Why Legal Matters Early
Many founders skip legal basics to move fast, but this creates costly problems later. Getting the fundamentals right early protects you, your co-founders, and your future investors.
Choosing Your Business Structure
Sole Proprietorship
- Best for: Testing ideas, side projects
- Pros: Simple, no paperwork, pass-through taxes
- Cons: Personal liability for everything
Limited Liability Company (LLC)
- Best for: Small teams, lifestyle businesses, consulting
- Pros: Liability protection, flexible taxation, simple to set up
- Cons: Varies by state, harder to raise VC funding
C-Corporation
- Best for: Startups planning to raise venture capital
- Pros: Preferred by investors, stock options possible, unlimited shareholders
- Cons: Double taxation, more paperwork, higher costs
S-Corporation
- Best for: Profitable small businesses
- Pros: Pass-through taxation, liability protection
- Cons: Restrictions on shareholders, not ideal for raising capital
Where to Incorporate
Delaware is the most popular choice for startups because:
- Business-friendly courts and laws
- Investors and lawyers are familiar with Delaware law
- Privacy protections for owners
- No state tax on out-of-state income
Essential Legal Documents
For Co-Founders
- Founders' Agreement - Roles, equity splits, vesting, IP assignment
- Vesting Schedule - Typically 4 years with 1-year cliff
- IP Assignment - All founders assign their work to the company
For Employees/Contractors
- Employment Agreement - Terms, compensation, at-will status
- Confidentiality Agreement (NDA) - Protects your secrets
- Invention Assignment - Company owns what employees create
- Contractor Agreement - Clear scope, IP ownership, payment terms
For Customers
- Terms of Service - Rules for using your product
- Privacy Policy - How you handle user data (required by law)
- Service Level Agreement (SLA) - For B2B, uptime guarantees
Protecting Intellectual Property
Trademarks
Protect your brand name, logo, and slogans. Search USPTO before choosing a name.
Patents
Protect inventions. Expensive and slow, but valuable for defensible tech.
Copyrights
Automatically protect your code, content, and creative works.
Trade Secrets
Protect confidential business information through NDAs and security.
Common Legal Mistakes
- Handshake agreements with co-founders - Always document equity and roles
- No vesting - Founders who leave early shouldn't keep all their equity
- Using templates without understanding - Get legal review for important docs
- Ignoring contractor vs. employee rules - IRS penalties are severe
When to Hire a Lawyer
- Incorporating and issuing founder stock
- Raising investment (even from friends/family)
- Signing significant contracts
- Hiring your first employees
- Any litigation or legal threats
Action Items
- Decide on business structure (LLC vs C-Corp)
- Choose incorporation state
- Draft founders' agreement with vesting
- Create IP assignment for all founders
- Get Terms of Service and Privacy Policy templates