legal-compliance

name	legal-compliance
description	Navigate startup legal fundamentals—entity selection, founder agreements, vesting schedules, ESOP, SAFEs, and cap table management. The goal isn't to replace lawyers but to help founders know what questions to ask. Use when forming a company, structuring equity, raising on SAFEs, or setting up option pools.

Legal & Compliance

Core Principle

Legal isn't a cost center — it's risk management. The goal isn't to replace lawyers. It's to walk into the room knowing exactly what questions to ask and what answers to expect.

Entity Selection

Common Structures

Entity Type	Best For	Tax Treatment	Fundraising
Delaware C-Corp	VC-backed startups	Corporate tax (double taxation)	Standard — VCs require it
LLC	Bootstrapped, consulting, real estate	Pass-through (flexible)	Harder to raise VC
S-Corp	Small businesses with profits	Pass-through (salary + distributions)	Not suitable for VC
B-Corp	Mission-driven companies	Same as C-Corp	Compatible with impact investors

Why Delaware C-Corp for VC-Track Startups

1. VCs expect it — their legal docs are built for Delaware C-Corps
2. Established case law — predictable legal outcomes
3. Stock classes — can issue preferred shares for investors
4. 83(b) election compatible — founders can minimize tax on vesting shares
5. Franchise tax is manageable — don't let it surprise you though

Questions to Ask Your Lawyer

- "Should we incorporate in Delaware even though we operate in [state]?"
- "Do we need to register as a foreign corporation in our operating state?"
- "What's the cost difference between C-Corp and LLC for our situation?"
- "When does entity choice actually matter vs. when can we convert later?"

Founder Agreements

Critical Terms

Term	What It Covers	Why It Matters
Equity split	Who owns what percentage	Must be explicit from day 1
Vesting schedule	How equity is earned over time	Protects against early departures
IP assignment	Who owns what's built	Company must own the IP, not founders
Roles & responsibilities	Who does what	Prevents confusion and conflict
Decision-making	How decisions/deadlocks are resolved	Voting rights, tie-breakers
Departure terms	What happens when someone leaves	Buyback rights, non-compete

Vesting Schedules

Standard: 4-year vest with 1-year cliff

Timeline:
  Month 0:   0% vested (clock starts)
  Month 12:  25% vested (cliff — first chunk)
  Month 13+: ~2.08% per month (monthly vesting)
  Month 48:  100% vested

Example: Founder with 40% equity
  At cliff (12 months): 10% vested
  At month 24: 20% vested
  At month 48: 40% fully vested

83(b) Election — Don't Forget This

CRITICAL: File within 30 days of receiving restricted stock.

What it does: You pay tax on the stock's value TODAY (usually near $0)
             instead of paying tax when it vests (potentially much higher).

Miss the deadline? You owe income tax on each vesting event
                    at the fair market value at that time.

Action: File with IRS within 30 days. Keep proof. Tell your lawyer.

ESOP (Employee Stock Option Pool)

Standard Terms

Pool size: 10-20% of fully diluted shares (typically set pre-fundraise)
Vesting: 4-year vest, 1-year cliff (same as founders)
Strike price: 409A valuation (usually 25-35% of preferred share price)
Exercise window: 90 days after departure (standard but negotiate)

Option Grant Guidelines

Role Level	Equity Range (% of pool)	Notes
VP / C-level (early)	1-5%	Depends on stage and cash comp
Director	0.5-1.5%
Senior engineer	0.25-0.75%
Junior hire	0.05-0.25%

Questions Employees Should Ask

- "How many total shares outstanding?" (to calculate actual %)
- "What's the current 409A valuation / strike price?"
- "What happens to my options if the company is acquired?"
- "Is there a post-termination exercise window beyond 90 days?"
- "When is the next 409A valuation scheduled?"

SAFEs (Simple Agreement for Future Equity)

SAFE Terms Explained

Valuation Cap: Maximum valuation at which your SAFE converts to equity
  → Lower cap = better deal for investor

Discount: Percentage discount on the next round's price
  → Typical: 15-25%

Most Favored Nation (MFN): If you issue a SAFE with better terms later,
  → Earlier investors get upgraded to the better terms

Pro-rata rights: Right to invest in future rounds to maintain ownership %

SAFE vs. Convertible Note

Feature	SAFE	Convertible Note
Debt?	No	Yes (accrues interest)
Maturity date?	No	Yes (triggers repayment)
Interest?	No	Yes (typically 2-8%)
Complexity	Simple	More complex
YC standard?	Yes	No
Best for	Pre-seed, seed	Bridge rounds

Common SAFE Scenarios

Post-money SAFE at $10M cap, raising $1M:
  Investor owns: $1M / ($10M) = 10% (post-money, so dilution is clear)

Pre-money SAFE at $8M cap, raising $1M:
  Investor owns: $1M / ($8M + $1M) = 11.1% (pre-money, so math is less predictable)

YC standard: Post-money SAFEs (since 2018) — makes dilution transparent.

Cap Table Management

What to Track

Shareholder     | Shares    | Type      | % Ownership | Vesting Status
----------------|-----------|-----------|-------------|---------------
Founder A       | 4,000,000 | Common    | 40%         | 24/48 months
Founder B       | 3,000,000 | Common    | 30%         | 24/48 months
ESOP Pool       | 1,500,000 | Reserved  | 15%         | —
Seed Investor   | 1,000,000 | Preferred | 10%         | Fully vested
Angel Investor  |   500,000 | SAFE      | 5%          | Converts at Series A
----------------|-----------|-----------|-------------|
Total           | 10,000,000|           | 100%        |

Cap Table Rules

1. Keep it updated after EVERY transaction (grant, exercise, transfer)
2. Model dilution BEFORE agreeing to new rounds
3. Understand fully-diluted vs. issued-and-outstanding
4. Use software (Carta, Pulley, Captable.io) — spreadsheets break at scale
5. Your lawyer should review before every financing event

Anti-Patterns

Legal Theater	Real Legal Thinking
"We'll figure out equity later"	Founder agreement signed before writing code
Skipping 83(b) election	Filed within 30 days, proof kept
"We don't need a lawyer yet"	Lawyer for incorporation and first financing
Cap table in a spreadsheet at Series A	Carta or equivalent from seed stage
Not understanding your own SAFE terms	Can explain cap, discount, and conversion math
Equal equity split "because it's fair"	Equity reflects contribution, role, and risk

Power Move

"Walk me through the legal setup for a new startup: entity selection rationale, founder agreement terms with vesting, ESOP pool sizing, and a cap table model showing dilution through a $2M seed round on a post-money SAFE. Then list the 5 questions I should ask my lawyer before signing anything."

The agent becomes your legal prep partner — not replacing counsel but ensuring you arrive informed and ask the right questions.