The Startup Legal Setup: A Founder''s Guide to the First Documents That Prevent Ninety Percent of Later Problems
Ninety percent of the legal issues that surface during Series A or later diligence are things that should have been done correctly in the first year. Founders discover them at exactly the wrong moment — during a diligence process, with a term sheet in hand and 30 days to close. The fixes are usually expensive, sometimes deal-killing.
This guide covers the specific documents and filings that need to be in place from the start, and the four founder-side filings that are most commonly missed.
The default choice for a venture-backed startup is a Delaware C-corporation. Not Delaware LLC. Not California C-corp. Not S-corp. Delaware C-corp.
Every VC firm''s standard documents are built for Delaware C-corps.
Delaware corporate law is the most developed and predictable in the country.
The Court of Chancery handles corporate disputes with expert judges and no juries.
Every acquiring company''s legal team is fluent in Delaware C-corp mechanics.
Multi-state operating flexibility with a single corporate structure.
The exceptions are narrow: if the company will never raise institutional capital and prioritizes tax pass-through, an LLC might be right. In every venture-scale scenario, Delaware C-corp is the answer.
Six documents produced at incorporation. All should be executed and stored properly.
1. Certificate of Incorporation. Filed with Delaware. Sets authorized shares, par value, and initial capital structure. 2. Bylaws. Internal governance rules — how the board is elected, meeting requirements, officer roles. 3. Board Consent (Initial). The first board resolution — adopts bylaws, elects officers, authorizes stock issuance. 4. Founder Stock Purchase Agreements. One per founder. Governs founder stock purchase, vesting, transfer restrictions. 5. Common Stock Certificates. Physical or electronic evidence of founder stock ownership. 6. Cap Table. Working document tracking all equity. Kept in Carta, Pulley, or equivalent from day one.
Use a reputable startup law firm (Cooley, Wilson Sonsini, Gunderson, Fenwick, Orrick, and a dozen boutiques) or one of the reputable startup formation services (Clerky, Stripe Atlas). Do not use a general-purpose law firm without startup experience — the small errors compound.
Founders should be issued restricted common stock at incorporation with a standard 4-year vest, 1-year cliff, monthly thereafter.
1. Purchase the stock at par value ($0.0001/share is standard). Not granted, not gifted — purchased with actual dollars. A founder buying 8M shares at $0.0001 pays $800. This purchase is what makes the 83(b) election viable and locks in the low-basis, capital-gains-treatment outcome.
2. File the 83(b) election within 30 days. This is the single most important filing in a founder''s life. See the next section.
Vesting exceptions: some founders push for "no vesting" on founder stock. Never. Vesting protects the company against a co-founder leaving in month 6 with all the equity. Any future investor will require vesting anyway; better to have it in place from the start.
Acceleration: standard is single-trigger acceleration on change of control for founder-CEOs and double-trigger for other C-level roles. Meaning: if the company is acquired, the CEO''s remaining unvested stock accelerates fully; other executives accelerate only if terminated post-acquisition.
What it does: an 83(b) election tells the IRS that you want to be taxed on the value of your founder stock now (at incorporation, when it''s worth par value — practically zero), rather than as it vests (when it will be worth much more, and each vesting event triggers ordinary income tax).
Without an 83(b): as the stock vests, every vesting event is a taxable event at the fair market value at that moment. Vesting into a $1B company means a huge ordinary income tax bill without any liquidity.
With an 83(b): the founder pays ordinary income tax now on the tiny amount (par value × shares — pennies to a few hundred dollars), and all future appreciation is treated as long-term capital gains, taxed only at sale.
The deadline: 30 days from the date of stock purchase. Not from incorporation. Not from close of Series A. 30 days from the founder buying the stock.
How to file: signed election form mailed to the IRS office where you file your personal taxes, via certified mail with return receipt. Keep proof of mailing. File a copy with the company. Attach a copy to the following year''s personal tax return.
The consequence of missing this: irreversible. You cannot fix it after day 30. The founder pays ordinary income tax on the full appreciation as it vests, for the entire life of the company. This has cost founders tens of millions of dollars.
Every person who contributes IP to the company — founders, employees, contractors, advisors — must sign an IP assignment agreement transferring their contributed IP to the company.
1. PIIA (Proprietary Information and Invention Assignment) for employees and interns. Signed as part of the offer letter. Assigns all work-related IP to the company. See the intern PIIA guide for details. 2. Consultant IP Assignment. Signed by every contractor who does technical or creative work. Non-negotiable — do not pay a contractor invoice without one on file. 3. Founder IP Assignment. Signed by each founder at incorporation. Assigns any pre-formation IP that the founder is contributing to the company.
The diligence trap: at Series A or acquisition, the investor''s lawyers will audit every employee''s and contractor''s IP file. Any gap — a contractor who did meaningful work without a signed IP assignment — can require a retroactive fix. Retroactive fixes require locating the contractor (sometimes years later) and getting them to sign. Some refuse. Some are unreachable. Some negotiate. All create diligence delays.
Rule: no work begins until the IP assignment is signed. No exceptions. Enforce this from day one.
Beyond the 83(b), four filings that are commonly missed in year one.
The company''s tax ID. Obtained free from the IRS website in 15 minutes. Required to open a bank account, file taxes, hire employees.
Delaware charges every incorporated entity an annual franchise tax. Due March 1 each year. The default calculation method (Authorized Shares) can produce absurd bills for startups with lots of authorized shares — sometimes $75,000 for a company with $0 revenue. The alternative Assumed Par Value Capital method almost always produces a much lower bill ($400–$1,000 for early-stage startups). Every startup should file under the Assumed Par Value method.
If the company operates in a state other than Delaware (has employees there, an office there, or does business there), it must file as a foreign corporation in that state. California is the most common example. Missing this filing can result in fines, back-taxes, and inability to enforce contracts in that state''s courts.
Depending on the location, most cities require a business license. San Francisco charges a business registration fee; New York City has a general business tax registration; many others. Small dollars but the "unlicensed operation" flag surfaces at diligence.
After the initial setup, ongoing hygiene matters. The monthly-quarterly rhythm.
Update the cap table for any new grants, exercises, or transfers.
Review Delaware franchise tax status if approaching year-end.
Board consents for any stock grants approved between meetings. 409A valuation refresh if approaching 12-month deadline or after any material event.
Corporate insurance renewal (general liability, D&O, cyber, E&O).
Full cap table audit — reconcile Carta/Pulley to signed board consents.
1. Missing the 83(b) deadline. Career-defining tax mistake. Never miss this. 2. Starting operations before incorporation. Any IP created before the entity exists must be assigned to the entity later, which requires the creator''s cooperation. Incorporate first, work second. 3. Contractors working without signed IP assignments. Diligence trap that surfaces years later. 4. Franchise tax filed under Authorized Shares method. Can produce $50k+ bills unnecessarily. Always file under Assumed Par Value. 5. Skipping state qualifications. Silent for years, surfaces as a diligence issue and sometimes as a lawsuit. 6. Board minutes not kept up to date. Every stock grant, every material decision requires a board consent. Missing consents get discovered at Series A and require weeks of "cleanup."
The first year of legal setup is not a compliance chore. It''s the foundation that either survives every future diligence event or requires expensive retroactive fixes at the worst possible moments.
Delaware C-corp. Founder stock purchased at par with signed vesting agreements. 83(b) filed within 30 days. IP assignments before any work begins. EIN, franchise tax under Assumed Par Value, state qualifications, business licenses. Monthly cap table updates, quarterly board consents, annual filings.
The founders who invest a few thousand dollars and one focused week in the setup save themselves ten to a hundred times that at every future round. The founders who cut corners discover the corners were load-bearing at exactly the wrong moment.
