A Founder's Guide to Legal Basics
Legal matters can be intimidating for startup founders, but ignoring them can lead to serious problems down the road. While you should always consult with a qualified startup lawyer for formal advice, understanding the basic landscape is essential. This guide provides a high-level overview of the key legal areas you need to consider.
Disclaimer: This is not legal advice. Always consult a lawyer.
1. Company Formation & Structure
Choosing the right legal structure is one of the first decisions you'll make.
- Sole Proprietorship / Partnership: Easy to set up, but they offer no liability protection, meaning your personal assets are at risk. Not suitable for startups seeking investment.
- Limited Liability Company (LLC): Offers liability protection and is relatively easy to manage. It can be a good starting point for bootstrapped businesses, but most investors prefer C-Corporations.
- C-Corporation (C-Corp): This is the standard structure for startups that plan to raise venture capital. It allows the company to issue stock to investors and employees. Most VCs will require you to be a Delaware C-Corp.
2. Founder Agreements
As detailed in its own section, this is non-negotiable. You must have a co-founder agreement that covers:
- Equity splits
- Vesting schedules (typically 4-year with a 1-year cliff)
- Roles and responsibilities
- Intellectual Property assignment
3. Intellectual Property (IP)
Your company's intellectual property is its most valuable asset. You need to protect it.
- IP Assignment: Ensure all employees and contractors sign agreements that assign any IP they create for the company to the company.
- Patents: Protect novel inventions. Consult a patent lawyer to see if your technology is patentable.
- Trademarks: Protect your brand name, logo, and slogans.
- Copyrights: Automatically protect original works like code, website content, and marketing materials.
- Trade Secrets: Protect confidential information (like algorithms or customer lists) through NDAs and internal security practices.
4. Contracts and Agreements
- Non-Disclosure Agreements (NDAs): Use these to protect confidential information when talking to potential partners or employees. However, be aware that most investors will not sign an NDA.
- Employment & Contractor Agreements: Have clear, written agreements with everyone who works for you. These should define their role, compensation, and IP assignment.
- Customer Agreements (Terms of Service & Privacy Policy): These are legally binding contracts that govern your relationship with your users. You must have a clear Privacy Policy that explains how you collect and use customer data.
5. Fundraising Legalities
When you raise money, you are selling securities, which is a highly regulated activity.
- Accredited Investors: In the US, you can generally only raise money from "accredited investors" who meet certain wealth criteria.
- Term Sheet: This document outlines the key terms of an investment. While mostly non-binding, it's a critical negotiation tool.
- Due Diligence: Investors will conduct a thorough legal review of your company (your "due diligence") before they invest. Having your legal house in order is crucial for a smooth process.
When to Hire a Lawyer
While you can use online services for basic formation, you should engage a startup lawyer for key events like:
- Structuring your co-founder agreement
- Setting up your company stock plan
- Navigating your first fundraising round
Investing in good legal advice early can save you from catastrophic and expensive mistakes later.