10 Legal Mistakes Startups Make When Raising Seed or Series A Funding

Raising seed or Series A funding is a pivotal moment for any startup. It’s the point where your vision begins, 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, and offer practical solutions to ensure your company stays on track during its most critical growth phase.

1. Wrong Entity Type

Companies looking to raise venture capital should be organized as a C-Corporation for mainly two reasons: qualified small business stock (“QSBS”) and issuing equity. QSBS allows eligible shareholders to exclude from federal capital gains tax the greater of $10MM and 10x basis. However, one of the requirements is that the company has to be a C-Corp. Also, issuing equity to employees, advisors, investors and contractors is relatively easy with a C-Corp. With a LLC or partnership, every person who receives equity is considered by the IRS to be a “partner” and, cannot be on payroll, must pay estimated self-employment taxes and file a K-1*.     

Common Errors:

• Incorporated as S-Corporation
• Organized as LLC

Best Practices:

• Form a C-Corporation either in Delaware or the state where the business will operate

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. Mistakes are common, particularly when founders are managing the cap table using Excel or Google Sheets.

Common Errors:

• Inaccurate or outdated equity tracking
• Missing convertible note or SAFE conversions
• Overlooking vesting schedules

Best Practices:

• Use third party cap table management software like Carta, Globalshares, Pulley, or Ledgy

3. No 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.

Common Errors:

• 3^rd party vendors, such as developers, assert ownership over IP
• Co-founders/key employees depart and claim ownership over key IP

Best Practices:

• Ensure all pre-incorporation IP is assigned to the company
• Use formal IP assignment agreements for employees, co-founders and contractors
• Conduct IP due diligence before fundraising

Get help assigning IP to your startup the right way

4. 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 Errors:

• Launching without trademark clearance
• Delaying patent applications
• Not filing trademarks in the company’s name

Best Practices:

• File trademarks and patents early
• Ensure all filings are in the company’s name
• Regularly monitor for potential infringements

5. Equity Vesting

Founders, employees and advisors leave companies. Without vesting, departing team members could walk away with a large equity stake without having contributed long-term value. This outcome can strain the cap table, create resentment among remaining team members, and deter future investors who want assurance that equity is earned over time. Vesting protects the company by aligning ownership with ongoing contribution and commitment.

Common Errors:

• No co-founders agreement
• No restricted stock awards for co-founders
• Employee/advisor equity awards lack vesting schedules

Best Practices:

• Restricted Stock Awards with reverse vesting
• Stock Options with Vesting Schedules
• Restricted Stock Units with vesting schedules

6. 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. Before finalizing any investment, VCs will conduct due diligence, which should uncover common legal issues such as unsigned agreements, missing operative documents and

Common Errors:

• Missing Operative documents such as Bylaws and Operating Agreement
• Not documenting equity awards
• Failure to document the appointment of directors or officers
• No resolutions or minutes

Best Practices:

• Create data room to house material contracts
• Engage legal counsel to “clean up” governance before fundraising

Review our startup legal structure guide for funding readiness

7. Wrong Offering Type

Startups must carefully choose the type of fundraising offering they pursue: a priced round or an unpriced round. A priced round involves setting a company valuation and issuing a fixed number of preferred shares at a determined price. In contrast, an unpriced round, typically using convertible notes or SAFEs, defers valuation until a future financing event. This decision is critical, as it not only affects the structure of the deal and the company’s cap table but also influences the types of investors who will be willing or able to participate. Choosing the wrong offering type for your stage, goals, or investor audience can limit traction and complicate future rounds.

Common Errors:

• Offering a priced round too early in the company’s lifecycle
• Seeking to raise too much capital using convertible notes or SAFEs

Best Practices:

• Network among other startups to understand what kind of offering they undertake
• Conduct industry research through platforms such as Carta, AngelList and Crunchbase

8. Accepting a Bad Term Sheet

Too many founders try to DIY legal work to save money, only to end up paying far more later to fix preventable issues.

Common Errors:

• Too high valuation
• Agreeing to full-ratchet anti-dilution
• Agreeing to off-market investor preferences, like participating preferred or 2x liquidation preference

Best Practice:

• Network among other startups to understand what kind of offering they undertake
• Conduct industry research through platforms such as Carta, AngelList and Crunchbase

9. Failure to File Form D

If a startup has raised money in the past, such as in a “Friends and Family” round, they “offered” securities. 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

Common Errors:

• Failure to file a Form D within 15 days of the offering Too high valuation
• Failure to comply with state “Blue Sky” laws

Best Practice:

• File Form D online with the SEC via the EDGAR system within 15 days of the first sale. You’ll need to apply for a CIK number and set up EDGAR credentials.
• Register with NASAA’s EFD system and submit state notice filings 

10. Failure to Retain Experienced Counsel

Startups often try to cut costs by avoiding legal fees early on, but this can lead to costly mistakes in formation, fundraising, and IP ownership. IF YOU DON’T GET YOUR FUNDRAISING RIGHT, YOUR STARTUP WILL FAIL. Experienced startup counsel can prevent issues before they arise, and know the market terms so that founders are getting a fair deal. Founders who treat legal as an afterthought often pay far more to fix problems later.

Common Errors:

• Drafting documents yourself
• Using ChatGPT or Google to create agreements

Best Practice:

• Retain counsel that is experienced in venture capital and fundraising

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.

The information provided herein is for general informational purposes only and does not constitute legal advice, nor does it create an attorney-client relationship. You should consult a qualified attorney for advice regarding your specific legal situation or compliance obligations.

*LLCs are elect to be taxed in different ways. For multi-member LLCs that are taxed as partnerships, these are common issues.