Top 10 Startup Terms Every Founder Should Know (Legally Speaking)
Launching a startup involves more than innovation and market fit; it requires a strong grasp of foundational legal terms that can shape your company's future. Founders who understand key legal concepts are better equipped to protect their interests, avoid common pitfalls, and make informed decisions. This article outlines the top 10 legal terms every startup founder should know to navigate the early stages of building a business.
1. Incorporation
Incorporation refers to the legal process of forming a business entity—typically a corporation or a limited liability company (LLC). Incorporating separates personal assets from business liabilities, provides tax advantages, and establishes credibility with investors. Founders should consult with legal counsel to determine the best jurisdiction and structure for their startup.
2. Cap Table (Capitalization Table)
A cap table is a spreadsheet or tool that outlines the ownership structure of a startup. It lists equity holders, including founders, investors, and employees, along with their respective shares, options, and convertible securities. Understanding your cap table is critical when raising venture capital or issuing employee equity.
3. Vesting Schedule
A vesting schedule dictates when founders and employees gain full ownership of their equity. Standard startup vesting schedules include a four-year period with a one-year cliff, ensuring that equity is earned over time. Vesting aligns incentives and protects the company from early departures.
4. Convertible Note
A convertible note is a form of short-term debt that converts into equity during a future financing round, often at a discount or with a valuation cap. This is a common tool for seed-stage startups to raise funds before setting a valuation. Founders should understand the implications of dilution and investor rights tied to notes.
5. SAFE (Simple Agreement for Future Equity)
SAFEs are alternative investment instruments to convertible notes. Developed by Y Combinator, SAFEs are designed to convert into equity under specific conditions without accruing interest or having a maturity date. Though founder-friendly, they still require careful negotiation and legal review.
6. Term Sheet
A term sheet is a non-binding document that outlines the key terms of an investment agreement. It includes details such as valuation, investment amount, equity stake, board rights, liquidation preferences, and anti-dilution provisions. Founders must review term sheets with experienced legal advisors to avoid unfavorable terms.
7. Intellectual Property (IP) Assignment
Startups often rely heavily on intellectual property. An IP assignment agreement ensures that any inventions, code, designs, or content created by founders or contractors are legally owned by the company. This is essential for protecting proprietary assets and satisfying investor due diligence.
8. Founder Agreement
A founder agreement outlines each founder's roles, responsibilities, equity ownership, and exit provisions. It addresses key issues such as decision-making authority, vesting schedules, and dispute resolution mechanisms. This agreement reduces the risk of internal conflicts and provides a governance structure.
9. Due Diligence
Due diligence is the investigative process investors conduct before committing capital to a startup. This includes reviewing financial records, legal documents, IP ownership, and contracts. Being due diligence-ready demonstrates professionalism and increases investor confidence.
10. 409A Valuation
A 409A valuation is an independent appraisal of the fair market value of a startup's common stock, required for issuing stock options legally and compliantly. It protects the company from IRS penalties and is necessary when offering equity compensation to employees.
Legal Literacy Is a Competitive Advantage
Understanding foundational legal terminology is critical for every startup founder. From incorporation to investment agreements, legal fluency empowers you to make smarter decisions, negotiate more effectively, and attract investor confidence.
For expert legal counsel tailored to your startup's unique needs, contact our Miami-based attorneys at 786.461.1617 to schedule a consultation. We offer comprehensive legal solutions to help your startup succeed from inception to exit.