Legal Foundations Every Startup Founder Must Know
Your legal setup is your startup's launchpad
Good legal decisions early on save you time, money, and heartache down the road.
Avoid hidden risks that derail growth
The legal structures you put in place today will either propel or paralyze your next move.
This is practical, plain-English roadmap
Not just theory 4 all actionable advice whether you're preproduct, bootstrapping, or post-angel.
Formation & Equity Basics
Delaware C-Corp: Why it's standard
Investor-friendly and predictable under corporate law
Avoid LLCs unless you're not planning to raise VC
Founder stock: what, how much, when?
Issue when company forms - earlier
means lower fair market value and tax exposure
Equity splits: contribution vs. equal
Don't just divide equally unless contributions are truly equal
Assess time, money, relationships, and technical expertise
Vesting and 83(b): Earn It, Lock It In
Standard vesting = 4 years, 1-year cliff
Equity is earned over time - protects the company if someone leaves early
83(b) election = file within 30 days
Tell the IRS you want to be taxed on your founder stock today when it's nearly worthless, not later when it's valuable. A missed 83(b) can trigger unexpected tax on illiquid assets.
What if my cofounder leaves early?
If a founder leaves before fully vesting, the unvested shares typically return to the company, allowing reallocation to future hires or investors
IP Ownership: Don't Build on Sand
Everything must be owned by the company
Your intellectual property is your most valuable asset
Use CIIA agreements with everyone
Confidential Information and Invention Assignment Agreements
Work-for-hire isn't enough
Without a signed assignment, the creator often retains rights
Every founder, employee, contractor, or advisor who touches your IP must sign a CIIA. If your company doesn't own the code, brand, or product created, you have a potentially big problem that can kill deals.
Using Contractors: IP + Classification Risks
Use written agreements for every contractor
Include IP assignment and define them as an independent contractor
Misclassification = fines + liability
Watch for control over schedule, full-time exclusivity, and company-provided equipment
IP created by contractors isn’t yours unless assigned
Ensure all work product is properly assigned to your company
Be deliberate when offering advisor equity
Use written agreements with defined scope, term, vesting schedules, and IP assignment
Understanding SAFE Terms
What is a SAFE?
Simple Agreements for Future Equity let you raise money quickly without setting a valuation today
Valuation cap = max price investor pays
The lower the cap, the more equity they get
MFN clause = matches better terms
Lets early investors match terms you offer later investors
Discount = investor bonus
Often 10-20% when converting
Always model what your cap table looks like with different scenarios to understand dilution before it's too late.
When to Lawyer Up
Don't wait for a term sheet or dispute to seek help
Legal risk compounds quietly, and fixing it later is almost always more expensive.
Hire counsel when:
Issuing equity or signing SAFEs
Before launching product
When hiring employees or contractors
Use fixed-fee or fractional models if budget is tight
Many firms, including Hinman Legal, offer flexible fee schedules or fractional general counsel support.
