board consent, signed agreements, payment proof, and any filed 83(b)s.

• Confirm fully executed board consents and plan adoption votes.
• Match stock and option agreements to payment receipts and cap entries.
• Verify authorized share headroom so you won’t run out of shares at the wrong time.

Why a 409A matters for options and tax compliance

A 409A valuation sets a defensible FMV for option pricing. That protects the company and recipients from Section 409A penalties.

Get onboarded to cap table software like Carta or Pulley to centralize records, issue electronic notices, and generate clean exports for investor due diligence.

Investor expectations: clean cap exports, audit trails, and consistent documents speed negotiations and save time during diligence. Run short mini tie‑outs after hires, SAFEs, or revenue milestones to keep the company ready.

Equity Incentive Plans, options, and employee equity

Adopt a formal equity plan early so option grants and share math stay clean as you hire.

Adoption and recordkeeping

You’ll need both board and stockholder approvals to adopt an Equity Incentive Plan. Record those votes in the minute book and attach the plan and form agreements to company records.

Key documents and forms

Prepare these documents before any awards:

• Equity Incentive Plan
• Form of Option Agreement and grant notice
• Form of Restricted Stock Award and related documents
• Signed grant paperwork stored in your minute book and cap table platform

Timing, 409A, and grant mechanics

Get a current 409A valuation before issuing options so exercise prices meet FMV. Grants draw from the plan reserve; top up the pool before major hiring or a financing.

Tip: use cap table software like Carta to issue options, collect signatures, sync vesting schedules, and avoid common errors. Train managers and employees so everyone understands vesting, exercise windows, and post‑termination rules.

Intellectual property: assignment, ownership, and strategy

A tidy record of inventions and code saves deals and prevents messy audits.

Protect the company’s core assets early. Every employee and contractor should sign a Proprietary Information and Invention Assignment Agreement (PIIAA/CIIAA) so inventions and work product vest with the company.

PIIAA/CIIAA and consulting assignments

Use present‑tense assignment language in consulting agreements. Phrases like “will assign” create gaps that can threaten rights later.

Cleaning up prior IP and chain of title

Inventory prior property and execute transfer agreements when code or inventions originated elsewhere. Keep schedules of assets, repos, and disclosed prior inventions in HR files.

Unclear ownership or missing signatures is a common diligence red flag that can derail financing or an acquisition.

• Require signed PIIAA/CIIAA for employees and contractors.
• Document carve-outs: list prior inventions not assigned.
• Address open source and third‑party code to avoid viral license risk, and note copyright for published materials.
• Maintain a central IP ledger tracking assignments, dates, and repository access for auditors and buyers.

Trademarks, copyrights, and patents for startups

Protecting name, code, and inventions starts with simple, targeted steps that reduce risk without heavy cost.

When to file a trademark: file once the name is unique and used in commerce. Pick classes that match your services or product—B2B SaaS often files in software and cloud services classes. Expect roughly $1,000–$1,500 per class and plan filings around launches to control expense.

TM versus registered marks and budget planning

Use “TM” immediately to signal claim to the name, but a registered “®” gives stronger nationwide rights and simpler enforcement. Filing in multiple classes or countries raises costs quickly. Map filings to where customers are and where you plan to sell.

Copyright and practical registration

Copyright attaches automatically when original code or content is fixed. Registration is optional but valuable: it enables statutory damages and stronger remedies in disputes. Many software companies defer registration until a release or sale is imminent.

Patents: when they matter

Most software companies defer patents due to ROI and ease of workaround. Deep tech and life sciences are exceptions where patents can be crucial. Consult counsel before public disclosures to preserve patent rights and speed future exits.

Employment, contractors, and moonlighting risks

Treat worker classification as a strategic decision: it shapes taxes, liability, and who owns what you build.

Classify people correctly. Misclassifying a contractor as an independent worker can trigger payroll audits, wage claims, and questions about IP ownership. Use practical tests and consult state rules as you scale.

Classify workers and avoid common pitfalls

Track whether someone is an employee or a contractor. Employees get payroll tax withholding and benefits; contractors do not. Mistakes can create tax, wage, and IP exposure for the company.

Restrictive covenants and prior employer claims

Review existing employment agreements for non‑compete and non‑solicit clauses. Some states limit non‑competes; non‑solicits and confidentiality rules are often stronger. If prior work used an old employer’s time or tools, that employer may assert rights.

• Consider waivers or releases when risk is material and enforceable.
• Standardize onboarding with PIIAA/CIIAA and clear offer letters to capture assignments.
• Train managers to avoid soliciting employees bound by prior agreements or encouraging disclosure of third‑party secrets.

Founders’ personal exposure and documentation

Founders who knowingly breach restrictive covenants risk personal liability. Document clean creation: company equipment, company accounts, and company repositories from Day 1 to evidence ownership.

Practical tip: use clear assignments, keep signed agreements in one place, and get local counsel when hiring across multiple states to align with employment laws.

Core commercial contracts: Terms of Service and MSAs

Use a posted Terms of Service for self‑serve customers and a tailored MSA for negotiated enterprise sales. That split reduces negotiation friction and keeps core risk in predictable documents.

Clickwrap ToS for self‑serve vs negotiated MSA for sales‑led motion

Clickwrap works when customers sign up online. It creates acceptance records and speeds conversions.

Reserve your MSA for deals that need custom terms, SOWs, or higher revenue. Let order forms stack onto a base agreement so sales cycles stay fast.

High‑leverage clauses to prioritize

Focus on indemnity, limitation of liability, IP ownership and license grants, and warranties. Mutual indemnities and clear caps protect the company without scaring customers.

Avoid accidental IP assignment and uncapped liability

Beware generic templates that assign your intellectual property or promise unlimited remedies. Train sales and employees on fallback positions and escalation paths.

• Version control posted terms and keep acceptance logs.
• Use signature records for negotiated agreements and store all documents centrally.
• Align your privacy policy and security posture with contract promises to avoid contradictory obligations on data handling.

Clear, reusable contracts reduce negotiation time and prevent accidental exposure.

Privacy policy and data protection compliance

Make sure your published privacy policy mirrors what your product actually does with user data. A mismatch between words and practice is an easy way to invite complaints, enforcement, or breach of contract claims.

Making your privacy policy match actual data practices

Start with a data inventory: list what you collect, why you collect it, how long you keep it, and who you share it with. Update that inventory when you add analytics, SDKs, or new integrations.

Avoid overpromising. Generic templates often say more than a company does. Those claims can create exposure if regulators or customers expect protections you don’t provide.

When GDPR, CCPA, or CPRA may apply

Map your footprint. GDPR applies to EU data subjects; CCPA/CPRA kicks in based on California thresholds like revenue or volume of personal data. If you cross a threshold, you must honor access, deletion, and opt‑out rights.

“A clear, truthful privacy policy is both compliance and a trust-building tool.”

• Operationalize compliance: vendor DPAs, security controls, and a process to handle user rights requests within required timelines.
• Keep naming consistent across sites, apps, cookies, and SDK disclosures so customers see one coherent story.
• Review processor and sub‑processor agreements to ensure flow-down obligations and incident notice timelines match your policy.
• Coordinate your privacy statements with your Terms of Service and any security whitepapers to avoid contradictions.

Set a cadence to revise the policy after product changes, new integrations, or when your customer base grows. That keeps the company defensible and customers informed.

Fundraising basics: SAFE vs priced equity rounds

When raising capital, choose the instrument that matches your timeline, investor mix, and appetite for dilution.

Speed, cost, and control tradeoffs

SAFEs close fast, cut legal fees, and defer valuation. That makes them ideal for small seed financing and to get runway quickly.

Priced rounds cost more and take longer, but they set valuation, board seats, and investor protections up front. Use them when the raise is substantial or the investor group is complex.

Dilution dynamics with multiple SAFEs

Stacks of SAFEs with different caps, discounts, MFN clauses, or pro rata rights can convert into surprising dilution at the priced round.

Rule of thumb: model conversion scenarios and keep a running calculator so you can see how many shares each instrument will create.

Raising many small SAFEs often forces a larger priced round later to clear the cap table and leave 20–25% for new money.

Practical checklist: coordinate securities compliance and tax filings, model option pool shuffles, and prepare clean cap exports for investors to speed diligence.

Securities law, due diligence, and investor onboarding

Treat every securities issuance like a short audit. Counsel should confirm federal and state exemptions, complete required registrations, and advise which notices must happen before funds transfer. Obtain board consent that explicitly authorizes the financing and the exact share or SAFE terms.

Board consents, exemptions, and Blue Sky filings

Start with a checklist. Track board resolutions, subscription or SAFE agreements, disclosure schedules, and investor questionnaires. Select exemptions such as Regulation D and file Blue Sky notices in relevant states on schedule. Late filings can trigger rescission rights, fines, or delayed closings.

Special considerations for foreign investors

Foreign capital often requires extra reps and screening. Run OFAC and KYC checks, consider export control or CFIUS exposure in sensitive sectors, and document any additional registration steps. Maintain consistent securities ledgers and share issuance logs that match your cap table.

“A clean paper trail—consents, offering docs, KYC, and cap records—speeds diligence and prevents surprises.”

• Checklist: resolutions, agreements, disclosure schedules, investor questionnaires.
• Filings: identify exemptions, submit Blue Sky notices, and meet pre‑sale deadlines.
• Foreign capital: add OFAC/KYC, extra representations, and sector checks.
• Data room: organize corporate records, prior financings, IP assignments, and material contracts for investor review.

Communicate timelines to investors early, keep the entity charter and bylaws aligned with share mechanics, and preserve a consistent paper trail to make onboarding smooth and defensible.

Taxes, licenses, and critical admin you can’t ignore

Don’t let routine admin slow growth: organize tax, banking, and permit tasks early so the company stays in good standing and you avoid surprises during diligence.

Paying Delaware franchise tax the smart way

Delaware offers two calculation methods. Pick the portal method that yields the lowest liability when it applies. Many early companies pay roughly $400 if they use the correct option.

EIN, banking, and address choices

Get an EIN online if an officer has an SSN or ITIN; otherwise plan for fax or mail timelines and keep the SS-4 in your documents. Open a bank account with formation papers, EIN, and KYC details—Mercury is remote-friendly for many companies.

Keep your registered agent address distinct from your operational mailing address. Use mail scanning services like Earth Class Mail or Virtual Post Mail so you don’t miss statutory notices or service of process.

Business licenses, permits, and ongoing filings

Register where you hire or lease space and track annual reports and fees in each state. Identify industry permits (healthcare, fintech, alcohol) and local licenses early.

• Organize licenses, permits, and tax filings with your cap table and minute book.
• Set calendar reminders for payroll registrations, unemployment insurance, and recurring tax deadlines.

Keep a tidy admin folder—organized filings and quick access to documents speed audits and investor checks.

Legal basics for new startups founders: a step‑by‑step guide to your first year

A tactical first-year plan keeps equity clean, IP secured, and fundraising ready—one milestone at a time.

Week 1–2: incorporate as a Delaware C‑Corp, authorize 10,000,000 shares with a sensible par value, adopt bylaws, and execute initial board consents.

Week 2–3: issue founder stock at FMV (often par), collect payments, record entries in your cap tool, and make sure to file 83(b) elections within 30 days.

Month 1: have every employee, contractor, and consultant sign PIIAA/CIIAA with present‑tense assignment language and transfer any prior IP into the company.

Month 1–2: publish a truthful ToS and privacy policy and prepare an MSA for negotiated deals so sales work aligns with your promises.

Month 2: onboard to Carta or Pulley, upload corporate docs, and schedule a 409A before granting options.

Quarter 2–3: adopt an Equity Incentive Plan with approvals, top up the option pool (10–15%), pay Delaware franchise tax using the lowest method, set up EIN and banking, and register where you hire.

Quarter 3–4: run a cap table tie‑out, assemble a diligence‑ready data room, and plan fundraising (SAFE vs priced) based on timing, size, and investor mix.

Keep this practical roadmap handy so the company can scale without messy rework later.

Conclusion

,Wrap up with a lean playbook that protects essentials so your company stays fundable and focused on product.

Protect core items: Delaware C‑Corp choices, clean equity and 83(b)s, IP assignments, privacy alignment, and solid commercial terms. Use Clerky, Carta or Pulley, and Mercury to cut admin drag.

Bring in a lawyer for securities filings, bespoke MSAs, cross‑border issues, or disputes. That timing saves time on investment rounds and speeds investor diligence.

Action: document thoroughly, review policies regularly, and keep agreements aligned with how you actually operate. Do this and your company will earn trust with customers and investors and unlock more options in the future.