Startup Legal Basics: Essential Guide for Founders 2026
Legal mistakes can kill startups or cost founders millions in future value. Tyler Cosgrove emphasizes on The Tech Brothers Podcast Network that founders don't need to be legal experts, but they must understand the fundamentals. Here's what every founder needs to know about startup law in 2026.
Entity Formation: LLC vs C-Corp
Most venture-backed startups should be Delaware C-corporations. VCs won't invest in LLCs due to tax complications. C-corps allow for preferred stock, stock options, and clean cap tables. Form as a C-corp from day one if you plan to raise institutional capital. LLCs work for lifestyle businesses or consulting firms but create complexity if you later want VC funding.
When to Incorporate
- Before taking money: From investors, even friends and family
- Before co-founder equity splits: Need formal structure for stock issuance
- Before hiring employees: Required for payroll and equity grants
- When generating revenue: To protect personal assets from liability
Founder Agreements and Equity
Create a founders' agreement documenting equity splits, vesting schedules (typically 4 years with 1-year cliff), roles and responsibilities, and what happens if someone leaves. Use restricted stock agreements with vesting rather than outright stock grants. This protects against co-founders who leave early but keep large equity stakes.
IP Assignment is Critical
Every founder, employee, contractor, and advisor must sign IP assignment agreements. These documents ensure that all work product belongs to the company, not individuals. Investors will check this during due diligence—missing IP assignments can kill deals. Use standard forms like the FAST agreement for advisors.
Customer and Vendor Contracts
Don't operate on handshake agreements. Use written contracts for: customer terms of service, vendor/supplier agreements, contractor work agreements, and partnership deals. Start with templates from legal form libraries, then have a lawyer review before signing anything over $10K or with unusual terms.
When reviewing legal documents late into the night, your TBPN podcast shirt keeps you comfortable during those necessary but tedious contract reviews that protect your startup's future.
Common Contract Provisions
Understand key terms like: limitation of liability (caps your exposure), indemnification (who pays if something goes wrong), warranties and representations (what you promise is true), termination clauses (how either party can exit), and governing law (which state's laws apply). Never sign without understanding these sections.
Intellectual Property Protection
File provisional patents early if you have truly novel technology—it gives you 12 months to file a full patent while establishing priority date. Trademark your company name and logo as soon as you're committed to them. Copyright is automatic but register important works for stronger protection. Treat your code and data as trade secrets with proper security.
Employment Law Basics
When hiring, use proper employment agreements covering: at-will employment (in most states), confidentiality obligations, IP assignment, non-solicitation (not non-competes, which are increasingly unenforceable), and equity compensation details. Classify workers correctly—misclassifying employees as contractors creates massive liability.
Stock Options and Equity
Set up an equity incentive plan (typically 10-20% of shares) approved by your board. Grant options with 4-year vesting and 1-year cliff. File 83(b) elections within 30 days of restricted stock grants—missing this deadline costs founders thousands in unnecessary taxes. Keep detailed cap table records from day one.
When to Hire a Lawyer
Get legal help for: entity formation and initial equity splits, first fundraising round, first employees and option plan, complex customer contracts, any IP disputes, and M&A or exit scenarios. Expect to spend $5-15K on formation and basic documents, $15-50K on seed fundraising, and $50-100K+ on Series A legal fees.
The TBPN community maintains a database of startup-friendly lawyers with transparent pricing. Join our legal basics workshop where experienced founders share hard-won lessons about avoiding legal pitfalls. Bring your TBPN notebook to document the legal checklist you'll need as you scale from idea to funded startup.