Raising seed or Series A funding is a pivotal moment for any startup. It’s the point where your vision starts gaining real momentum but it’s also when legal missteps can have serious consequences. From unfiled IP assignments to poor cap table management, many common legal mistakes startups make can derail fundraising efforts or lead to long-term governance issues.
At Faison Law Group, we help founders avoid these costly errors by providing expert legal guidance tailored to early-stage companies. In this post, we’ll walk you through the top legal pitfalls for startups, explain why SEC compliance matters, and offer practical solutions to ensure your company stays on track during its most critical growth phase.
Why SEC Compliance Matters in Early-Stage Fundraising
Before diving into specific startup legal mistakes, it’s essential to understand that why SEC compliance matters cannot be overstated. The Securities and Exchange Commission (SEC) regulates all securities offerings in the U.S., including those made by early-stage companies raising private capital.
Failing to comply with federal and state securities laws can result in:
- Rescission rights for investors
- Fines and penalties
- Loss of future fundraising eligibility
Bottom line: Ignoring SEC compliance for startups can derail your company’s future before it even gets off the ground.
1. Unfiled IP Assignments: Who Owns Your Startup’s Intellectual Property?
One of the most overlooked yet dangerous legal issues early-stage startups face is unclear ownership of intellectual property (IP). If core technology, branding, or proprietary content isn’t properly assigned to the company, it can create disputes down the line, especially during due diligence.
What Can Go Wrong:
- Founders retain personal ownership of key IP
- No written assignment agreements exist
- Co-founder IP assignment issues arise after a dispute
How to Fix It:
- Ensure all pre-incorporation IP is assigned to the company
- Use formal IP assignment agreements for employees and contractors
- Conduct IP due diligence before fundraising
2. Poor Cap Table Management: A Deal Killer
Your capitalization table (cap table) shows who owns what percentage of your company. Mismanaging this document can cause confusion, valuation disputes, and failed closings.
Common Errors Include:
- Inaccurate or outdated equity tracking
- Missing convertible note or SAFE conversions
- Overlooking vesting schedules
Best Practices:
- Maintain a clean, updated cap table using tools like Carta or EqWorks
- Work with legal counsel to model dilution scenarios
- Always reconcile cap table entries before closing a round
3. Ignoring Founder Legal Responsibilities
Many first-time founders don’t realize the founder legal responsibilities involved in running a startup, especially when raising money. This includes fiduciary duties, disclosure obligations, and ensuring proper corporate records.
Mistakes to Avoid:
- Not having a clear founder agreement
- Failing to disclose conflicts of interest
- Improper handling of corporate records
Founder Legal Checklist:
- Draft and sign a co-founder agreement
- Adopt bylaws and appoint officers formally
- Hold regular board meetings and document decisions
4. Missing or Weak Cofounder Agreements
A cofounder agreement is essential for defining roles, equity splits, exit clauses, and dispute resolution mechanisms. Skipping this step can lead to chaos if things go south.
Key Provisions to Include:
- Equity vesting schedule
- Decision-making authority
- Dispute resolution process
- Exit or buyout terms
5. Failing to Secure Trademarks or Patents
Many startups overlook the importance of protecting their brand identity or proprietary technology. This can leave them vulnerable to infringement claims or loss of competitive advantage.
Common IP Mistakes:
- Launching without trademark clearance
- Delaying patent applications
- Not filing trademarks in the company’s name
How to Protect Yourself:
- File trademarks and patents early
- Ensure all filings are in the company’s name
- Regularly monitor for potential infringements
6. Not Understanding Investor Rights and Control Issues
Founders often focus on getting a term sheet signed without realizing how certain clauses can erode their control over the business.
Legal Risks in Seed and Series A Rounds:
- Overly broad liquidation preferences
- Board seats ceded to investors too early
- Drag-along and tag-along rights that limit founder flexibility
How to Retain Control:
- Negotiate balanced board composition
- Limit investor veto rights to major decisions
- Understand how founder rights are affected by preferred stock terms
7. Skipping Proper Corporate Governance
Good corporate governance is not just a formality; it’s a necessity for maintaining credibility with investors and avoiding legal exposure.
Early-Stage Startup Legal Checklist:
- Incorporate properly (usually as a Delaware C-Corp)
- Hold initial board and shareholder meetings
- Document all major decisions in minutes
Review our startup legal structure guide for funding readiness
8. Incomplete or Inaccurate Investment Documentation
Missing or poorly drafted investment documents can delay closings or invalidate your offering entirely.
Common Errors Include:
- Missing subscription agreements
- Incomplete SAFE or convertible note templates
- Failure to update operating agreements or bylaws
Best Practices:
- Use legally reviewed templates
- Ensure all documents align with your cap table
- Have legal counsel review final documentation before closing
9. Mishandling Early-Stage Tax and Entity Structure Decisions
Choosing the wrong startup legal structure can have long-term tax implications and complicate future fundraising.
Common Mistakes:
- Choosing an LLC without considering investor preferences
- Delaying incorporation until after issuing equity
- Failing to obtain EINs or file initial tax returns
Early Legal Steps for Founders:
- Choose the right entity (typically a Delaware C-Corp for VC-backed startups)
- File necessary federal and state tax documents
- Set up payroll and contractor agreements early
10. Waiting Too Long to Engage Legal Counsel
Too many founders try to DIY legal work to save money; only to end up paying far more later to fix preventable issues.
Legal Liabilities for Founders:
- Personal liability from improper setup
- Costly corrections to IP or cap table problems
- Missed deadlines for SEC filings or blue sky compliance
How to Prevent These Risks:
- Consult a startup lawyer early; ideally before raising funds
- Review all investor documents with legal counsel
- Keep legal records organized and accessible
Final Thoughts: Avoiding Legal Errors in Startup Funding
The stakes are high when raising seed or Series A funding and so are the risks of making legal missteps. From unfiled IP assignments to poor cap table management, these top startup legal mistakes can cost you time, money, and even your company.
By following a startup legal checklist and working with experienced counsel, you can avoid unnecessary risk and build a strong foundation for growth.
Ready to Raise Legally? Let Us Help You Avoid Costly Mistakes
At Faison Law Group, we specialize in guiding startups through the legal complexities of venture capital compliance. Whether you’re preparing for your first seed round or scaling toward Series A, we ensure your legal groundwork is solid and investor-ready.
👉 Contact us today to schedule a consultation and get expert legal support tailored to your stage.