Formation & governance
Is structure built at formation cheaper than cleanup later?
Fractional Attorney for Technology Start Ups and Growth Stage Businesses, Charlotte Corporate Counsel ·
The short answer
Yes. Structure built at formation is cheaper than cleanup later. At formation, the founders agree, nothing depends on the documents yet, and nobody is waiting on them. In diligence, every fix needs a signature from someone whose position has changed, on an investor's deadline. At Charlotte Corporate Counsel, I build corporate governance once, at formation, so it holds up at the next round. I make the full case for building legal infrastructure at formation in my essay.
What does cleanup cost you when diligence finds it?
Cleanup never arrives on your schedule. It shows up as a diligence list after the term sheet, while your round waits to close. Every open item becomes a question from the investor's counsel, and every answer eats your time when you have the least of it.
The fees are only part of the bill. A fix that took one signature at formation now needs a co-founder who has moved on, a contractor you haven't spoken to in two years, or a fresh board consent. Each of those people can say no, or say yes slowly.
Some gaps can't be cleaned up at all. A founder's 83(b) election has to be filed with the IRS within 30 days of the stock grant. Miss that window and no later paperwork reopens it.
Here's how it plays out for two co-founders
Say two co-founders incorporate, split the shares evenly, and skip vesting to save time. A contractor builds the first version of the product on a handshake. A year later, one founder steps back. Then a seed investor's counsel asks two questions: who owns the code, and what happens to the departed founder's shares?
At formation, the fix was three documents. Founder agreements with vesting, IP assignments from both founders, and a contractor agreement that assigns the work to the company. Everyone wanted to sign them that month.
Now you're negotiating with someone who holds half the company and has no reason to give any back. You're also tracking down a contractor to sign over code they were paid for long ago. Same documents, a much harder room.
Won't paying for this now eat money I need for the product?
Only if you buy more than you need. Formation doesn't call for the most elaborate structure available. It calls for the pieces an investor's counsel will check, done once.
When we work together, you get a clear, fixed-scope proposal, so you know exactly what you're getting and what it costs before any work begins. If you're forming now, tell me what you're building, and we'll start with a short intro call, no charge and no obligation.
Five checks to run on your formation file this week
You can find most gaps in an afternoon. Run these before an investor's counsel does.
- Pull every signed document. Your certificate of incorporation, bylaws or operating agreement, founder agreements, and stock purchase agreements. Anything you can't find goes on your list.
- Confirm founder shares vest. Then confirm each 83(b) election was filed on time, and that you kept proof.
- List everyone who built something. Anyone who wrote code, made designs, or touched customer data needs a signed IP assignment and confidentiality agreement with the company.
- Match your cap table to the paper. Every share on the spreadsheet should trace to a signed agreement.
- Price the fix before anyone starts. Ask for a fixed scope and a fixed cost in writing.
Sign it while everyone still agrees, and the diligence list becomes a list you can answer in a day.
Working on something like this? Tell Charlotte about it.
Tell Charlotte about your dealRead the full argument
My essay walks through why a formation checklist alone misses what diligence reopens, and two related questions get their own short answers.
