Legal Checklist for Startups

Legal Checklist for Startups

Get This Right From Day One

**Core Principle:** Legal = Your DBA. Technical debt haunts you. Legal debt destroys you.

Why Legal Matters

❌ Without Proper Legal

• **Equity disputes:** "I thought I owned 50%!"
• **IP issues:** Former employer claims ownership
• **Cap table chaos:** Can't raise because ownership unclear
• **Tax penalties:** Didn't file 83(b) election on time

✅ With Proper Legal

• **Clean cap table:** Everyone knows who owns what
• **Protected IP:** Company owns all code/IP
• **Investor-ready:** Can raise capital without fixing mess
• **Peace of mind:** Sleep at night

Timeline: What to Do When

Week 1      →  Incorporate (Delaware C-Corp)
Day 1       →  Vesting agreement
Before code →  IP assignment
First hire  →  Offer letter + equity docs
Fundraising →  SAFE docs (YC template)

Day 1: Core Company Formation

1. Incorporate (Delaware C-Corp)

**Why Delaware?**

• Standard for US startups
• VC-friendly legal framework
• Established case law
• Easy to admin remotely

**Why C-Corp (not LLC)?**

• Can issue stock options
• VC/accelerator requirement
• Easier to raise capital
• Clear ownership structure

**How to do it:**

• [ ] **DIY:** Stripe Atlas ($500) or Clerky ($1K-$2K)
• [ ] **Lawyer:** Startup lawyer ($2K-$5K)

**What you get:**

• [ ] Certificate of Incorporation
• [ ] Bylaws
• [ ] Initial board resolution
• [ ] Stock purchase agreements
• [ ] 83(b) election forms

**Time:** 1-2 weeks

2. Vesting Agreement (Day 1)

**What it is:** Your founder shares vest over 4 years

**Standard terms:**

• **4-year vesting:** Earn shares over 48 months
• **1-year cliff:** Nothing vests until month 12, then 25% vests
• **Monthly thereafter:** Remaining 75% vests monthly

**Why it matters:**

• **Protects cofounders:** If someone leaves early, they don't keep 50%
• **VC requirement:** Won't invest without founder vesting
• **Fair to everyone:** Rewards people who stay and build

**Example:**

You and cofounder each get 5M shares (50/50 split)
Total: 10M shares outstanding

Month 0-11: Neither of you vest anything
Month 12: You each vest 1.25M shares (25%)
Month 13-48: You each vest ~104K shares/month

If cofounder quits at month 6: They keep 0 shares
If cofounder quits at month 24: They keep 2.5M shares (50% vested)

**Critical:** Everyone on the same vesting schedule, including you.

3. IP Assignment Agreement

**What it is:** All code/IP belongs to the company, not individuals

**Must be signed:**

• [ ] **Founders:** Before writing any code
• [ ] **Employees:** Day 1 of employment
• [ ] **Contractors:** Before starting work
• [ ] **Advisors:** Before giving equity

**What it covers:**

• Code written for the company
• Inventions/ideas related to business
• Works created during employment
• Pre-existing IP you're contributing

**Common mistake:** Someone writes code before forming company, then claims ownership later.

**Fix:** Sign assignment agreement retroactively assigning all prior work.

Before Your First Hire

4. Employment Offer Letter

**Must include:**

• [ ] Title and role description
• [ ] Salary and benefits
• [ ] Start date
• [ ] At-will employment clause (can fire anytime, for any legal reason)
• [ ] Equity grant details (if applicable)
• [ ] Confidentiality and IP assignment

**Template:** Use lawyer template or Clerky

5. Equity Grant Documentation

**If giving equity:**

• [ ] **Stock options:** Grant agreement, vesting schedule
• [ ] **Stock purchase:** 83(b) election form (FILE WITHIN 30 DAYS!)
• [ ] **Restricted stock:** Vesting and repurchase agreement

**Standard early employee equity:**

• **Employee #1:** 0.5%-2%
• **Employee #2-5:** 0.25%-1%
• **Employee #6-10:** 0.1%-0.5%

**Vesting:** 4-year vest, 1-year cliff (same as founders)

Before Writing Any Code

6. Founders' Agreement

**Covers:**

• [ ] **Equity split:** Who owns what %
• [ ] **Roles & responsibilities:** Who does what
• [ ] **Decision-making:** How do you resolve disagreements?
• [ ] **Time commitment:** Full-time vs. part-time
• [ ] **Vesting terms:** Standard 4-year with 1-year cliff
• [ ] **Exit scenarios:** What if someone wants out?

**Example clauses:**

**Decision-Making:**

Major Decisions (unanimous required):
- Raising capital
- Selling company
- Hiring executives
- Changing business model

Minor Decisions (majority or founder with domain):
- Product roadmap → CTO decides
- Marketing strategy → CEO decides
- Hiring engineers → CTO decides

**Exit Scenario:**

If a founder wants to leave:
1. Unvested shares return to company
2. Company has right to buy vested shares at fair market value
3. 60-day notice required
4. Non-compete for 6 months

83(b) Election (CRITICAL!)

What It Is

Tax election to pay taxes on stock NOW (when it's worth $0) instead of later (when it's worth $$$)

Example Without 83(b)

Year 0: You buy 5M shares at $0.0001/share = $500 cost
Year 1: 25% vests, company valued at $10M
        Your 1.25M shares worth $2.5M
        IRS says you owe tax on $2.5M income (!)
        Tax bill: ~$1M
        Problem: Shares are illiquid, you don't have $1M

Example With 83(b) (Filed within 30 days)

Year 0: You buy 5M shares at $0.0001/share = $500 cost
        You file 83(b) election
        Tax on $500 income = ~$200
Year 1+: No tax bill as shares vest
        Pay capital gains tax only when you SELL

How to File

• [ ] **Day 1:** Sign stock purchase agreement
• [ ] **Within 30 days:** File 83(b) with IRS (mail + receipt)
• [ ] **Within 30 days:** Send copy to state tax authority
• [ ] **Within 30 days:** Send copy to company
• [ ] **Keep proof:** Certified mail receipt

**Miss this deadline? You're screwed. It's a one-time election.**

Before Fundraising

7. Clean Cap Table

**Cap table** = Capitalization table = who owns what

**Must be accurate:**

• [ ] All founders listed with vesting schedules
• [ ] All employee grants documented
• [ ] All advisor grants documented
• [ ] All SAFEs/convertible notes listed

**Tools:**

• **Carta:** Industry standard ($2K-$5K/year)
• **Pulley:** Cheaper alternative ($500-$2K/year)
• **Spreadsheet:** Fine for pre-seed, upgrade at seed

8. SAFE Documents (Simple Agreement for Future Equity)

**What it is:** Quick way to raise pre-seed/seed capital without setting valuation

**Standard terms:**

• **Valuation cap:** Maximum valuation for conversion (e.g., $10M)
• **Discount:** % discount on next round (e.g., 20%)
• **MFN:** Most favored nation (get best terms of any later SAFE)

**Example:**

You raise $500K on SAFE with:
- $10M valuation cap
- 20% discount

Next year, you raise Series A at $20M valuation
SAFE converts at lower of:
- $10M cap (50% discount from $20M) ← this wins
- $16M ($20M with 20% discount)

SAFE investor gets: $500K / $10M × 100 = 5% of company

**Where to get SAFE docs:**

• **Y Combinator:** Free templates (most common)
• **Lawyer:** Customized ($1K-$5K)

Customer Contracts

9. First Customer Contract

**Must include:**

• [ ] **Scope of work:** What you're delivering
• [ ] **Payment terms:** How much, when
• [ ] **Term & renewal:** Length of agreement
• [ ] **SLA (Service Level Agreement):** Uptime guarantees
• [ ] **Liability caps:** Limit your exposure
• [ ] **IP ownership:** Customer owns their data, you own platform
• [ ] **Termination clause:** How to end agreement

**Red flags in customer contracts:**

• **Unlimited liability:** "Company liable for all damages"
• **IP assignment:** "Vendor assigns all IP to customer"
• **Perpetual licenses:** "Customer can use software forever without paying"
• **Revenue sharing:** "Customer gets % of your revenue"

**When to negotiate:** Always. Don't sign their paper without lawyer review ($500-$1K).

Ongoing Compliance

10. Annual Requirements

• [ ] **Delaware franchise tax:** Due March 1 ($450 minimum)
• [ ] **Annual report:** File with Delaware by March 1
• [ ] **Federal taxes:** 1120 corporate tax return (April 15)
• [ ] **State taxes:** If doing business in other states
• [ ] **Board meetings:** Quarterly minimum, document decisions

11. Record Keeping

**What to keep:**

• [ ] Board meeting minutes
• [ ] Stock issuance records
• [ ] Employee offer letters and terminations
• [ ] IP assignments
• [ ] Contracts with customers/vendors
• [ ] Tax filings

**Where to keep:**

• **Physical:** Fireproof safe or bank safety deposit box
• **Digital:** Encrypted cloud storage (Google Drive, Dropbox, Carta)

When to Hire a Lawyer

DIY (Pre-seed, <$100K raised)

• **Incorporation:** Stripe Atlas, Clerky
• **SAFEs:** YC templates
• **Contracts:** Modify templates

Lawyer (Seed+, >$100K raised)

• **Fundraising:** $5K-$20K per round
• **Customer contracts:** $500-$1K per review
• **Employment issues:** $2K-$5K
• **IP disputes:** $10K-$50K+

How to Find Startup Lawyer

• [ ] Ask accelerator (YC, a16z, Techstars)
• [ ] Ask other founders
• [ ] Wilson Sonsini, Cooley, Gunderson Dettmer (top startup firms)
• [ ] Look for "deferred fees" (pay when you raise)

**Budget:** $10K-$20K for year 1 (with deferral)

Common Legal Mistakes

Mistake #1: Splitting Equity 50/50 Without Vesting

**Problem:** Cofounder leaves month 2, keeps 50%

**Fix:** Everyone vests, including you

Mistake #2: Not Filing 83(b) Election

**Problem:** $1M tax bill when shares vest

**Fix:** File within 30 days, no exceptions

Mistake #3: Verbal Agreements

**Problem:** "I thought we agreed I'd get 10%!"

**Fix:** Everything in writing, signed by everyone

Mistake #4: Founder as Employee Instead of Officer

**Problem:** Can't make decisions, need board approval for everything

**Fix:** Founders are officers (CEO, CTO), not employees

Mistake #5: Giving Equity Without Vesting

**Problem:** Advisor gets 1% for one intro, does nothing else

**Fix:** Everyone vests (standard: 2-year vest for advisors)

Legal Checklist Summary

Week 1

• [ ] Incorporate (Delaware C-Corp)
• [ ] Sign founders' vesting agreement
• [ ] File 83(b) election (within 30 days!)
• [ ] Sign IP assignment agreement
• [ ] Open bank account

Before First Hire

• [ ] Offer letter template ready
• [ ] Employee stock option plan approved
• [ ] IP assignment agreement template

Before Fundraising

• [ ] Cap table accurate and up-to-date
• [ ] SAFE documents ready
• [ ] Board meeting minutes documented

Ongoing

• [ ] Quarterly board meetings
• [ ] Annual Delaware franchise tax (March 1)
• [ ] Federal taxes (April 15)
• [ ] All equity grants documented

Resources

• [https://www.law.upenn.edu/clinic/entrepreneurship/startupkit/](https://www.law.upenn.edu/clinic/entrepreneurship/startupkit/)
• **Carta:** Cap table management (free until you raise)
• **Cooley GO:** Free legal resources for startups

**Download all 12 templates:** [sanscourier.ai/qconsf-2025](http://sanscourier.ai/qconsf-2025)

*From the QCon SF 2025 talk: "From Staff Platform Engineer to a16z Founder: What I Wish I'd Known" by Gonzalo (Glo) Maldonado*