Do founders need IP assignment agreements?

Yes. Without signed IP assignment agreements from founders, employees, and contractors, the company may not clearly own the product it is building.

What should founders focus on in customer contracts?

Founders should review payment terms, scope, termination rights, indemnification, limitation of liability, and dispute resolution before signing.

What legal issues should be cleaned up before fundraising?

Before fundraising, founders should make sure formation records, cap table records, equity grants, IP assignments, and core employment and contractor agreements are complete and accurate.

Startup Legal Quick Reference: The Most Common Questions Answered

Q: What is the difference between an LLC and a C Corporation?

Both provide liability protection, but LLCs are usually pass-through for taxes while C Corporations are taxed at the entity level and are generally preferred for venture financing.

This page provides short, factual answers to the legal questions startup founders ask most often. Each answer links to a longer resource for founders who need more depth.

Entity Formation

What is the difference between an LLC and a C Corporation?

An LLC (Limited Liability Company) and a C Corporation are both legal entities that separate personal and business liability. Key differences:

Taxation: LLCs are "pass-through" entities by default -- profits and losses flow to members' personal tax returns. C Corporations are taxed at the corporate level, and dividends are taxed again at the individual level (double taxation) -- but C Corps can retain earnings at lower corporate tax rates.
Investment: Venture capital funds generally cannot invest in LLCs for tax reasons. If you intend to raise institutional venture capital, a Delaware C Corporation is the standard structure.
Flexibility: LLCs are more flexible for non-standard ownership arrangements and profit distributions.
Complexity: C Corporations require more formal governance (board of directors, annual meetings, stock records). LLCs are simpler to administer.

Which state should I incorporate in?

Most startups that intend to raise venture capital incorporate in Delaware, regardless of where they operate. Delaware corporate law is well-developed, investor-friendly, and widely understood by attorneys, investors, and courts. If you are not raising institutional capital and are operating a local business, forming in your home state is typically simpler and cheaper.

Do I need an operating agreement?

Yes. An operating agreement governs how your LLC is run -- ownership percentages, management authority, voting rights, profit distribution, and what happens when a member wants to leave. Without one, your state's default rules apply, which may not reflect what you actually agreed to.

Equity and Vesting

What is a standard founder vesting schedule?

The most common founder vesting schedule in U.S. startups is: four years total, with a one-year cliff. This means:

No shares vest during the first year
At the one-year mark, 25% of total shares vest at once (the "cliff")
The remaining 75% vest monthly over the following three years

Vesting protects co-founders and the company from a scenario where one founder leaves early but retains all their equity.

What is a SAFE note?

A SAFE (Simple Agreement for Future Equity) is an investment instrument that gives an investor the right to receive equity in a future priced round, without immediately issuing shares. SAFEs have no interest rate and no maturity date. Key terms include the valuation cap (the maximum valuation at which the SAFE converts) and the discount rate (a reduction on the per-share price at conversion). Full SAFE note explainer.

What is QSBS?

QSBS (Qualified Small Business Stock) is a tax benefit under Section 1202 of the Internal Revenue Code that allows eligible investors and founders to exclude up to 100% of capital gains -- up to $10 million or 10x the original investment -- from the sale of qualifying stock in a small business C Corporation held for at least five years. Eligibility requirements are specific; consult a tax attorney or CPA to confirm QSBS status.

What is a cap table?

A capitalization table (cap table) is a record of all equity ownership in a company -- who owns what, how much they paid, and what type of equity they hold. The cap table determines how exit proceeds are distributed. Founders should maintain an accurate cap table from formation and model dilution across anticipated funding rounds.

Intellectual Property

Who owns the IP my contractors create?

Under U.S. copyright law, the creator of a work owns the copyright -- not the person who paid for it, unless there is a written agreement transferring ownership. This means that contractors who write code, design logos, or create other IP for your startup may own that IP unless they have signed an IP assignment agreement. Every contractor engagement should include a written IP assignment clause.

What is the difference between a patent, trademark, and copyright?

Patent: Protects inventions (processes, machines, designs, plant varieties). Requires registration. Lasts 20 years for utility patents.
Trademark: Protects brand identifiers (names, logos, slogans) that distinguish your goods or services. Federal registration provides nationwide protection. Can be renewed indefinitely.
Copyright: Protects original creative works (writing, code, music, art). Arises automatically at creation; registration strengthens enforcement. Lasts the life of the author plus 70 years.
Trade Secret: Protects confidential business information that provides a competitive advantage. No registration required; protected as long as kept secret.

Do I need to register my trademark?

Federal trademark registration is not required to use a trademark, but it is strongly recommended. Registration provides nationwide protection, the right to use the (R) symbol, a legal presumption of validity, and the ability to record the mark with U.S. Customs. Common law trademark rights exist without registration but are geographically limited.

Contracts

What should every vendor contract include?

At minimum: the parties and their legal entities, scope of work, payment terms and amounts, intellectual property ownership, confidentiality obligations, limitation of liability, termination provisions, and governing law.

What is an NDA and when do I need one?

A non-disclosure agreement (NDA) requires one or both parties to keep certain information confidential. Use NDAs before sharing sensitive business information with potential partners, investors, employees, or contractors. Key terms include what information is covered, what is excluded, and how long the obligation lasts. Mutual NDAs bind both parties; one-way NDAs bind only one.

What is indemnification?

Indemnification is a contractual obligation by one party to compensate the other for certain losses or claims. For example, a vendor may indemnify a customer against claims arising from the vendor's IP infringing a third party's rights. Indemnification clauses can be broad or narrow; their scope significantly affects each party's financial risk under the agreement.

What is a limitation of liability clause?

A limitation of liability clause caps the maximum financial exposure either party can face under a contract. Without one, a party could theoretically owe unlimited damages for breach. A common formulation caps liability at the total fees paid in the twelve months preceding the claim.

Hiring

Should I hire employees or contractors?

This depends on the nature of the work and relationship. Workers who work regular hours, follow your direction on how to do the work, work exclusively for you, and perform work core to your business are likely employees under IRS and DOL tests -- even if you call them contractors. Misclassifying employees as contractors exposes businesses to back taxes, penalties, and lawsuits.

What documents do I need when hiring an employee?

At minimum: a written offer letter, a W-4 (for federal tax withholding), an I-9 (employment eligibility verification), and a confidentiality and IP assignment agreement. Many employers also use an offer letter that sets out compensation, benefits, at-will status, and start date.

Can I enforce a non-compete against an employee?

It depends on the state. Non-competes are generally unenforceable against employees in California, North Dakota, and Oklahoma. Many other states have enacted restrictions on non-compete use, including limitations on which employees can be subject to them and how long they can last. The FTC has also taken enforcement actions related to non-competes; consult current guidance.

Fundraising

What is a term sheet?

A term sheet is a non-binding document summarizing the key terms of a proposed investment. It covers the investment amount, pre-money valuation, type of security, key investor rights (board seats, pro rata rights, information rights), and major protective provisions. While the term sheet itself is typically non-binding, its terms form the basis for the definitive investment documents.

What is a liquidation preference?

A liquidation preference determines how exit proceeds are distributed in a sale, merger, or liquidation. Preferred stockholders (typically investors) receive their liquidation preference before common stockholders (typically founders and employees) receive anything. A 1x non-participating preference means investors get their money back first; a participating preference means investors get their money back AND share in remaining proceeds.

When do I need an attorney for fundraising?

For any priced equity round. Securities law is complex, federal and state registration requirements apply, and the documents have long-term consequences for your cap table, governance, and founder control. SAFEs and convertible notes involve less complexity but still benefit from attorney review, particularly for the first time a founder uses them.

This page is for informational purposes only and does not constitute legal advice. For document drafting, contract review, and legal tools, visit Talking Tree. For matters requiring a licensed attorney, use Find Counsel.