The Legal Considerations Every Startup Should Address Before Seeking VC Funding

18 June 2025

When you’re knee-deep into building your startup, it’s easy to focus solely on the big dreams: scaling your product, landing your first major client, and, of course, securing that sweet VC funding. You’ve probably imagined the moment—pitching to investors, wowing them with your vision, and walking out with a signed term sheet in hand. Feels great to think about, doesn’t it?

But before you dive headfirst into the venture capital (VC) world, there’s something crucial you need to address: the legal stuff. Yep, I said it—the boring, nitty-gritty legal considerations. These details play a massive role in how attractive your startup looks to investors. Neglect them, and you might just scare away the very people you're hoping will write you a check. So, let’s unpack what you need to take care of before you step into that investor meeting.

Why Legal Considerations Matter

Think of your startup as a house. The legal framework? That’s your foundation. A shaky foundation (or worse, a house with no foundation) is a disaster waiting to happen. No investor wants to throw money into a setup that could crumble at any second. If your company isn’t legally sound, you’re setting yourself up for trouble during funding negotiations—or even worse, later down the line.

#1: Get Your Incorporation Right

First things first—what’s your business structure? Have you incorporated the company yet? A lot of startups start on the wrong foot by skipping this step or picking the wrong structure. If you’re serious about VC funding, you’ll want to create a C Corporation. Why? Because venture capitalists typically expect this structure—it’s clean, it's straightforward, and it allows for easier distribution of stock.

Skipping incorporation or choosing a more casual structure (like a sole proprietorship or partnership) can create headaches. Not only does it limit your ability to issue shares, but it also increases liability risks. You don’t want to mix business finances with your personal assets. Trust me, that’s a lawsuit waiting to happen.

Key Steps to Incorporate:

1. Choose Your State: Delaware is the go-to favorite for startups because of its business-friendly laws, but your home state could work too.
2. Draft Articles of Incorporation: This is like your startup’s birth certificate. It lists essential details about the business.
3. File Incorporation Documents: Do this with the Secretary of State (for Delaware or your chosen state).
4. Secure an EIN: That’s your Employer Identification Number—think of it as the business’s Social Security number.

#2: Dot Your I’s With Intellectual Property (IP)

Here’s the thing about startups: your idea and innovation are often your most valuable assets. Protecting your Intellectual Property (IP) isn’t optional—it’s mandatory. If your product, service, or technology isn’t legally protected, what’s stopping someone else from copying it? Oh, and good luck impressing investors—no one wants to back a sitting duck.

Start by identifying your IP. Do you have copyrights, trademarks, or patents? For tech-heavy startups, patents are often a big deal. If you haven’t secured these protections yet, get a lawyer to help you. Also, make sure the company owns the IP—not you as an individual or your co-founder. This is a point of confusion for many early-stage startups, and it can cause chaos during due diligence.

Pro Tip:

Did you hire contractors to help build your product or design your logo? Ensure you have work-for-hire agreements in place. Without these, the contractor technically owns the work. Yep, even if you paid for it.

#3: Founder Equity and Vesting Agreements

Let’s talk about equity—it’s the pizza pie everyone wants a slice of. The mistake startups often make is giving out shares willy-nilly before formalizing agreements. This can lead to drama and, frankly, a mess that’s hard to untangle.

Investors will ask hard questions about who owns how much of the company. If your cap table (a fancy term for your ownership summary) is confusing or riddled with mistakes, it’s a red flag. Worse still, things can get awkward if a co-founder leaves early and walks away with a chunk of equity.

This is where vesting schedules come in. With vesting, equity isn’t handed out all at once—it’s earned over time. For example, founders might have a 4-year vesting schedule with a 1-year cliff. That means no one gets their shares until they’ve stuck around for at least a year, and after that, equity is distributed gradually. This motivates everyone to stay committed.

Don’t Forget:

If you’re issuing equity, make sure to file 83(b) elections with the IRS, ideally within 30 days of granting shares. Skip this step, and you (or your co-founders) could face significant tax headaches later.

#4: Nail Down Contracts and Agreements

Contracts are your safety net. They ensure everyone involved with your company is on the same page, legally speaking. Sloppy or non-existent contracts can lead to misunderstandings, disputes, and even lawsuits.

Here are the key agreements your startup needs before seeking funding:
- Founder Agreements: Cover roles, responsibilities, and equity distribution among founders.
- Employee Offer Letters: If you’ve started hiring, outline employment terms clearly.
- NDAs (Non-Disclosure Agreements): Protect your trade secrets when discussing your ideas with outsiders or potential partners.
- Client/Vendor Agreements: Establish clear terms with anyone you’re doing business with.

Having these contracts neatly organized shows investors that you’re running a tight ship.

#5: Address Regulatory Compliance

Depending on your industry, there may be specific laws or regulations you need to comply with. Ignoring this can be a dealbreaker for investors, especially those operating in highly regulated sectors like healthcare, finance, or tech.

For instance, if you’re handling user data, you’d better make sure your company is GDPR or CCPA compliant. If you're developing a medical device, you might need FDA approvals. Investors don't have the patience for companies that cut corners here, so consult legal experts early.

#6: Prepare for Legal Due Diligence

Once you start wooing investors, they’ll likely conduct legal due diligence. This is like a background check for your company. If you’ve skipped any of the legal steps we’ve covered so far, this stage could get awkward—or worse, tank the deal altogether.

Due diligence usually involves reviewing:
- Incorporation documents
- Intellectual property filings
- Equity and cap tables
- Contracts and agreements
- Regulatory compliance

Proactively getting your legal ducks in a row ensures you don’t get caught off guard.

#7: Stay Tax-Savvy

Taxes might not be the sexiest topic, but they’re critical. If your financial books are messy or you’re behind on filings, it could spook away even the most enthusiastic investor. Work with a tax advisor who knows startups—you’ll thank yourself later.

#8: Plan for Exit Strategies

It might seem odd to think about the end before you’ve even started, but investors love an exit strategy. Are you planning to IPO? Get acquired? Merge with another company? The path you lay out will influence how you structure your legal framework. Without an exit plan, you’re flying blind.

Wrapping It Up

Sure, legal considerations aren’t the most exciting part of building a startup, but they’re a necessary evil—kind of like flossing your teeth. Neglecting these details could hurt your chances of landing VC funding or even sink your startup altogether. So, before you step into that pitch meeting, take the time to make sure your legal foundation is solid. Think of it as setting the stage for your big moment.

Remember, the stronger your legal footing, the more confident you’ll be when it’s time to sit across from investors. And hey, confidence is half the battle, right?