Legal Setup for Startups

LLC vs C-Corp vs Delaware C-Corp

If you're raising venture capital, the entity question is already answered: Delaware C-Corp. Most US investors — and many international investors who lead US rounds — require it as a condition for writing a check. The corporate structure is familiar to their lawyers, the shareholder rights are well-established under Delaware case law, and preferred stock mechanics work cleanly within it. You can incorporate via Stripe Atlas or Clerky for $500–$1,500, which is dramatically cheaper than engaging a law firm for a bespoke incorporation.

Wyoming LLCs are a legitimate option for bootstrapped businesses: the annual fee is roughly $100, the operating agreement is simpler, and you're not locked into corporate formalities like board meetings. The limitation is capital formation — issuing equity to employees and investors through an LLC requires custom operating agreement modifications that get expensive fast. If there's any chance you'll raise institutional capital or issue options to employees, incorporate as a Delaware C-Corp from day one rather than converting later. Conversion is possible but creates legal complexity and costs $5,000–$15,000 in professional fees.

IP Assignment

Intellectual property assignment is the legal issue that kills the most funding rounds at due diligence. The problem occurs when a founder or employee writes code outside of work — on evenings or weekends — before an IP assignment agreement is signed. In some US states and most other jurisdictions, code written outside of employment hours may legally belong to the individual who wrote it, not the company. Investors discovering ambiguous IP ownership will pause the process until it's resolved, and sometimes that resolution requires compensating the individual or restructuring equity.

Every person who contributes code, design, or content to the product must sign an IP assignment agreement before they start working — not after. This includes co-founders, the first ten employees, contractors, and part-time contributors. Clerky and Stripe Atlas include standard IP assignment forms in their incorporation packages; these cover the most common scenarios. If a founder had a previous employer with a broad IP ownership clause in their employment contract, that agreement needs to be reviewed before they assign IP to the new company, because the prior employer may have a competing claim.

Standard Contracts

Four contracts cover the legal exposure of a typical early-stage startup. The Founders' Agreement addresses equity distribution, vesting schedules, decision-making authority, what happens if a founder leaves, IP ownership, and non-compete clauses. Without it, a co-founder dispute defaults to whatever equity split was agreed verbally — which no one remembers the same way six months later. The NDA protects confidential information when talking to potential hires, partners, and enterprise customers; use a mutual NDA so both parties are protected.

The Contractor Agreement covers scope, payment, IP assignment (critical — freelancers own their work by default unless assigned in writing), confidentiality, and termination conditions. Clerky and Stripe Atlas offer standardised versions that can save $3,000–$8,000 compared to having a law firm draft from scratch. The Employee Offer Letter establishes compensation, role, at-will employment status, equity grant reference, and incorporation of the IP assignment and confidentiality agreements. These four documents together cover roughly 90% of the contractual exposure a pre-Series A startup faces.

When to Hire a Startup Lawyer

Startup lawyers charge $400–$600 per hour, and most early legal needs can be handled with standardised documents from Clerky, Stripe Atlas, or Bonterms for enterprise contracts. The trigger for engaging a lawyer is when the standard form no longer fits. Four situations require it: raising a priced funding round (the term sheet negotiation and share issuance require custom work), issuing equity to employees via an ESOP (your lawyer must file an 83(b) election correctly within 30 days), signing enterprise contracts exceeding $50,000 (liability, indemnification, and SLA clauses need legal review), and international expansion (each new jurisdiction brings employment law and data privacy obligations).

Finding the right startup lawyer matters as much as deciding when to hire one. The best startup lawyers have closed dozens of seed and Series A rounds — they can spot non-standard terms in a term sheet immediately and know which investor requests are routine versus which ones to push back on. Sources for referrals: YC alumni network, Clerky's lawyer directory, and other founders who have closed similar rounds. Avoid general-practice law firms for startup legal work; the hourly rate may be lower but the partner won't know what a post-money SAFE is.

Frequently Asked Questions

Can I operate as a sole proprietor before incorporating? Yes, for the earliest experiments — but not once you take on co-founders, employees, or customer payments. Sole proprietorship offers no liability protection; a legal dispute or financial obligation is your personal liability. Incorporate before you accept money from anyone who isn't yourself.

What is an 83(b) election and why does it matter? An 83(b) election is a tax filing that tells the IRS you want to be taxed on restricted stock at its current (low) value rather than at its (higher) vested value. It must be filed within 30 days of receiving restricted stock or options. Missing the deadline can create a substantial tax bill when shares vest; it's one of the most costly administrative errors early founders make.

Do I need a lawyer to issue SAFEs? No — YC's SAFE documents are standard and publicly available at ycombinator.com/documents. Many founders issue SAFEs without legal involvement for small pre-seed rounds. You should have a lawyer review the SAFE if the amount is over $250,000 or if the investor wants to negotiate terms, because non-standard clauses can have significant consequences at Series A conversion.

What is a non-compete clause and is it enforceable? A non-compete clause restricts an employee or co-founder from working for competitors for a defined period after leaving. Enforceability varies dramatically by state: California does not enforce non-competes at all, making it a major reason why talent moves freely in the Bay Area. The FTC proposed a national ban in 2024. Consult a local employment lawyer before relying on non-competes as a retention mechanism.

How do I handle GDPR compliance as an early-stage startup? If you have any users in the EU or UK, you're subject to GDPR. The minimum compliance steps are: publish a privacy policy that explains what data you collect and why, obtain explicit consent before sending marketing emails, implement a data deletion process so users can request removal of their data, and avoid storing personal data on servers outside of compliant jurisdictions. Tools like Termly and iubenda generate compliant privacy policies for $10–$30 per month.