Disclaimer: This article provides general information, not legal advice. Laws vary by jurisdiction and situation. Consult a qualified attorney for advice specific to your circumstances.

Legal issues rarely seem urgent until they become emergencies. Co-founders split without agreements. Intellectual property goes unprotected. Wrong entity structures create tax nightmares. These problems compound over time and become expensive to fix.

This guide covers the legal fundamentals every founder should understand—from entity formation through contracts and compliance.

Founders often postpone legal work as a distraction from building product and acquiring customers. This creates future problems.

Co-founder disputes destroy companies. Without clear agreements, equity disputes become existential threats when relationships sour.

Unprotected IP gets copied. Competitors can freely use your innovations if you haven’t established protection.

Wrong entity structure creates tax problems. Restructuring later is expensive and complicated.

Unsigned contracts become lawsuits. Verbal agreements are difficult to enforce when disputes arise.

When You Need a Lawyer

Certain situations require professional legal help:

  • Formation decisions (for funded startups)
  • Co-founder agreements
  • Raising money (any amount)
  • Hiring employees
  • Major contracts
  • IP disputes
  • Regulatory compliance issues

When DIY Can Work

Some situations can be handled with templates and research:

  • Basic LLC formation for simple businesses
  • Simple contractor agreements
  • Basic NDAs
  • Terms of service (using established templates)

Know the difference. Getting the decision wrong costs more than the lawyer would have.

Choosing Your Business Structure

Your entity type affects taxation, liability, fundraising ability, and operational complexity.

Sole Proprietorship

What it is: No separate legal entity. You and your business are the same.

Pros:

  • No formation required
  • Simplest taxes (Schedule C)
  • Minimal paperwork

Cons:

  • Personal liability for business debts
  • Can’t easily bring on partners
  • Can’t raise equity funding
  • Less credible to some customers

Best for: Testing ideas, side hustles, solo consulting before commitment.

Not for: Anything with liability risk or growth plans.

LLC (Limited Liability Company)

What it is: Separate legal entity with flexible structure.

Pros:

  • Liability protection (personal assets protected)
  • Tax flexibility (choose how to be taxed)
  • Simpler than corporations
  • No ownership restrictions

Cons:

  • Harder to raise venture capital
  • No stock options (membership units instead)
  • Self-employment taxes on all profits (unless S-Corp election)

Best for: Bootstrapped businesses, service businesses, real estate, companies not seeking VC.

Not for: Startups planning to raise venture capital.

C-Corporation

What it is: Separate legal entity with shareholders.

Pros:

  • Can raise venture capital easily
  • Issue stock options to employees
  • No ownership restrictions
  • Unlimited growth potential
  • Established legal framework

Cons:

  • Double taxation (corporate tax + dividend tax)
  • More complex and expensive to maintain
  • Annual reporting requirements
  • More formalities required

Best for: Startups planning to raise VC, high-growth companies, companies wanting to issue equity compensation.

Delaware is standard. Even if you’re physically elsewhere, Delaware offers favorable business laws, specialized courts, and investor familiarity.

S-Corporation

What it is: Corporation with pass-through taxation.

Pros:

  • Liability protection
  • Avoid double taxation
  • Potential self-employment tax savings

Cons:

  • Ownership restrictions (100 shareholders max, no foreign owners)
  • Only one class of stock
  • Can’t have VC investors (most VCs require C-Corp)

Best for: Profitable small businesses, consulting firms, professional services.

Not for: VC-backed startups.

Entity Comparison

FactorLLCC-CorpS-Corp
VC fundraisingDifficultEasyDifficult
Stock optionsNoYesLimited
Tax flexibilityHighLowMedium
ComplexityLowHighMedium
Self-employment taxUsually yesNoNo
Foreign ownersYesYesNo

Recommendation Framework

Planning to raise VC? Delaware C-Corp

Bootstrapped service business? LLC in your home state

Profitable small business wanting tax savings? S-Corp

Uncertain about direction? Start with LLC, convert later if needed

Where to Incorporate

Delaware

Most startups incorporate in Delaware regardless of physical location because:

  • Favorable business laws - Well-developed and business-friendly
  • Court of Chancery - Specialized business court with experienced judges
  • Predictable precedent - Extensive case law provides clarity
  • Investor expectations - VCs and lawyers are familiar with Delaware

You’ll still need to register as a “foreign corporation” in states where you have employees or significant business activity.

Your Home State

For local businesses with no VC ambitions, incorporating in your home state is simpler. You avoid the complexity of managing registrations in multiple states.

Wyoming or Nevada

These states offer benefits like no state income tax and privacy protections. However, they’re less common for funded startups and may require registration in other states anyway.

Co-Founder Agreements

65% of startups fail due to co-founder conflict. A co-founder agreement doesn’t prevent conflict but provides frameworks for resolving it.

Why You Need One

  • Verbal agreements are unenforceable when relationships deteriorate
  • Assumptions diverge over time without documentation
  • Departure scenarios require predetermined rules
  • Investors will require clear ownership structure

Essential Terms

Equity Split

Document who owns what percentage and the rationale. Common approaches:

  • Equal split (if contributions truly equal)
  • Unequal based on role, commitment, prior work
  • Consider future contributions, not just past

There’s no single right answer, but the answer should be explicit and agreed upon.

Vesting Schedule

Standard: 4-year vesting with 1-year cliff.

After the cliff, one year of shares vest. Remaining shares vest monthly or quarterly over the following three years.

Vesting protects everyone. If a co-founder leaves after six months, they don’t walk away with half the company. Founders should vest too—even if they’ve been working on the idea for years.

Roles and Responsibilities

Define who handles what:

  • CEO responsibilities
  • Technical/product leadership
  • Business development
  • Decision-making authority

Clarity prevents stepping on toes and ensures nothing falls through cracks.

IP Assignment

All intellectual property created for the company should belong to the company, not individual founders. This includes:

  • Code and software
  • Designs and branding
  • Business methods and processes
  • Content and documentation

Include assignment of any prior work being contributed.

Departure Terms

What happens when someone leaves?

  • Vesting stops at departure
  • Company may have right to repurchase unvested shares
  • Non-compete provisions (where legal)
  • Transition expectations

Decision Making

How are major decisions made?

  • Board composition and voting
  • Matters requiring unanimous consent
  • Deadlock resolution mechanisms

Founder IP Assignment

Everyone should sign an assignment ensuring:

  • All work product belongs to company
  • Prior inventions are disclosed
  • Future inventions during employment assigned

Intellectual Property Protection

Types of IP

Trademarks

Protect brand names, logos, slogans.

  • Duration: Indefinitely if maintained
  • Process: File with USPTO, state trademark offices
  • Timeline: 8-12+ months for federal registration
  • Cost: $250-350 per class for basic filing

Before launching, search existing trademarks to avoid infringement. Building a brand on someone else’s trademark is expensive to fix.

Patents

Protect inventions, processes, novel methods.

  • Duration: 20 years from filing
  • Process: Complex, usually requires patent attorney
  • Timeline: 2-3+ years for approval
  • Cost: $10,000-30,000+ including attorney fees

Most startups don’t need patents initially. Focus on building the business first. Patents matter more for:

  • Hardware innovations
  • Pharmaceutical/biotech
  • Truly novel technical inventions
  • Defensive purposes in litigious industries

Copyrights

Protect creative works, software code, content.

  • Duration: Life of author + 70 years
  • Process: Automatic upon creation; registration optional
  • Cost: $45-65 for registration

Copyright exists automatically when you create something. Registration provides additional enforcement benefits.

Trade Secrets

Protect confidential business information.

  • Duration: As long as secrecy maintained
  • Process: NDAs, security measures, limited access
  • Cost: Implementation and enforcement

Trade secrets require active protection. Once disclosed publicly, protection is lost.

IP from Contractors

When you hire contractors to build things, who owns the work?

Without a written agreement assigning IP to you, the contractor may own what they create. Always get signed agreements with explicit IP assignment before work begins.

“Work for hire” provisions and invention assignment clauses should be in every contractor agreement.

Essential Contracts

Terms of Service

Governs your relationship with users. Key elements:

  • Acceptable use policy
  • Limitation of liability
  • Intellectual property rights
  • Account termination rights
  • Dispute resolution mechanism

Don’t copy competitors’ terms without understanding them. Use established templates and customize appropriately.

Privacy Policy

Required if you collect any user data. Must explain:

  • What data you collect
  • How you use it
  • Who you share it with
  • User rights to their data
  • How to contact you

Privacy laws (GDPR, CCPA) have specific requirements. Take this seriously.

Contractor Agreements

Every contractor relationship needs documentation covering:

  • Scope of work
  • Payment terms and amounts
  • Deadlines and milestones
  • IP assignment (critical)
  • Confidentiality obligations
  • Termination provisions

The IP assignment clause is the most important part. Without it, contractors may own what they build for you.

Employee Agreements

When hiring employees, cover:

  • At-will employment (where applicable)
  • Compensation and benefits
  • Confidentiality obligations
  • IP assignment
  • Non-compete/non-solicit (where legal and appropriate)
  • Termination procedures

NDAs (Non-Disclosure Agreements)

Protect confidential information when sharing with potential partners, contractors, or others.

  • One-way (you’re sharing) vs. mutual (both parties sharing)
  • Duration of confidentiality obligations
  • Definition of confidential information
  • Exclusions (public information, independent development)

Note: Most investors won’t sign NDAs. This is standard practice, not a red flag.

Employees vs Contractors

Misclassifying workers as contractors when they should be employees creates significant legal and tax liability.

IRS Classification Factors

Behavioral control: Do you control how the work is done, or just what result is needed?

Financial control: Do they have unreimbursed expenses? Opportunity for profit/loss? Work for multiple clients?

Relationship: Is the relationship ongoing or project-based? Do you provide benefits?

Contractor Indicators

  • Sets own hours and methods
  • Works for multiple clients
  • Provides own equipment
  • Has opportunity for profit or loss
  • Project-based engagement

Employee Indicators

  • Set schedule controlled by company
  • Works only for you
  • Uses your equipment
  • Ongoing indefinite relationship
  • You control how work is done

Consequences of Misclassification

  • Back employment taxes plus penalties
  • Benefits owed retroactively
  • State-specific penalties (California is particularly strict)
  • Potential lawsuits

When in doubt, err toward employee classification or consult an attorney.

Raising money means selling securities, which triggers legal requirements.

SAFEs (Simple Agreement for Future Equity)

Y Combinator’s standard for early-stage fundraising.

  • Not debt, not equity—converts to equity at future round
  • Simpler than convertible notes
  • Standard terms reduce negotiation
  • Widely understood by angels and early investors

Convertible Notes

Short-term debt that converts to equity.

  • Interest rate and maturity date
  • Conversion discount and/or valuation cap
  • More complex than SAFEs
  • Still common for seed rounds

Priced Rounds

Actual equity sale with set valuation.

  • Requires valuation negotiation
  • More legal complexity and cost
  • Standard for Series A and beyond

Securities Law Basics

Raising money = selling securities = legal requirements.

Most startup fundraising uses exemptions from full SEC registration:

  • Regulation D - Most common; typically Rule 506(b) or 506(c)
  • Accredited investors - Income >$200k or net worth >$1M (excluding home)
  • Regulation CF - Crowdfunding with limits

Always use a lawyer for fundraising. Securities violations have serious consequences.

  1. No co-founder agreement - Equity disputes destroy companies

  2. No vesting - Co-founder leaves early with full equity

  3. Wrong entity structure - Expensive and complicated to fix

  4. No IP assignment - Contractors own what they built for you

  5. Handshake deals - Unenforceable when disputes arise

  6. Misclassifying workers - IRS penalties and back taxes

  7. Ignoring privacy laws - GDPR and CCPA fines add up

  8. DIY fundraising documents - Securities law violations

  9. No trademark search - Building brand on someone else’s mark

  10. Waiting too long - Legal problems compound over time

Finding Startup Lawyers

Not all lawyers understand startups. Look for:

  • Experience with early-stage companies
  • Familiarity with standard startup documents
  • Reasonable fees for startup stage
  • Willingness to defer some fees
  • References from other founders

Sources for finding startup lawyers:

  • Referrals from other founders
  • Y Combinator’s lawyer list
  • Local startup ecosystem networks
  • Accelerator recommendations

Expect to pay $300-600/hour for quality startup legal work. Some tasks can be done on fixed-fee basis.

Formation Services

  • Clerky - Startup-focused formation and documents
  • Stripe Atlas - Delaware C-Corp formation package

Free Document Templates

  • Cooley GO - Legal documents for startups
  • Y Combinator - SAFE documents and templates
  • Orrick - Open source startup documents

DIY Tools

  • LegalZoom - Basic formations (careful with complex needs)
  • Rocket Lawyer - Document templates

Formation

  • Choose appropriate entity type
  • Incorporate in appropriate state
  • Obtain EIN from IRS
  • Register in states where operating
  • Open business bank account
  • Establish record-keeping systems

Co-Founder Matters

  • Sign co-founder agreement
  • Implement vesting schedules
  • Complete IP assignment
  • Document equity split clearly
  • Define roles and responsibilities

Intellectual Property

  • Search trademarks before launching brand
  • File trademark application
  • Get IP assignments from all contributors
  • Implement trade secret protections
  • Copyright registration for critical works

Operations

  • Terms of service for product/service
  • Privacy policy compliant with relevant laws
  • Contractor agreement template ready
  • Employee agreement template (when hiring)
  • NDA template for sensitive discussions

Compliance

  • Understand tax obligations
  • Privacy compliance (GDPR/CCPA if applicable)
  • Industry-specific regulations identified
  • Annual filing requirements calendared

The Bottom Line

Legal work isn’t exciting. It doesn’t feel like building your business. But legal foundations protect everything you’re building.

Focus on the essentials:

  1. Right entity structure for your goals
  2. Co-founder agreement before problems arise
  3. IP protection for what you’re creating
  4. Proper contracts for every important relationship

You don’t need to become a legal expert. You need to know enough to recognize when to DIY and when to get professional help.

The money spent on good legal advice early prevents expensive problems later. An hour of lawyer time now costs less than litigation later.

Build on solid legal foundations.