The Founder’s First-Year Legal Handbook

Here is the whole first year in one paragraph. In the first weeks you decide what kind of company you are forming and file the papers that bring it into existence. Soon after, you and your co-founders write down who owns what and what happens if someone leaves. Then the company starts doing things: signing contracts, hiring people, building a product, choosing a name. Each of those creates a little paperwork, and the paperwork piles up in a folder that nobody looks at until the day someone important asks to see it. That day is usually a financing or an acquisition, and the state of the folder decides how that day goes.

The chapters that follow take those moments one at a time. Two ideas run through all of them, and they are worth stating once here.

The first is that almost everything in this handbook is cheap to do at the right moment and expensive to do later. A founder’s share assignment costs an hour in month one and a negotiation in year three. A board consent is a page when it is signed on time and a problem when it is reconstructed from memory. Doing things in order is most of the trick.

The second is that you do not have to do any of this alone, and you should not try to do all of it yourself. Some steps are genuinely simple. Others look simple and are not. Each chapter says which is which, and the last chapter is about how to work with a lawyer so that you get the judgment you need without paying for more than you need.

The first legal decision most founders make is made in ten minutes on a website, and it is the one they live with longest. The choice is between a limited liability company (an LLC) and a corporation, and the difference is not cosmetic. It decides how you are taxed, what outside investors will expect, how much formality you have to keep up, and, in New York, whether you owe a publication fee that surprises nearly everyone.

An LLC is the simpler structure. Its owners are called members, its rules live in a document called an operating agreement that the members write themselves, and by default its profits pass straight through to the members’ personal tax returns rather than being taxed at the company level. It has almost no required formalities. A corporation is more formal: it has shareholders, a board of directors, officers, and a set of rituals (annual meetings, written approvals, minutes) that have to be kept up. By default it pays tax on its own profits, though a corporation that qualifies and elects to be an S corporation is taxed more like a pass-through, and an LLC can elect to be taxed as a corporation. Settle the tax classification with an accountant rather than assuming the default. But it is the structure investors know, it can issue the preferred stock they want and the stock options your employees will want, and it is what venture-backed companies almost always are.

The rough rule is this. If you plan to raise money from investors in the next couple of years, form a corporation now, and form it in Delaware, whose corporate law investors know best; you then register it in New York as a company doing business here. If you are building something you will own and run, an LLC is usually the better fit. If you are not sure, an LLC is the cheaper place to wait, provided you convert before the first serious investor conversation rather than in the middle of it.

Whichever you choose, one New York rule deserves its own paragraph. A New York LLC must, within a hundred and twenty days of its articles of organization taking effect, publish a notice once a week for six weeks running in two newspapers designated by the clerk of the county where the office is, and then file proof with the state. What the newspapers charge depends on the county, and in Manhattan it is the expensive end; get a current quote before you budget for it. Skip it and the company’s authority to do business in New York is suspended until you comply, which becomes a problem at exactly the wrong moment. Corporations have no such requirement.

Falling out with a co-founder is one of the most common ways a promising company dies, and nearly every one of those breakups traces back to a conversation that never happened. Talking about what happens if it goes wrong feels like bad luck when everyone is excited. It is not. It is the kindest thing founders can do for each other, and it is far cheaper in month one than in year three.

Seven conversations cover it. Who owns how much, and why. Whether the shares are earned over time (they should be). Who does what, and who breaks ties. What the company owns, and whether each founder has actually handed it over. Where the money comes from and who can spend it. What happens when someone leaves. And how you will disagree, because you will.

Have the conversations over a long dinner and write the answers down. The documents come afterwards, and they are short: a share purchase agreement for each founder with the vesting terms, an assignment of intellectual property, and a shareholders’ agreement (or, in an LLC, the operating agreement) covering decisions and transfers. A lawyer can draft them quickly once the decisions exist. What a lawyer cannot do is make the decisions for you.

One term deserves the spotlight because it protects everyone: vesting. Vesting means founders earn their shares over time rather than owning them all on the first day. The standard is four years with a one-year cliff: nothing is earned for the first twelve months, a quarter at the one-year mark, the rest month by month after that. A founder who leaves after eight months leaves with nothing; one who leaves after two years leaves with half. It sounds like a lack of trust. It is the opposite. It protects each founder from every other founder’s change of circumstances, and investors will require it anyway. Setting it yourselves means you choose the terms.

A company is a legal fiction, and it acts through its paperwork. When the board decides something, a piece of paper records the decision. When the company issues shares, a piece of paper authorizes it. When someone is made an officer, a piece of paper gives them the title and the authority that comes with it. The collection of those pieces of paper is called the minute book, and its condition is the first thing an investor’s lawyer looks at.

For a corporation, most decisions are made by written consent: a short document stating the resolution, signed by the directors, filed with the minutes. In New York there is one rule about consents that catches nearly every founder out. The board can act in writing without a meeting only if every director signs. Not a majority. Everyone. If one director has not signed, the action has not been taken, however clearly everyone agreed on the call. Delaware, where many startups are formed, has the same unanimity rule for written consents.

Three kinds of decisions need board action rather than an informal yes: issuing shares or options, electing officers, and adopting an equity plan for employees. And three consents go missing at nearly every young company. The one electing the officers, so that the person signing as chief executive actually holds the title. The one approving each individual option grant, with the share count, the vesting schedule and the price fixed on the date the board approved it, not the date the offer letter promised it. And the catch-up consent that ratifies whatever an officer signed between meetings on the assumption that the authority was implied.

None of this is hard. It is a habit: when the company does something that matters, a consent gets drafted, everyone signs, and it goes in the folder. The chapter’s checklist is that habit written down.

In the first year a company signs more contracts than its founders expect: a non-disclosure agreement with a prospective partner, a first customer agreement, a stack of software and vendor terms, an agreement with a freelance designer, and often a lease. Most of them are signed as sent, because the other side called them standard and reading them felt slow.

Here is why they matter more than their length suggests. A term you accept once becomes a term you accept two hundred times, because it lives in a template. Your customer agreement in particular is the most repeated legal document the company will ever produce, and the version you sign in year one becomes the position you defend in year four. Getting the first few right is the highest-leverage legal work a young company can buy.

You do not need to understand every clause. You need to find five of them in any document and know what they mean. What are you giving (the scope, the exclusivity, the term)? What are you getting, and how is it calculated? Who owns what comes out of the relationship? Who is on the hook if something goes wrong, and up to how much? And how does it end? Find those five answers and you understand the deal well enough to know whether to sign it or send it to a lawyer.

Hiring the first employee changes the company’s legal life more than any other single event in the first year. Before that moment, the law mostly asks you to keep your records straight. After it, New York asks specific things of you, with specific deadlines, and it does not grade on effort.

The good news is that the list is finite, and most of it is set up once. You register as an employer. You get the insurance the state requires. You give each new hire the written notices the law prescribes. You put a short handbook in place. And you make sure that every person who makes anything for the company has signed a document handing it over.

The one decision that grows more expensive every month it is left alone is the line between employees and contractors. Calling someone a contractor does not make them one. If they work your hours, under your supervision, with your tools, on your core business, the law will likely treat them as an employee whatever the agreement says, and the exposure (unpaid taxes, benefits, penalties) accrues per person per year. Year one is when it is cheap to look at.

New York also has a law that founders hiring freelancers rarely know about. When you hire an independent contractor for covered work worth eight hundred dollars or more, on its own or added to every contract between the two of you in the immediately preceding hundred and twenty days, the law requires a written contract with specific contents, a copy for the freelancer, payment by the agreed date or within thirty days of the work being done, and a copy kept for six years. It applies to the graphic designer you found online exactly as much as to a consultant. Several trades are carved out: sales representatives, licensed medical professionals, construction contractors, and lawyers doing legal work under the contract, but only lawyers in good standing with a U.S. bar who are not under a court order suspending or restricting their practice. Check the list before deciding a hire is covered or is not.

By the end of the first year the company owns things that did not exist at the start: a name people recognize, a product, a body of code or designs or content, a website with users. Each of these is an asset, and each can be lost or clouded by something small left undone in the first months.

Start with the name. A surprising number of companies build a brand for a year and then discover that someone else registered a similar name for a similar business first, and now has the right to make them change it. A trademark clearance search before you commit to a name costs little and takes days. A rebrand after launch costs everything the brand was worth. Once the name is clear, filing a federal trademark application early puts your date ahead of anyone who comes later; the registration itself takes a year or more to arrive, which is one more reason to start early.

Then the work. The chapters on the founders’ paper and on your first people covered the assignments that make the company the owner of what its founders, employees and contractors create. Two more things belong here. If your product uses open-source software, someone should know which licenses are involved, because a few of them carry conditions that can matter to an acquirer. And if the company owns the design files, the code repository, the domain and the social accounts, make sure it is actually the company that holds the account, not a founder’s personal login.

Finally, the promises the company makes to the public. A website that collects anything from users (an email address, an account, analytics) needs a privacy policy that describes what the company actually does with the data, and terms of use that set the rules. These are not boilerplate. A privacy policy written at launch that no longer describes the product is a finding in nearly every review, and depending on who your users are and where they live, privacy laws from California to Europe may apply to a company in New York.

At some point in the first year many companies take in outside money for the first time: from friends and family, from an angel, sometimes from a fund. The instruments are simpler than they sound, and the legal rules around them are stricter than founders expect.

The two most common early instruments are the SAFE and the convertible note. A SAFE (the letters stand for simple agreement for future equity) is a short document in which an investor gives the company money now in exchange for shares later, at the company’s next priced round, usually at a discount or subject to a cap on the valuation. It is not a loan; there is no interest and no repayment date. A convertible note is similar but is technically debt: it carries interest and a maturity date, and converts into shares at the next round. Both let you raise without settling on a valuation today. The terms that matter are the valuation cap, the discount, and what happens if there is no next round.

Selling shares (or SAFEs, or notes) is selling securities, and securities law applies to a two-person company exactly as it applies to a public one. The good news is that private companies almost always sell under an exemption from full registration. Which exemption you are using has to be decided before you offer anything, because each one sets its own rules. The common private route lets you sell to accredited investors (people who meet income or net-worth thresholds) and a limited number of others, and it forbids advertising the offering publicly. A different route does permit public advertising, at the price of having to verify that every buyer really is accredited. Either way, a notice goes to the federal regulator within fifteen days of the first sale, and New York has its own notice requirement that depends on the exemption you picked, so check the Attorney General’s current process rather than assuming one filing fits. Miss a notice and the money is still yours, but the problem follows the company into every later financing.

The other thing the first money does is trigger the first real look at your folder. Even a friendly angel will ask for the formation documents, the founders’ agreements, the cap table and the contracts. This is the moment the habits in the earlier chapters pay for themselves, and the checklist below is the folder an investor expects to see.

Most of what this handbook describes happens once. A handful of things come round every year, and they are the things that get missed, because nobody wrote them down and the person who knew has moved on. Here they are, stated as rules rather than dates, because the dates move and depend on when your company was formed and when its year ends.

Put each of these in the shared calendar with a name next to it. Reviewing the list takes five minutes at the start of each quarter, and it is the difference between a company that is always ready to be looked at and one that hopes nobody looks.

Founders tend to make one of two mistakes about lawyers in the first year. Some call for everything and spend money they did not need to spend. More common, and more expensive in the end, are the ones who call for nothing, because each individual question seemed too small to be worth the cost of asking, until the questions had compounded into a problem that was not small at all.

Here is a better rule. Some things in this handbook you can do yourself: the folder, the calendar, the bank account, the tax number, reading a vendor contract for its renewal clause. Some things look simple and are not: the founders’ agreements, the first customer template, the lease, anything with a personal guarantee, the first financing, a departure that is not entirely friendly. Those are the moments a lawyer should be in the room, and they are the moments when good advice is cheapest relative to what it prevents.

The way you engage a lawyer matters as much as when. For a young company there are broadly two arrangements. You can call a lawyer when something comes up and pay by the hour, which works well for a discrete project and badly for a stream of small questions, because the first hour of every call is spent explaining who you are. Or you can put a lawyer on a monthly plan as your general counsel: an outside lawyer who learns the business once, stays, and answers the small questions as they come, for a fixed monthly fee covering a set number of hours. Plans of this kind typically start at a few hours a month and grow with the company. The right time for one is usually earlier than founders expect: when legal questions are arriving more than once a month, when contracts are being signed unread because review feels slow, or when a financing or a big customer is on the horizon.

A word about the free alternative. A chatbot is a very good way to learn the vocabulary of a problem before you call anyone, so that the call is shorter and cheaper. It is not your lawyer. It does not know New York, it does not know what you did not tell it, nothing you type into it is confidential or privileged, and nobody is accountable when it is wrong. Use it to prepare your questions. Then ask a person who is responsible for the answer.