Starting a business is thrilling. You’ve got the idea, the drive, and maybe even a co-founder who’s just as excited as you are. However, as tempting as it can be to jump straight into building your product or customer base, skipping over the legal and financial basics is one of the most common and costly mistakes that new entrepreneurs make.

Early choices about how you form the company, how you share ownership, and how you raise capital will shape who controls the business, how money flows, and even how an eventual exit plays out. Missteps here can mean losing control of your vision, locking yourself into investor terms you don’t fully understand, or facing disputes with the very people you started the company with.

Here are six concepts every founder needs to understand to set the stage for long-term success.

1. Choosing the Right Entity for Your Startup

The first foundational decision you’ll need to make is how to legally structure your company.

Your choice of entity will impact how much personal risk you take on, how you get taxed, and how attractive your company looks to investors.

The main options are:

• LLC: This type of entity protects personal assets and allows flexible management. Profits are usually taxed once as ‘pass-through’ income. LLCs are popular with small businesses but less favored by professional investors.
• C-Corp: The standard for venture-backed startups. They face ‘double taxation,’ but can issue multiple classes of stock, grant stock options, and qualify for valuable tax breaks like the Qualified Small Business Stock (QSBS) exclusion.
• S-Corp: This type of corporation also avoids double taxation but is limited to no more than 100 US shareholders and only one class of stock (provided this ‘one-class’ rule does permit some differences among shares, such as varying voting rights). These restrictions make it a poor choice for raising outside capital.

David Lopez-Kurtz of Croke Fairchild Duarte & Beres LLC explains that the decision will depend on your expected life cycle of the company, where you are in your evolution, the nature of the company, what you’re looking to do, and from whom you expect to be raising capital.

If you’re an early-stage technology company looking to raise capital from VCs, forming a corporation is preferable. VCs are typically precluded from working with tax partnerships, which are LLCs with more than one member by default.

On the other hand, if you are starting a business with business partners and each contributes cash and other resources, it may make sense from a tax efficiency perspective to form an LLC and be a tax partnership.

2. Governance and Founder Agreements

Clear governance is crucial for startups. Early on, it may seem unnecessary to put in place bylaws, shareholder agreements, or operating agreements between co-founders. However, disagreements will inevitably arise, and when they do, having these documents in place prevents deadlock.

Buy-sell provisions, rules for replacing directors, and voting rights ensure that one founder can’t stall critical decisions or walk away with disproportionate control. Without them, disputes can drag startups into costly litigation or even dissolution.

Strong governance is also a signal to investors. Professional investors will walk away quickly if they sense the founders lack a clear framework for decision-making.

Lastly, intellectual property assignments in favor of your entity (so that it owns the needed rights) are highly recommended for the financing stage.

3. Equity Financing and Dilution

Failing to understand how equity and dilution interact is one of the fastest ways for founders to lose their grip on the companies they built.

Equity funding can fuel growth, but it comes at a cost: you’re giving up ownership and often some control. Common stock usually offers voting rights but sits at the back of the line for payouts. Preferred stock typically comes with special rights like liquidation preferences and dividend priorities, meaning investors get paid first in an exit.

The other side of the equation is dilution. Your percentage shrinks with every new round of financing, which may include angels, VCs, and even employee stock options. Ideally, the pie grows faster than your slice shrinks, but in addition to the numbers, later investors will often demand board seats or veto powers that reduce founders’ control.

Michael Weis of Weis Burney LLC warns that as startups progress from Series A through later rounds, their equity structures get “really complicated, really fast.” Each new financing adds layers of rights and obligations, and the once-simple ownership split between founders and early investors often turns into a complex equity stack that needs ongoing revisions.

This complexity often shows up first in term sheets, which set the roadmap for a deal. These are documents that outline liquidation preferences, anti-dilution protections, and board seats. Though short, they can permanently shift control if founders don’t understand what they’re signing.

4. Debt, SAFEs, and Other Financing Alternatives

Equity isn’t the only way to fund a business. Debt (i.e. loans or credit) lets you keep your ownership intact but requires repayment, usually with interest. Lenders often want collateral, like company assets or IP, and sometimes even personal guarantees. If revenue falters, the pressure of repayments can put the whole business at risk.

At the other end are SAFEs (Simple Agreements for Future Equity). SAFEs are not loans, meaning you don’t pay them back. Instead, they convert into equity in a later financing round. They’re simple and quick, making them popular with early-stage investors and founders alike. The trade-off is that conversion can be significant, meaning founders may give up more equity than expected.

Robert Londin of Jaspan Schlesinger Narendran LLP reminds founders that fundraising is a long journey. Companies usually start with friends and family money, move on to angels and seed rounds, then progress through Series A, B, and C venture capital rounds before ever thinking about an IPO or larger scale exit transaction. While it may seem like a straightforward pathway, the reality is that it often takes much longer and comes with plenty of ups and downs along the way.

5. Employee Incentives and Vesting

Equity isn’t just for investors. It’s also how founders, employees, and advisors are compensated and motivated.

Giving out equity without vesting is asking for trouble. Imagine granting 10% of your company to an early engineer who leaves after just three months. Without vesting, they would keep their ownership when they leave.

Vesting is the process by which someone earns their ownership in a company over time (or upon achievement of deliverables), rather than receiving it all upfront. In startups, equity typically vests over four years with a one-year cliff, meaning no shares are earned until the first year is completed. After that, ownership builds gradually each month or quarter. This structure ensures that equity is tied to sustained commitment and contribution.

Gary Chodes of The National Law Review flags that when one founder contributes something substantial up front, such as intellectual property, it may make sense for their ownership to vest immediately, while the other founders’ shares vest over time as they contribute ongoing effort. This approach balances fairness and commitment, ensuring equity reflects the value each person actually delivers.

??Beyond founders, later-stage companies introduce stock option plans, restricted stock, and executive compensation programs. These layers create an ‘equity stack’ that gets more complex with every financing round. Investors pay close attention to how these incentive plans are structured. They want to be sure the team is motivated to stay and that too much equity isn’t being given away too quickly.

6. Valuation and Exit Planning

One of the trickiest challenges in later rounds is valuation. Every financing forces a negotiation about what the company is worth, based on models, assumptions, and future potential. Valuation experts are often brought in when cap tables and equity stacks become too complex for founders alone to navigate.

Exit planning is tied to valuation too. Whether the goal is an IPO or an acquisition, early structuring choices on entity type, investor rights, vesting, and even tax elections can all shape what the exit looks like. A poorly structured company may scare off acquirers or create tax headaches for founders and investors alike.

Startups often underestimate how early these considerations matter. It’s important to remember that exits are not a distant problem. They’re a direct consequence of the governance, financing, and ownership choices made in the first few years.

Strong Foundations Make Strong Startups

The legal and financial framework of a startup is never just background detail. Choosing the wrong entity, failing to protect IP, or misunderstanding how dilution works can ripple through every stage of growth. Investors notice these gaps immediately, and fixing them later is far more expensive and disruptive than setting them up correctly from the start.

What this all adds up to is simple: founders need to treat governance and financing as seriously as product development. Get the basics of structure, agreements, equity, and incentives right, and you’ll not only avoid costly missteps but also build credibility with investors, partners, and your own team.

To learn more about this topic, view What Every Founder Entrepreneur Must Know. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about start-ups & entrepreneurship.

This article was originally published here.

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