.svg)
Most startup legal problems are preventable. The pattern is always the same: a founder assumes the legal can wait, builds for months or years without addressing it, and then discovers during due diligence or a transaction that the cleanup costs 10x what prevention would have.
What costs $500 to prevent often costs $5,000 to fix later and $50,000 to clean up before an acquisition.
This post covers the 13 most common legal mistakes we see at Fellow, why they happen, and how to avoid them.
1. Missing or late 83(b) elections
Founders receive restricted stock at incorporation and don't file the 83(b) election within 30 days. The consequence: taxes on phantom gains at ordinary income rates as shares vest, potentially resulting in six- or seven-figure tax bills with no cash to pay them.
There is no fix for a missed 83(b). The deadline is absolute.
Prevention: File the 83(b) within the first week of receiving restricted stock. Mail via certified mail. Keep the receipt permanently.
2. No IP assignment agreements before work starts
Founders, employees, or contractors begin work without signing a Proprietary Information and Inventions Assignment Agreement (PIIA). Under US copyright law, creators own their work by default. Without a signed assignment, the company may not own its core intellectual property.
This surfaces during due diligence and can delay or kill deals. Retroactive assignments are expensive and require cooperation from people who may have already left.
Prevention: Get PIIAs signed before the first day of work. No exceptions, including for co-founders.
3. Granting options without a 409A valuation
A company grants stock options without a valid 409A valuation, or grants when the existing valuation is stale. Employees who receive discounted options face income tax plus a 20% penalty tax on the spread each year the options are outstanding.
Prevention: Get a 409A before your first option grant. Update after material events like financings or term sheets.
4. Inconsistent cap table records
Founders track equity in spreadsheets, make changes without proper documentation, or let the cap table fall out of sync with legal documents. This creates expensive diligence problems and delays in closings.
Prevention: Use a proper cap table platform (Carta, Pulley). Document every equity transaction.
5. Securities law violations
Issuing securities without proper compliance: wrong exemption, no filings, general solicitation. Investors can sue for a full refund plus interest. Personal liability for founders and directors is possible.
Prevention: Consult counsel before accepting any investment. File Form D and state notices. Avoid public fundraising communications.
6. Misclassifying workers
Treating workers as independent contractors when they should be employees. The consequences include back taxes, penalties, overtime and benefits claims, and class action lawsuits.
Prevention: Understand the ABC test and common law factors. When in doubt, classify as employee.
7. Founder disputes without documentation
Founders don't document equity splits, vesting, roles, or departure terms. When a co-founder leaves, there's no mechanism to recover unvested shares. The company becomes unfundable.
Prevention: Document everything in writing from day one. All founder stock should vest on a standard schedule.
8. Ignoring corporate formalities
Not holding Board meetings, no minutes, mixing personal and corporate finances. This risks piercing the corporate veil, which means personal liability for founders.
Prevention: Hold quarterly Board meetings at minimum. Keep proper minutes. Maintain separate corporate bank accounts.
9. Wrong or missing contracts
Operating on handshakes, using templates from the internet, or signing contracts without legal review. This leads to unfavorable or unenforceable terms, IP disputes, and liability exposure.
Prevention: Get legal review for material contracts. Use templates reviewed by your counsel.
10. Trademark and IP neglect
Not clearing trademarks before launch, not registering key marks, not protecting trade secrets. A forced rebrand after investment is one of the most avoidable and expensive mistakes.
Prevention: Clear important marks before public use. File trademark applications for key brands.
11. Promising equity informally
Telling employees, advisors, or contractors they'll get equity without Board approval or documentation. Oral promises may be enforceable. This creates cap table confusion and litigation risk.
Prevention: Never promise specific equity amounts until Board-approved. All grant offers should say "subject to Board approval."
12. Not incorporating when you should
Founders operate without a legal entity past the point where one is needed. They take money, sign contracts, or have contributors create IP, all in their personal names.
The trigger events: someone wants to give you money, you're signing contracts, non-founder contributors start creating IP, or co-founders need to formalize equity.
Prevention: Incorporate before any of these triggers become real. Delaware C-Corp is standard for startups planning to raise from US investors.
13. Waiting too long to get help
Founders try to do everything themselves or wait until there's a crisis to engage counsel. Small mistakes compound into big problems. Cleanup costs 10x what prevention would have cost.
Prevention: Engage counsel early. Ask questions before acting.
The bottom line
Every mistake on this list is preventable. The cost of prevention is almost always a fraction of the cost of cleanup. The founders who avoid these problems aren't luckier. They just address the legal fundamentals early.
If you're not sure where your company stands on any of these issues, we can do a quick review and tell you exactly what needs attention. Reach out to us at Fellow.
