Formation and Equity Basics
03.02.26
Your Legal Setup Is Your Startup’s Foundation
This educational guide is for founders building venture-scale, high-growth startups — not businesses built for profitability rather than hypergrowth. Good legal decisions early on save you time, money, and heartache down the road.
Avoid hidden risks that can derail growth
The legal structures you put in place today will either propel or paralyze your next move.
Formation & Equity Basics
Delaware C-Corp: Why it's standard
· Investor-friendly and predictable under corporate law
· LLCs offer pass-through taxation and flexibility, making them ideal for businesses built for profitability rather than hypergrowth or companies not seeking outside investment — but they create friction for VC due to the pass-through taxation and their flexibility
· “You want your business to be exciting, and its structure to be “boring and standard”---this creates much less friction when you’re trying to raise a round
Founder stock: make sure it’s subject to “vesting”
· Issue common stock to your founders when the company forms — earlier means lower fair market value and tax exposure
· Stockholders must file their 83(b) election within 30 days of receiving restricted stock (stock that “vests” over time)
· Vesting and 83(b): Earn It, Lock It In
Standard vesting = 4 years, 1-year cliff
Equity is earned over time – this helps to protect the company if someone leaves early
83(b) election = file with the IRS within 30 days of receipt of the stock
The stockholder tells the IRS that they want to be taxed on their common stock today (when it's nearly worthless), not later when it's more valuable. A missed 83(b) election can trigger unexpected tax on illiquid assets.
· What if my cofounder leaves early?
If a founder leaves before fully vesting, the unvested shares typically return to the company, allowing reallocation to future hires
IP Ownership: Don't Build on Sand
Everything must be owned by the company
· Intellectual property is the company’s valuable asset
· Use Confidential Information and Invention Assignment Agreements (CIIA) with everyone---employees and contractors
· Without a signed assignment, the creator often retains rights
· Every founder, employee, contractor, or advisor must sign a CIIA. If your company doesn't own the code, brand, or product created, you have a potentially big problem that can kill deals or result in someone holding the company hostage before a large transaction.
Understanding SAFE Terms
“Simple Agreement for Future Equity” lets the company raise money quickly without doing a “priced round” (setting a valuation today that is reflected in the stock price)
· Valuation cap = max price investor pays
· The lower the cap, the more equity they get when it converts
· “Most Favored Nation” (MFN) clause = matches better terms
Early investors match terms you offer later investors
· Discount = investor bonus
Often 10-20% when converting
Always model what your cap table looks like with different scenarios to understand dilution
When to Hire a Lawyer
Don't wait for a term sheet or dispute to seek help
Legal risk compounds quietly. Fixing it later is almost always more expensive and the “clean up” will often delay closing of a transaction.
Hire counsel when:
· Issuing equity or signing SAFEs
· Before launching product
· When hiring employees or contractors
Use fixed-fee or fractional models if budget is tight
Many firms, including Buell Law, offer flexible fee schedules or fractional general counsel support. Always interview more than one law firm and make sure that you’re comfortable with both the lawyer AND the fee structure; you’re building your team and the lawyer is an essential player.