Legal and Financial Foundations
The essential legal and financial structures every startup needs. Getting these wrong early creates compounding problems — the wrong entity structure can block fundraising, missing vesting schedules can cause cofounder disasters, and poor financial hygiene can kill a company before it even starts.
Entity Structure: C-Corp vs LLC
For startups planning to raise venture capital, the answer is almost always Delaware C-Corporation.
| Delaware C-Corp | LLC | |
|---|---|---|
| VC compatible | Yes — industry standard | No — most VCs won’t invest |
| Stock options | Can issue ISOs and NSOs | Cannot issue standard stock options |
| Multiple share classes | Yes (common, preferred, etc.) | Complex and non-standard |
| Tax | Double taxation (corporate + personal) | Pass-through (simpler for small cos) |
| Governance | Established case law (Delaware) | Varies by state |
| YC compatible | Required for YC investment | Must restructure |
When an LLC makes sense: Bootstrapped businesses, lifestyle businesses, or companies that will never raise VC.
SAFE Notes (Simple Agreement for Future Equity)
Created by Y Combinator, SAFEs are the standard instrument for pre-seed and seed fundraising:
- Not debt (no interest, no maturity date)
- Converts to equity at the next priced round
- Comes in two flavors: post-money (YC standard since 2018) and pre-money
- Key terms: valuation cap, discount rate, MFN (most favored nation)
- Simpler and cheaper than convertible notes
The 83(b) Election
One of the most time-sensitive steps in early startup life:
- When founders receive restricted stock (stock that vests over time), they can file an 83(b) election with the IRS
- Must be filed within 30 days of the stock grant — no extensions
- Allows founders to pay tax on the stock’s value at grant time (usually near zero) rather than at vesting time (potentially millions)
- Missing this deadline can cost founders hundreds of thousands in taxes
Vesting Schedules
Standard: 4-year vesting with 1-year cliff
- 1-year cliff: No equity vests until the first anniversary
- After cliff: Equity vests monthly over remaining 3 years
- Protects the company if a founder leaves early
- Without vesting, a departing cofounder retains their full share (dead equity)
See also: cofounder-dynamics
Essential Early Legal Steps
- Incorporate as a Delaware C-Corp (use Clerky or Stripe Atlas)
- Issue founder stock with vesting schedules and 83(b) elections
- Set up an equity incentive plan (stock option pool, typically 10-20%)
- IP assignment agreements — ensure all IP belongs to the company, not individuals
- Founder agreements — document roles, responsibilities, equity splits, decision-making authority
- Basic employment/contractor agreements
Financial Hygiene
- Open a business bank account immediately (separate personal and business finances)
- Track expenses from day one — even pre-revenue
- Know your burn rate and runway at all times
- “Watch your cash flow obsessively” — Sam Altman
- File taxes on time (even if revenue is zero)