Starting a company is exciting, but it also comes with a steep learning curve. As startup attorneys, we’ve seen how small missteps in the early stages of a business can turn into costly, time-consuming problems later on. If you're a first-time founder, here are some of the most common legal and operational pitfalls we see, and how to avoid them.
1. DIY Incorporation Without Following Through
Plenty of founders start off by filing incorporation documents themselves or using low-cost services like LegalZoom. While that may check the box on paper, it often leaves out crucial follow-up steps that are essential to building a legally sound business:
- Adopting bylaws
- Creating and approving board resolutions
- Appointing officers
- Issuing stock with proper documentation, including stock purchase agreements and vesting schedules
Without these foundational elements in place, your business may lack the legal infrastructure needed to secure funding, attract talent, or defend itself in court.
Pro Tip: Incorporation is just the beginning, make sure you're completing the full checklist of post-incorporation requirements.
2. Missing the 83(b) Election Deadline
If you're issuing restricted stock with vesting to founders or early employees, filing an 83(b) election with the IRS is critical. This simple one-page form must be filed within 30 days of the stock grant, and missing the deadline can lead to a massive, and completely avoidable, tax bill down the road.
Pro Tip: Set a calendar reminder the moment equity is issued, and file the 83(b) immediately.
3. Skipping the Hard Conversations with Cofounders
Many startups begin as a conversation between friends. But without clearly defined expectations, things can go south quickly. We've seen promising startups struggle or fall apart due to lack of clarity on:
- Time commitments
- Roles and responsibilities
- Equity splits and vesting
- Decision-making authority
Pro Tip: Get everything in writing early. Founder agreements and cofounder conversations may feel awkward at first, but they can save your company (and your friendship) in the long run.
4. Underestimating Startup Costs—Especially Legal
Founders are often laser-focused on building the product and landing their first customers. That’s great, but don’t forget to budget for essential operational costs, including legal. Cutting corners on legal documents today often means spending thousands more to clean things up later, especially when investors come in and want everything buttoned up yesterday.
Pro Tip: Build legal costs into your budget from day one. Many firms (like ours) offer startup-friendly packages designed to support your early-stage growth without draining your runway.
Being a founder means wearing many hats, but legal mistakes shouldn't be one of them. By taking the time to properly structure your company, communicate with your cofounders, and plan for future costs, you'll save yourself time, stress, and money in the long run.
Need help avoiding these first-time founder missteps? Kinetic Law specializes in helping startups lay strong legal foundations, so you can focus on building your vision.