Common Legal Mistakes Startup Founders Make And How To Avoid Them


Startup founders often face a myriad of challenges, and among the most daunting are the legal aspects. The legal landscape can be complex and unfamiliar, leading to potentially impactful mistakes. These mistakes can have serious implications, but they can be avoided or mitigated with the right approach.

Key Takeaway

Startup founders should prioritize clear and documented agreements when it comes to equity, compensation, and roles to avoid potential legal disputes and implications in the future.

Ill-Defined Relationships

One of the common legal mistakes made by startup founders is the use of imprecise language when discussing equity, compensation, and roles with co-founders and early employees. These discussions often lead to oral promises and agreements without proper documentation. This lack of clarity can result in significant issues down the line, especially when it comes to equity ownership and stock options.

  • Founders might promise early employees equity in percentages without clarifying vesting terms or the type of stock to be issued.
  • Employees may refuse to sign paperwork months later, leading to potential legal disputes.

These ill-defined relationships can create a cloud on the company’s capitalization, making it challenging to resolve without resorting to litigation. The recent lawsuit involving Consensys and its founder/former CEO, Joseph Lubin, serves as a real-world example of the impact of poorly documented relationships as a company grows.

Early employee plaintiffs in the Consensys case alleged that specific equity-related promises were made through oral statements and nonlegal documents, leading to significant legal challenges as the company evolved.

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