Corporate governance
Which formation shortcuts get re‑opened in a later raise?
The formation shortcuts investor counsel re-opens are the ones that touch ownership: founder equity with no signed paper, code nobody assigned to the company, a missed 83(b) election, and decisions no board approved in writing. Governance built right at formation costs far less than the cleanup diligence forces later, which is the case I make in building the legal infrastructure at formation that still holds up.
Why does a year-one shortcut cost you in year three?
Because the fix now runs on someone else's clock. At formation, papering your founder shares or an IP assignment takes a signature from people who are all in the room. In diligence, the same fix can need a co-founder who left or a contractor you haven't spoken to in two years.
You know the moment: the diligence list comes back, and half of it is paperwork you never finished. None of it is hard law. It's just late, and late means legal fees, a round that waits, and questions you have to answer while the term sheet is open.
The four shortcuts investor counsel asks about
Investor counsel reads the documents under your cap table, not the spreadsheet. Picture a two-founder SaaS company that formed fast on a template. Here's where its paper usually runs out.
Founder equity on a handshake
You agreed to 50/50 in a chat, with no equity purchase agreement and no vesting. Counsel asks what each of you paid and what happens if one of you leaves. Now you're negotiating vesting with your co-founder mid-round.
Code the company never owned
Version one was built on a founder's laptop before you incorporated, or by a freelancer on a one-page statement of work. Unless an IP ownership agreement assigns it, the company may not own its own product.
A missed 83(b) election
When founder shares vest, the election has to reach the IRS within 30 days of the grant. There's no clean way to file it late, so a miss becomes a tax question investors weigh.
Decisions nobody approved
Shares issued, equity promised to an early hire, or the operating agreement changed, all without a written board or member consent. Counsel will ask for a ratification, signed by the same people, now.
Check your folder this week, before anyone sends a diligence list
Each of these takes an afternoon. Do them in order, because each one tells you who you need to reach for the next.
- Match every cap table row to signed paper. For each founder, find the equity purchase agreement and the vesting terms. A row with no document behind it is the first thing counsel flags.
- List everyone who built the product or the brand. Founders, early hires, contractors, agencies. Next to each name, find the signed assignment. Fix the gaps while those people still answer email.
- Find each founder's 83(b) copy and proof of filing. If one is missing, raise it with your tax adviser now, not after the term sheet.
- Pull the consent behind every share issuance. Where there isn't one, a ratification signed today is a short document.
Corporate governance is one of my four practice areas, from entity formation to founder agreements. Every engagement starts with a fixed-scope proposal, so you know what you're getting and what it costs before any work begins.
Working on something like this? Tell Charlotte about it.
Read the full argument
This page answers one question. My essay makes the whole case for getting the structure right before the first round.
Charlotte Lynn Luu
Attorney & Corporate Counsel, Charlotte Corporate Counsel
Charlotte is a Georgia-licensed attorney focused on contract negotiation and risk management for startups and growth-stage technology companies. She practiced at Baker Hostetler, Baker Donelson, and Kutak Rock before launching her own practice, and she writes on formation because she builds the structure founders later carry into a raise.
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