Legal Basics Every Founder Should Know Before Launching

Why Legal Basics Matter (Even Pre-Revenue)

The costly consequences of ignorance:

What can go wrong:

🚨 Personal liability: Your house, savings at risk 🚨 IP disputes: Can't prove you own your product 🚨 Co-founder battles: No written agreements = lawsuits 🚨 Can't raise funding: Investors require clean legal structure 🚨 Regulatory fines: Violating laws you didn't know existed 🚨 Trademark conflicts: Forced to rebrand after building traction 🚨 Tax nightmares: Improper structure = massive tax bills

Prevention cost: $2,000-$5,000 upfront Fixing later cost: $20,000-$100,000+ (if fixable)

Do it right from the start

Step 1: Choose the Right Legal Structure

Entity type determines everything:

Sole Proprietorship (DON'T use for startups)

What it is: You and business are one entity

Pros:

• Simple, no paperwork
• No cost

Cons: ❌ No liability protection (creditors can take personal assets) ❌ Can't raise VC funding ❌ Can't have co-founders with equity ❌ Looks unprofessional

Verdict: Only for freelancers/consultants, never startups

LLC (Limited Liability Company)

What it is: Separate legal entity, flexible structure

Pros: ✅ Liability protection (personal assets safe) ✅ Pass-through taxation (no double taxation) ✅ Flexible ownership/profit distribution ✅ Simple to maintain

Cons: ❌ Harder to raise VC funding (most VCs prefer C-corps) ❌ Can't issue stock options ❌ Self-employment taxes on all profits

Best for:

• Bootstrapped companies not seeking VC
• Small teams (2-5 people)
• Service businesses
• Lifestyle businesses

Cost: $100-$800 (state filing fees + registered agent)

C-Corporation (Standard for VC-backed startups)

What it is: Separate legal entity, issues stock, board of directors

Pros: ✅ Preferred by VCs (clean equity structure) ✅ Stock options (attract talent) ✅ Unlimited growth potential ✅ Limited liability ✅ Easy to transfer ownership ✅ Credibility (looks legitimate)

Cons: ❌ Double taxation (corporate + personal on dividends) ❌ More paperwork (annual meetings, minutes, filings) ❌ More expensive to maintain ($1,000-$3,000/year) ❌ More complex

Best for:

• Startups seeking VC funding
• High-growth ambitions
• Planning to hire employees with equity
• Standard choice for tech startups

Cost: $500-$2,000 (incorporation + initial legal)

Delaware C-Corp (The gold standard)

Why Delaware?

✅ VC expectation (99% of funded startups) ✅ Business-friendly laws (well-established corporate law) ✅ Court of Chancery (specialized business court, fast rulings) ✅ Privacy (officers/directors not public record) ✅ Flexibility (easy to do complex financing)

Cost: $89 Delaware filing + ~$300/year registered agent + $450/year franchise tax

Worth it if: Raising VC funding

Alternative: Incorporate in your state, reincorporate in Delaware before funding (common)

Step 2: Protect Your Intellectual Property

Your IP is often your only asset—protect it:

1. Founders' IP Assignment Agreement

Critical document: Transfers all IP to company

Without this:

• Founders personally own what they create
• Company has no legal claim
• Can't sell company (buyer needs to own IP)
• Investors won't fund

What it covers:

• Code written before incorporation
• Code written during employment
• Designs, inventions, ideas related to business
• Anything created using company resources

Timeline: Sign IMMEDIATELY upon incorporation

Cost: $0-$500 (part of standard incorporation docs)

2. Employee/Contractor IP Assignment

Every employee and contractor must sign:

Employees (offer letter should include):

• All work product belongs to company
• Assignment of inventions
• Non-compete (where legal)
• Confidentiality

Contractors (agreement must include):

• Work-for-hire clause (company owns deliverables)
• IP assignment
• Non-disclosure

Mistake: Hiring developer without IP assignment Result: Developer owns code, can withhold or demand payment

Rule: No work starts without signed IP assignment

3. Trademark Your Name/Logo

Protect your brand:

Search first:

• USPTO database (free search)
• Google (check domain, social media)
• Hire trademark attorney for comprehensive search ($300-$1,000)

File trademark:

• Federal trademark (USPTO): $350 per class
• Protects nationwide
• Takes 8-12 months to approve

When to file:

• Before public launch (if possible)
• Definitely before spending on branding
• Even earlier if serious about name

Alternative: "Common law" trademark (using name gives some rights, but weaker)

4. Copyright (Automatic but Register Important Works)

What's protected automatically:

• Code
• Website content
• Marketing materials
• Designs

Why register anyway ($45-$65 per work):

• Required to sue for infringement
• Statutory damages (up to $150K per work)
• Stronger legal standing

Priority registration:

• Core product/software
• Logo/brand assets
• Major content

5. Patents (Expensive, Consider Carefully)

What: Protects inventions

Cost: $10,000-$30,000+ (attorney fees, filing, prosecution)

Timeline: 2-4 years to approve

When worth it:

• True technological innovation
• Hardware/medical devices
• Investor requirement (some industries)
• Defensive purposes (prevent others from patenting)

When NOT worth it:

• Software (often not patentable, expensive, slow)
• Obvious ideas
• Early stage with limited capital

Alternative: Provisional patent ($2,000-$5,000, holds place for 1 year while you validate)

Step 3: Founders' Agreement (Prevent Co-Founder Wars)

Non-negotiable document:

What it must include:

✅ Equity split (with rationale) ✅ Vesting schedule (4 years, 1-year cliff minimum) ✅ Roles and responsibilities (who does what, who's CEO) ✅ Decision-making authority (voting rights, major decisions requiring unanimity) ✅ IP assignment (everything belongs to company) ✅ Non-compete/non-solicit (reasonable scope, 1-2 years) ✅ Confidentiality (trade secrets protected) ✅ Buyback provisions (what happens if someone leaves) ✅ Drag-along/tag-along rights (forced sale scenarios) ✅ Dispute resolution (mediation/arbitration before litigation)

Cost: $2,000-$5,000 (lawyer-drafted)

DIY: Cooley GO, Clerky (templates, $0-$500)—acceptable for simple situations

Timeline: Before building anything

Step 4: Basic Contracts and Agreements

Templates you need:

1. Customer contracts/Terms of Service

B2B (business customers):

• Master Services Agreement (MSA)
• Statement of Work (SOW)
• Service Level Agreement (SLA)

B2C (consumers):

• Terms of Service
• Privacy Policy (legally required if collecting data)
• Cookie Policy (if EU users)

Get templates: Docracy, Cooley GO, or hire lawyer ($1,000-$3,000)

GDPR/CCPA compliance: If serving EU or California, must comply (serious penalties)

2. Vendor/Contractor agreements

Must include:

• Scope of work
• Payment terms
• IP assignment (work-for-hire)
• Confidentiality
• Termination clause
• Liability limits

Protect yourself: Never start work without signed agreement

3. Non-Disclosure Agreements (NDAs)

When to use:

• Discussing idea with potential co-founders (before committing)
• Hiring contractors
• Partnerships/integrations
• Investor meetings (though most VCs won't sign)

When NOT to use:

• Customer conversations (looks paranoid)
• General networking
• After information is already public

Templates: Free online (AIPLA, Docracy)

Step 5: Employment Law Basics

Hiring people creates legal obligations:

Employee vs. Contractor (IRS cares a lot)

Employee:

• You control how, when, where they work
• Ongoing relationship
• Company provides tools/equipment
• Set hours
• You must: Withhold taxes, provide benefits, workers' comp insurance

Contractor:

• Control their own work methods
• Project-based
• Use own tools
• Flexible schedule
• You pay: Gross amount, they handle taxes (1099 at year-end)

Misclassification penalty: Huge fines + back taxes + penalties

When in doubt: Classify as employee (safer)

Equity compensation (stock options)

Key rules:

✅ ISO (Incentive Stock Options): Employees only, tax-advantaged ✅ NSO (Non-Qualified Stock Options): Employees or contractors ✅ Early exercise: Allows 83(b) election (important) ✅ 409A valuation: Required to set strike price (every 12 months or funding round)

Cost: 409A valuation: $2,000-$5,000

Mistake: Granting options without 409A = IRS penalties

At-will employment

US standard: Can fire anyone, anytime, for any reason (except illegal discrimination)

But document:

• Offer letters confirming at-will
• Performance issues (before firing)
• Cause for termination

Wrongful termination lawsuits expensive—document everything

Step 6: Regulatory Compliance (Industry-Specific)

Know your industry's rules:

Common regulatory areas:

Healthcare (HIPAA):

• Handling patient data = strict rules
• Penalties: $100-$50,000 per violation
• Must: Compliance officer, policies, encryption

Finance (FinCEN, SEC, state regulators):

• Money transmission licenses
• KYC/AML compliance
• Securities laws (if issuing tokens/investments)

Food (FDA, state health departments):

• Labeling requirements
• Facility inspections
• Safety standards

Education (FERPA):

• Student data protection
• Consent requirements

Data privacy (GDPR, CCPA):

• User consent for data collection
• Right to deletion
• Data portability

Research compliance early—ignorance not a defense

Step 7: Taxes and Accounting

Basic tax knowledge:

Federal Employer Identification Number (EIN)

What: Company's tax ID (like SSN for business)

Get it: IRS website, free, 5 minutes

Need it for: Bank accounts, hiring, tax filings

Sales tax (if selling physical goods)

Must collect in states where you have "nexus" (presence)

Nexus = office, employees, inventory, or significant sales

Register: Each state separately

File: Monthly/quarterly/annually (varies)

Penalty: Back taxes + interest + penalties

Hire: Accountant or use Avalara, TaxJar (automation)

Quarterly estimated taxes

C-corp: Pay quarterly corporate taxes

Founders: Pay quarterly on salary/distributions

Miss payments: Penalties + interest

Hire accountant early

Cost: $200-$500/month (startup-focused)

Worth it: Tax savings > cost, prevents mistakes

Use: Pilot, Bench, Kruze (startup specialists)

Step 8: Fundraising Legal Considerations

Preparing for investment:

SAFE/Convertible Notes

Simpler than equity:

• SAFE (Simple Agreement for Future Equity): YC standard
• Convertible Note: Debt converting to equity
• Faster, cheaper than priced rounds ($2,000-$5,000 legal)

Must include:

• Valuation cap
• Discount rate
• Conversion triggers

Priced Rounds (Series Seed, A, B, etc.)

Much more complex:

• Stock Purchase Agreement
• Voting agreements
• Right of first refusal
• Drag-along provisions
• Board composition

Legal cost: $20,000-$50,000+ (per round)

Investors' lawyers draft: You just review

Securities laws (don't violate)

Reg D, Reg CF, Reg A+:

• Rules for who can invest
• Accredited vs. non-accredited investors
• Disclosure requirements
• Filing requirements (Form D)

Violate these: SEC fines, investor lawsuits, criminal charges

Always: Use securities lawyer for fundraising

When to DIY vs. Hire a Lawyer

Strategic use of legal budget:

DIY acceptable:

✅ Incorporation (Clerky, Stripe Atlas: $500-$1,000) ✅ Standard NDAs (templates) ✅ Simple contractor agreements (templates) ✅ Trademark search (preliminary)

Hire lawyer:

✅ Founders' agreement (too important to mess up) ✅ First fundraising (securities laws) ✅ Complex IP (patents, disputes) ✅ Employment issues (firing, discrimination claims) ✅ Regulatory compliance (healthcare, finance, etc.) ✅ Litigation (obviously) ✅ Acquisition (selling company)

Find startup-friendly lawyers:

Options:

• Big law firms: $500-$1,000/hour (defer fees sometimes)
• Boutique startup firms: $300-$500/hour
• Solo practitioners: $200-$400/hour

Defer fees: Many startup lawyers defer until funding (converts to equity or paid from raise)

Free resources:

• Law school clinics
• Incubators/accelerators (often include legal)
• Cooley GO (free document generators)

The Founder's Legal Checklist

Before launch:

Choose entity type (C-corp for VC-backed)
Incorporate (Delaware if raising VC)
Get EIN
Founders' agreement signed (with vesting)
IP assignment agreements (all founders)
Open business bank account (separate from personal)
Basic insurance (general liability: $500-$1,500/year)
Accounting system setup
Trademark search (name/logo)
Terms of Service / Privacy Policy (if website/app)

Before hiring:
Employee offer letter template
Contractor agreement template
IP assignment in all agreements
Payroll system if employees (Gusto, Rippling)

Before fundraising:
Cap table clean (no weird ownership issues)
409A valuation (if issued options)
All contracts/agreements signed and organized
Securities lawyer consultation

Choose C-corporation for VC-backed startups (Delaware for funding plans), LLC for bootstrapped businesses. Sign founders' agreements immediately with equity splits, 4-year vesting, IP assignments, and decision-making authority. Protect IP through founders'/employee IP assignments, trademark registration ($350), and copyright registration for major works. Obtain EIN, separate business bank account, and comply with employment laws distinguishing employees from contractors. Implement privacy policies (GDPR/CCPA compliance), terms of service, and industry-specific regulations. Use DIY tools (Clerky, Cooley GO) for incorporation but hire lawyers for founders' agreements, fundraising, and complex IP. Legal foundation prevents catastrophic problems costing $20,000-$100,000+ later.