Business Law Essentials Every Tech Startup Founder Must Know
Attorney Advertising: Written by a non-attorney
You've built a prototype that investors love. User traction is climbing. Your co-founder just landed a meeting with a Series A firm. Then someone asks: "Wait, did we ever actually incorporate this thing?"
Legal foundations aren't the most exciting part of building a startup, but they determine whether you can raise capital, protect your IP, or even sell your company when the time comes. Get the structure wrong at Day 0, and you'll spend months untangling it later when VCs start asking hard questions about your cap table.
The good news? Building the right legal framework doesn't require a law degree. It requires understanding a few core concepts and making informed decisions early. Let's break down the business law fundamentals every tech startup founder needs to master.
Why Your Entity Structure Matters More Than You Think
Your entity structure affects everything: how much you pay in taxes, your ability to raise venture capital, your personal liability, and even whether you qualify for valuable tax benefits like QSBS.
The U.S. Small Business Administration notes that "the business structure you choose influences everything from day-to-day operations, to taxes and how much of your personal assets are at risk."[1] This isn't a decision to make casually over lunch.
Comparing Your Options
LLC
Best For: Bootstrapped startups, service businesses
Liability Protection: Strong
VC-Friendly: Limited
Tax Treatment: Pass-through
C-Corp
Best For: Venture-backed tech startups
Liability Protection: Strongest
VC-Friendly: Yes
Tax Treatment: Double taxation
S-Corp
Best For: Small businesses, consulting firms
Liability Protection: Strong
VC-Friendly: No
Tax Treatment: Pass-through
Sole Proprietorship
Best For: Solo founders testing an idea
Liability Protection: None
VC-Friendly: No
Tax Treatment: Pass-through
For most tech startups planning to raise venture capital, a Delaware C-Corporation is the standard. Delaware offers established business law, specialized courts, and a well-developed body of case law that investors understand and trust.[2] More than half of all U.S. publicly-traded companies call Delaware home for good reason.
If you're building a SaaS product, mobile app, or any technology business with plans to scale through VC funding, incorporate as a Delaware C-Corp from Day 0. You'll save yourself the headache and expense of converting later when investors require it.
The Legal Checklist for Launch
Getting your legal house in order doesn't happen in one afternoon. Here's the sequenced approach we recommend to WADR Law clients who are structuring their companies for growth:
☐ Choose and Form Your Entity
Timeline: Day 0 (before taking investment or hiring)
Action: Select your structure (likely a Delaware C-Corp) and file your certificate of incorporation. Don't skip the details on authorized shares and stock classes because these matter during fundraising.
☐ Issue Founder Stock and File 83(b) Elections
Timeline: Within 30 days of equity grant (CRITICAL DEADLINE)
Action: Divide equity among founders with appropriate vesting schedules. Then file 83(b) elections within 30 days to avoid catastrophic tax consequences later. Miss this deadline and you could owe taxes on unvested shares.
☐ Adopt Corporate Governance Documents
Timeline: Within first 90 days
Action: Draft bylaws, establish a board of directors, and create an operating agreement that outlines decision-making authority. Clean governance makes due diligence smoother when investors come calling.
☐ Protect Your Intellectual Property
Timeline: Before launching publicly
Action: File provisional patents if you have novel technology. Register trademarks for your brand name and logo. According to the USPTO, "studies show that startup companies that have IP protection are far more likely to be successful in raising funding."[3] Get assignment agreements signed by every team member to ensure the company owns the IP they create.
☐ Set Up Essential Contracts
Timeline: Before hiring employees or contractors
Action: Create employment agreements with clear IP assignment clauses. Draft contractor agreements that classify workers correctly (misclassification triggers serious tax penalties). Build customer terms of service and privacy policies that comply with data protection laws.
☐ Establish Compliance Infrastructure
Timeline: Within first 90 days
Action: Open a business bank account. Get an EIN from the IRS. Register for state taxes where you have nexus. Set up payroll if you have employees. Create systems for tracking equity grants and cap table management.
Contracts You Can't Build a Business Without
Even the most technical founders need to master basic contract literacy. These agreements form the skeleton of your startup's legal infrastructure:
Founder Agreements: Define equity splits, vesting schedules, roles, and what happens if someone leaves. A solid founder agreement prevents the "third co-founder who left after two months but still owns 33%" disaster.
Employment vs. Contractor Agreements: Classify correctly from day one. The IRS doesn't care what you call someone; they care about control, financial relationship, and type of work. Get this wrong and you face back taxes plus penalties.
Customer Agreements (SaaS/Terms of Service): Establish your relationship with users, define acceptable use, limit liability, and specify governing law. These protect you from lawsuits and set clear expectations.
NDAs and IP Assignment Agreements: Protect your trade secrets and ensure you actually own the code your team writes. Every employee and contractor should sign IP assignment agreements before writing a single line of code.
Investor Agreements (SAFEs, Convertible Notes): Understand what you're signing when you take early capital. SAFEs and convertible notes have major implications for dilution, valuation, and control.
⚠️ Common Legal Mistakes That Cost Startups Millions
Cautionary Tales from the Field
We've seen these patterns repeatedly while working with tech companies from inception through acquisition. Each mistake looks innocent at Day 0 but becomes catastrophically expensive when investors, acquirers, or the IRS come calling.
The Vesting Disaster
All founders think they'll work together forever. Many don't. That co-founder who seemed committed at launch? Six months in, they realize startup life isn't for them and leave. Without vesting, they still own 33% of your company forever. Good luck explaining that to Series A investors who want clean cap tables.
IP Assignment Failures
You don't automatically own code just because you paid someone to write it. Without signed IP assignment agreements, that contractor who built your MVP can claim ownership of your core technology. We've watched acquisition deals fall apart during due diligence when buyers discover the company doesn't actually own its own product.
Worker Misclassification
Treating employees as contractors to save on payroll taxes sounds smart until the IRS audit hits. The penalties and back taxes dwarf any savings. One client faced a six-figure bill for misclassifying just three workers over two years.
Trademark Procrastination
Your competitor files first, you rebrand. We've seen founders bootstrap for a year, build traction, then discover someone else owns their brand name. Now you're rebranding during your Series A raise, confusing customers and diluting everything you built. File trademark applications early, especially in crowded markets like fintech or consumer apps.
Template Document Traps
Generic operating agreements don't account for your specific equity structure, vesting schedules, or decision-making processes. The ambiguity sits dormant until a conflict arises, then becomes expensive litigation that could have been prevented with proper drafting up front.
When to Bring in Legal Counsel
Knowing when you need specialized legal help saves money and headaches. Handle routine filings yourself. Bring in experienced counsel for anything involving:
Equity structuring and fundraising (SAFEs, convertible notes, priced rounds)
Complex commercial contracts with enterprise customers
IP strategy for novel technology or crowded trademark spaces
M&A transactions and due diligence
Regulatory compliance in regulated industries (fintech, healthtech, etc.)
Employment disputes or potential litigation
Having worked as in-house counsel at companies like Facebook and Vox Media, we know what it's like to balance legal risk with the need to move fast. The key is knowing which corners you can cut (hint: very few in foundational legal work) and which require expert guidance.
Legal Foundations Scale With Your Company
The legal infrastructure you build at Day 0 either enables or limits your growth trajectory. Clean corporate structure, tight IP protection, and well-drafted agreements make fundraising faster, M&A smoother, and scaling less risky.
Think of business law as the operating system for your startup. You can build incredible products on top of a solid OS. But try building on a broken foundation and everything becomes harder: raising capital, hiring talent, closing enterprise deals, or eventually selling the company.
Get the legal fundamentals right early. Your future self (and your investors, and your acquirer) will thank you.
Need Legal Counsel for Your Startup?
At WADR Law, we've served as in-house counsel and general counsel at venture-backed companies like Facebook, Vox Media, and Mashable. We understand the pressure to move fast while building right, and we bring that insider perspective to every client engagement.
Whether you're incorporating at Day 0, preparing for your Series A, or navigating acquisition due diligence, we provide big law firm quality at a fraction of the cost through our remote-first model. Let's talk about how we can support your company's growth.
Frequently Asked Questions
Q: Do I really need to incorporate, or can I just start building?
A: You can build as a sole proprietorship, but you'll face personal liability for business debts and obligations. Once you have co-founders, take funding, or hire employees, incorporation becomes essential. Most venture-backed startups incorporate as Delaware C-Corps before raising their first dollar.
Q: What's the difference between filing patents, trademarks, and copyrights?
A: Patents protect inventions and novel technology (think: unique algorithms or hardware). Trademarks protect brand identifiers like names and logos. Copyrights protect creative works like code, writing, and design. Most tech startups need trademark protection immediately and should evaluate patent strategy based on their technology's novelty.
Q: Should I use a lawyer or just incorporate online?
A: For basic Delaware C-Corp formation, online services work fine. But you'll want legal counsel for equity splits, vesting schedules, fundraising documents, and any complex contracts. Investing in proper legal structure early costs a fraction of what you'll spend fixing mistakes during Series A due diligence.
Q: How do I know if someone should be an employee or contractor?
A: The IRS uses three categories: behavioral control (do you control how they work?), financial control (do you control business aspects of their job?), and relationship type (are there written contracts, benefits, permanency?). When in doubt, classify as an employee. The penalties for misclassification fall on the company, not the worker.
Q: What happens if I miss the 83(b) election deadline?
A: You'll owe income tax on the value of vesting shares as they vest, even if you can't sell them. For founders with significant equity, this can mean six-figure tax bills on paper gains. The 83(b) deadline is 30 days from grant date. There are no extensions. Miss it and you're stuck with the tax consequences.
Q: Can I change my entity structure later if I choose wrong?
A: Yes, but it's expensive and complicated. Converting from an LLC to a C-Corp triggers tax implications and requires legal work. Many startups that bootstrap as LLCs eventually convert when pursuing VC funding. It's possible, but starting with the right structure saves time and money.
References
[1] U.S. Small Business Administration. "Choose a business structure." SBA.gov, 2025. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
[2] Delaware Division of Corporations. "How to Form a New Business Entity." State of Delaware, 2025. https://corp.delaware.gov/howtoform/
[3] United States Patent and Trademark Office. "USPTO marks IP Month with expanded tools for entrepreneurs and startups." USPTO.gov, 2025. https://www.uspto.gov/about-us/news-updates/uspto-marks-ip-month-expanded-tools-entrepreneurs-and-startups