These 5 Legal Questions You Must Be Able to Answer Before Founding & First Funding

About this episode

Legal matters are among the biggest challenges founders face. While this article cannot replace legal advice, it provides valuable insights into the most important legal aspects you need to address before founding your startup and securing your first funding round.

Founder Bastian Krautwald, who successfully raised funding from top-tier investors like 468 Capital and EQT Ventures and sold his company to Getsafe, shares his experience alongside lawyer Manuel Nikoleyczik from musfeldt. Both have navigated funding rounds and exits together, giving them precise insight into which early decisions have significant long-term consequences.

The Fundamentals: Corporate Structure and First Steps

Before you even begin the actual founding process, you need to make fundamental decisions. Choosing the right corporate structure is the first critical step. This decision affects not only your liability and tax burden but also your flexibility in future funding rounds.

Once you bring co-founders on board, things get legally complex. Share allocation should be not only fair but also forward-thinking. This is often where the first conflicts arise that can later jeopardize the entire company.

Vesting: Protection Against Early Departure

Vesting mechanisms are essential to protect your company when a co-founder leaves prematurely. These arrangements determine when and to what extent shares are "earned." Without such mechanisms, you risk having a founder walk away with a significant stake after just a few months while the remaining founders do all the work.

A typical vesting schedule spans four years with a one-year "cliff" period. This means: if someone leaves the company before the first year is complete, all shares are forfeited. After that, shares are "earned" monthly or quarterly.

Intellectual Property: Proper IP Transfer

Proper transfer of intellectual property (IP) is often underestimated but critical for company value. All developments, ideas, and inventions created in the course of working for the startup must be clearly assigned to the company.

It becomes particularly complex when founders have already worked on the idea before official incorporation or bring experience from previous roles. Clear boundaries must be established to avoid future conflicts.

The Right Time for Legal Counsel

Many founders initially shy away from legal advisory costs. This is a mistake that can become expensive later. The right time to consult a lawyer is before founding – not when problems arise.

There's even government support for basic legal advice: the BAFA Investment Zuschuss can cover part of the consulting costs. This investment pays off long-term, as later corrections are usually much more expensive.

VSOP Pool and Investor Preparation

Investors often expect certain corporate structures to be established before their entry. This particularly includes a VSOP pool (Virtual Stock Option Program) for employees. This expectation has practical reasons: investors don't want to experience dilution of their shares through employee equity programs created after their investment.

Preparing such structures also shows investors that you operate professionally as a founder and understand the key legal aspects.

Financing Forms: Equity vs. Convertible Notes

For first-time financing, there are usually two options: traditional equity financing or convertible notes. Convertible notes are particularly popular because they're faster and more cost-effective to execute. However, they also have pitfalls that are often overlooked.

With convertible notes, pay special attention to conversion terms. Poorly structured agreements can lead to unexpected problems during later conversion. The question of notarization should also be clarified early on.

Practical Recommendations

Legal structures aren't "nice-to-have" – they're business-critical. You should definitely address these points early:

• –Clear agreements between co-founders with vesting provisions
• –Clean IP transfer to the company
• –Professional service agreements for all parties involved
• –Timely legal advice, ideally before incorporation

Remember: This article doesn't replace individual legal advice. For your specific case, you should additionally consult a lawyer you trust. Investing in professional legal structures from the beginning can save you significant time, money, and stress later on.