Setting Up a Venture: Formation, Capitalization, and Term Sheets

This guide provides general legal and tax information for founders, operators, and investors. It is not legal, tax, or investment advice. Consult counsel and a tax adviser about your specific facts.

Why the Setup Matters More Than the Pitch

The quickest way to identify a serious venture, in the eyes of a private-equity sponsor or institutional venture investor, is to look at the file that most founders treat as an afterthought: the corporate setup. Entity, jurisdiction, founder equity, IP assignment, vesting, option pool, and the first-money instrument tell an investor more about the operator than the deck does. They tell the investor whether the cap table will support multiple rounds without unraveling, whether the IP that will eventually be the asset is actually owned by the company, whether the founders understood their tax position when the equity was cheap, and whether the company can be diligenced in a week rather than a month. An institution that is going to write a check (or invest a fund's reputation through a syndicate) is reading the file for the absence of unforced errors.

This guide is the long version of that file. It walks through the formation, capitalization, and governance structure that institutional capital expects to see, with the citations to the actual statutes, regulations, and IRS provisions that govern each step. It is written for founders preparing to raise from venture funds, family offices, and private-equity-backed sponsors; for operators evaluating venture-studio engagements; and for advisors who want a single reference for the foundational questions that every deal eventually has to answer.

Step One: Choosing the Entity

The first decision is also the most consequential, because almost every later decision is constrained by it. For a company that intends to raise institutional venture capital, the answer is, with very few exceptions, a Delaware C-corporation. The reasons are practical, not ideological.

Why Delaware C-corporation

• Investor familiarity and predictability. Institutional investors will, in the ordinary case, decline to fund anything else without a strong reason. The diligence process for a Delaware C-corp is templated; the diligence process for a non-standard entity adds friction, cost, and risk.
• Statutory clarity under the General Corporation Law of the State of Delaware (DGCL). The DGCL is the most-litigated and most-interpreted corporate statute in the country, and the Delaware Court of Chancery's body of fiduciary-duty case law is the most developed in the United States. Sections 141 (board), 151–152 (classes and series of stock), 220 (books-and-records inspection rights), and 271 (sale of all or substantially all assets) are baseline references for any cap-table-aware operator.
• QSBS-eligible structure. Section 1202 of the Internal Revenue Code, 26 U.S.C. § 1202, allows the exclusion of capital gain on the sale of qualified small business stock (QSBS) held for more than five years, subject to issuer and shareholder requirements, including that the issuer be a domestic C-corporation. LLCs and S-corporations do not qualify. For founders and early investors, the QSBS exclusion is often the largest single tax benefit available, and it depends on getting the entity right at formation.
• Multiple classes of stock. Venture-priced rounds require the issuance of preferred stock with rights and preferences distinct from common. The DGCL accommodates classed stock cleanly under Sections 151 and 152. LLC operating agreements can replicate the economics, but at the cost of complexity and tax friction that institutional preferred investors typically refuse to absorb.

When a Different Structure Makes Sense

The Delaware C-corp is the default, not a universal answer. Founders should consider alternatives when:

• The business is operationally cash-flow-positive and not raising priced equity in the foreseeable horizon. A New York LLC under the New York Limited Liability Company Law, or a Delaware LLC under the Delaware Limited Liability Company Act at 6 Del. C. §§ 18-101 et seq., can be more tax-efficient because pass-through treatment under Subchapter K avoids the corporate-level tax. Conversion to a C-corp is possible later, but timing affects QSBS holding periods and triggers transactional costs.
• The investor universe is private-equity sponsors who prefer pass-through structures. Some PE strategies, including search funds and certain growth buyouts, are structured to acquire S-corp or LLC targets. Coordinate with prospective sponsors before formation rather than after.
• The business will be operated as a regulated activity. Banking, insurance, broker-dealer, and certain professional services are subject to entity-form constraints (for example, New York's professional service entity rules under N.Y. BCL Article 15 and N.Y. LLC Law Article XII) that can override the default analysis.

Step Two: Founders' Equity, 83(b), and Vesting

The defining mistake at this stage is buying into the assumption that founder equity does not need to be papered carefully because "we are the founders." Investors look closely at three things in the early cap table: how much was issued, when it was issued, and whether 83(b) elections were timely filed.

Issue at Par, Early, with Founder Stock Purchase Agreements

Founder common stock should be issued, paid for, and documented at the moment of formation, when the company has no enterprise value. Issuance is by board resolution, against a Founder Stock Purchase Agreement (FSPA) that records the consideration paid, the vesting schedule, the company repurchase right on departure, and the assignment of pre-formation IP. Documentation is what creates the corporate record an investor will diligence.

Consideration matters. Stock issued for past services or for an unsecured promissory note can create accounting and tax problems. Best practice is cash payment at par or a low fair value (for example, $0.0001 per share), because the dollar amount funds the founder's tax basis and the value at issuance is, by design, not material.

83(b) Election: 30 Days, No Extensions

If founder stock is subject to vesting (and it should be, for the reasons below), the founder must file an election under 26 U.S.C. § 83(b) within 30 days of the date of issuance. The election causes the founder to recognize ordinary-income tax on the spread between the purchase price and the fair market value at issuance, rather than on each vesting tranche over time. When the spread at issuance is zero (because the company is brand-new and the stock was purchased at fair value), the election creates no current tax and protects all future appreciation as capital gain. Failure to file is one of the most expensive unforced errors in venture practice. The 30-day deadline is statutory; the IRS treats it as jurisdictional, and there is no general extension.

Practical mechanics: the election is a one-page form mailed to the IRS service center where the taxpayer files returns, with a copy to the company. Track the postmark. Keep the certified-mail receipt. Reference 26 C.F.R. § 1.83-2 for the regulatory detail and required content of the election.

Vesting

Standard founder vesting is four years with a one-year cliff, with company repurchase rights at original cost (or, for some structures, at the lower of cost and fair market value) on unvested shares. Investors expect vesting because it aligns founder incentives with company-building over time and because it gives the company a clean way to deal with a co-founder departure without leaving 30% of the company in the hands of someone who left after 14 months. If the company is a year or two old when the first priced round closes, expect investors to negotiate a "vesting reset" or partial reset, especially for founders whose pre-financing vesting is largely complete.

Vesting acceleration is a separate negotiation. The two common formulations are single-trigger (acceleration on a change of control alone) and double-trigger (acceleration on a change of control followed by termination without cause or resignation for good reason within a defined window). Investors generally accept double-trigger, often resist single-trigger above a small percentage of unvested shares, and almost always want the formulation in the equity documents rather than in side letters.

QSBS Planning Starts Now

Section 1202 is structured so that the holding period begins on issuance. Founders who issue, file 83(b), and hold for more than five years can, subject to gross-asset and active-business requirements, exclude up to the greater of $10 million or 10x basis of capital gain on a qualified sale. 26 U.S.C. § 1202(b). The active business test under 26 U.S.C. § 1202(e) requires that at least 80% of the issuer's assets, by value, be used in the active conduct of one or more qualified trades or businesses. Some industries are categorically excluded under Section 1202(e)(3), including most professional services, financial services, hospitality, farming, and extraction. Get the analysis right at formation and the founder team has, in expected-value terms, often the largest tax benefit available to a U.S. operator.

Two Section-1202-adjacent provisions are routinely missed in setup guides and are worth keeping live from day one:

• Section 1045 rollover. 26 U.S.C. § 1045 lets a taxpayer who has held QSBS for more than six months but less than five years (and so cannot yet use the full Section 1202 exclusion) roll the gain into replacement QSBS within 60 days of sale, deferring the gain and tacking the prior holding period onto the replacement stock. The rollover is the principal answer to the "company sold at year four" problem and changes the calculus on whether a founder should cooperate with an early acquisition offer.
• Section 1244 small business stock loss treatment. 26 U.S.C. § 1244 allows a non-corporate holder of stock in a domestic small business corporation to treat up to $50,000 (or $100,000 on a joint return) of loss on the stock as ordinary loss rather than capital loss. The asymmetry, capital gain on a successful exit (Section 1202) and ordinary loss on a failure (Section 1244), is a meaningful expected-return enhancer that costs nothing to set up at formation.

Step Three: IP Assignment Is the Asset

For a software, hardware, or content business, the company's IP is the company. An institutional investor will not close a financing without a clean record showing that every piece of IP that matters is owned by the entity, not by an individual founder, contractor, or prior employer.

Founder IP Assignment

Anything a founder built before the entity existed, that the company will use, must be expressly assigned to the company in the FSPA or in a standalone Technology Assignment Agreement. The assignment language should be present-tense, specific, and broad enough to cover code, models, designs, trademarks, domain names, social-media handles, and customer lists. "Founder hereby assigns, transfers, and conveys" is the operative phrasing. Aspirational language like "founder will assign" is interpreted by some courts as an agreement to assign, not an assignment, which means the IP is still owned by the individual until further documentation issues.

Employee and Contractor PIIA

Every employee and every contractor who touches the product must sign a Proprietary Information and Inventions Assignment (PIIA) as a condition of engagement. The PIIA assigns inventions made within the scope of work to the company, imposes confidentiality obligations, and (where enforceable) includes restrictive covenants. New York imposes meaningful constraints on non-competes for non-executive employees, and the federal landscape on non-competes has been in flux since the FTC rule was challenged. The non-disclosure and IP-assignment portions of the PIIA, however, remain straightforwardly enforceable.

For copyrightable works created by independent contractors, the federal "work made for hire" doctrine under 17 U.S.C. § 101 applies only to nine enumerated categories of works, and only when the work is specially commissioned in a signed writing that recites the work-for-hire language. Outside those nine categories, contractor works require a separate express assignment to the company. Standard PIIAs include both the work-for-hire language and a backup assignment, exactly because the doctrine is narrower than most founders assume.

Prior-Employer Risk

Code, designs, or trade secrets developed at a prior employer cannot be brought into the new venture without express written consent. The company's IP rep and warranty in any priced round will require the founders to confirm that they did not. Diligence will look for git history that predates formation, references to prior-employer systems, and timing patterns that suggest moonlighting. The remedy for a real problem is almost never to rely on plausible deniability; it is to scope the issue, secure a release where possible, and rebuild what cannot be released.

Step Four: The Cap Table Is a Living Document

A clean cap table is a competitive asset. A messy one is a financing-blocker. From day one, maintain a cap table that tracks every issuance, every option grant, every transfer, every repurchase, and the resulting fully diluted percentages by holder. Software (Carta, Pulley, AngelList) is fine; a tightly maintained spreadsheet that ties to the certificate book is also fine. What is not fine is a cap table that disagrees with the stock ledger or that cannot be reconciled to board consents.

Authorized vs. Issued vs. Outstanding

Authorized shares are the maximum the certificate of incorporation permits. Issued shares are those issued by the company. Outstanding shares are issued and not held in treasury. The fully diluted share count adds outstanding shares, options issued, options reserved-but-unissued, warrants, and the maximum shares issuable under any convertible instruments (SAFEs, notes, MFN amendments). Investors price off the fully diluted number, so misstating it is an investor-relations problem on top of a math problem.

The Option Pool

An equity incentive plan (EIP) is adopted at, or shortly after, formation. The initial pool size is typically 10–15% of post-formation fully diluted, expanded at the seed and Series A as needed. Investors will negotiate a pre-money option pool top-up at the priced round, often to 10–15% of post-money fully diluted, which dilutes the founders rather than the new investors. Understanding the post-money cap-table math before agreeing to a pre-money pool size is the difference between giving up two points of dilution and giving up six.

409A Valuations

Stock options must be granted at an exercise price equal to or above fair market value to avoid the punitive tax regime under 26 U.S.C. § 409A. A valuation prepared by a qualified independent appraiser, refreshed at least every 12 months and after material events (financings, acquisition offers, major contracts), creates the safe-harbor presumption of reasonableness under 26 C.F.R. § 1.409A-1(b)(5)(iv)(B). Granting options without a current 409A is one of the recurring diligence findings that delays Series A closings.

Step Five: First Money via SAFEs, Convertible Notes, and Priced Rounds

The instrument used for the first dollar of outside capital sets the trajectory of the cap table for years.

SAFEs

The SAFE (Simple Agreement for Future Equity), introduced by Y Combinator and now the dominant pre-priced instrument in early-stage U.S. financings, is a convertible instrument that is not debt. It has no maturity, no interest, and no default mechanic. It converts into preferred stock at the next priced round, typically with a valuation cap, a discount, or both. The post-money SAFE (introduced in 2018) is now the YC-default form and is dilutive to founders and option pool, not to other SAFE holders, on conversion.

Practical points that founders consistently underestimate:

• Stacking SAFEs creates non-obvious dilution. Consider three post-money SAFEs of $1M each at a $10M post-money cap. Each SAFE, taken alone, converts into 10% of post-conversion fully diluted. Stacked, the three convert to 30% in aggregate, since each holder is locked to a fixed post-conversion percentage. Every dollar of that 30% dilution is borne by the common and the option pool, not by the other SAFE holders. The founder's mental model of "we sold 10% three times" is right on percentage and wrong on whose stack absorbs it. Layering a Series A on top, with a pre-money option pool top-up sized off the post-financing share count, routinely puts founders well below the 60% they thought they had.
• Pro-rata side letters on SAFEs. Many investors will request a pro-rata side letter giving them the right to participate in subsequent rounds. These should be tracked, scoped to the next round only, and (when possible) limited to "major investor" thresholds.
• MFN provisions. An MFN ("most favored nation") clause allows a SAFE holder to elect into more favorable terms granted to a later SAFE investor. MFN is fine in moderation; in volume, it makes the cap-table modeling exercise materially harder.

Convertible Notes

Convertible notes are debt and carry a stated interest rate, a maturity date, and a conversion mechanic that fires on a qualified financing or, depending on drafting, on maturity. Notes are appropriate when the investor counter-party is a family office or strategic that wants debt-like protections, when a bridge is structured to be repaid rather than converted, or when state-law or program-rule constraints favor debt over a SAFE. The maturity date is the principal source of trouble: a note that matures before a financing closes can convert at a default-driven discount or trigger a repayment event the company cannot fund. Negotiate maturity, extension mechanics, and conversion default behavior with that scenario in mind.

Priced Rounds: The NVCA Documents

The first true equity round, whether seed or Series A, is documented through the National Venture Capital Association (NVCA) model documents: the Certificate of Incorporation, the Stock Purchase Agreement, the Investor Rights Agreement, the Right of First Refusal and Co-Sale Agreement, the Voting Agreement, and the Management Rights Letter. The NVCA forms are widely accepted and are the diligence-light starting point. Material deviations should be intentional.

The economically meaningful terms in any priced round:

• Pre-money valuation and the corresponding price per share, computed against the fully diluted, post-pool share count.
• Liquidation preference. The default modern term is a 1x non-participating preference: investors get their money back before the common, then the common takes the rest, with a conversion option that lets investors convert to common if that yields more. Multiple-x preferences and participating preferred are red flags outside of distressed or down-round scenarios.
• Anti-dilution. Broad-based weighted-average is standard. Full-ratchet is aggressive and rare in healthy primary rounds.
• Pro-rata rights, information rights, registration rights, and rights of first refusal and co-sale. Standard in the IRA and ROFR/Co-Sale; the negotiation is around major-investor thresholds and termination on IPO.
• Protective provisions. Investor consent rights over a defined list of corporate actions (charter amendments, new senior securities, sale of the company, increases in option pool, dividends). These are governance, not economics, but they shape every later decision.

Step Six: Governance, Board Composition, and Founder Control

Governance is the layer that surfaces only when something goes wrong, which is exactly why investors care about it from day one.

Board Composition Through the Stages

Fiduciary Duties and the In re Trados Problem

Directors owe fiduciary duties to the corporation and its stockholders. Under Delaware law, those duties are owed to the common stockholders as the residual claimant in most contexts, even when the director represents a preferred holder. In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013), is the canonical reminder that a sale that returns capital to preferred and pays bonuses to management but leaves the common with nothing is a setup for an entire-fairness review. Operators and investor-directors who understand Trados conduct themselves better in distressed-sale negotiations. Section 102(b)(7) of the DGCL allows the certificate of incorporation to exculpate directors for breaches of the duty of care; it does not shield breaches of the duty of loyalty or good faith.

Founder Voting Power

Beyond board seats, founder control is also a function of voting agreements, drag-along rights, and (in some structures) dual-class stock. Most venture deals do not use dual-class structures; the more common founder-control mechanism is the combination of a friendly cap table, a voting agreement that aligns major investors and founders on board elections, and a stockholders' agreement that constrains transfers. Founders who do contemplate dual-class stock should expect institutional investor pressure for a sunset provision: a defined period or trigger (typically 7 to 10 years post-IPO, founder departure, or transfer of high-vote shares) at which the high-vote class collapses to one-vote-per-share. The Council of Institutional Investors and the major index families have made sunsets a near-default condition of acceptance, and the New York Stock Exchange and Nasdaq listing rules accommodate them.

Conflicted-Director Transactions and DGCL Section 144

Studio-incubated and sponsor-led ventures routinely involve transactions in which a director or controlling stockholder sits on both sides: a services agreement between the studio and the company, a fund-to-fund preferred bridge, an inter-company license. Under 8 Del. C. § 144, those transactions are not voidable solely because of the conflict if any one of three conditions is satisfied: disclosure to and approval by the disinterested directors, disclosure to and approval by the disinterested stockholders, or proof that the transaction was fair to the company at the time it was authorized. The cleanest path is to use Section 144's safe harbor architecture from day one: identify the conflict in the board minutes, document the disinterested directors' analysis, and where the transaction is material, get an independent reasonableness opinion or an arms-length comparable. Following the Section 144 procedure preserves the business judgment standard of review; failing to follow it shifts the burden to entire fairness, with the cost and uncertainty that entails.

Step Seven: Working with Venture Studios and Strategic PE Sponsors

Venture studios and strategic sponsors fall outside the standard VC playbook in ways that change the structuring conversation. The studio model, in which a studio incubates a venture, contributes operators, capital, and infrastructure, and retains a meaningful equity position, can be highly productive for the right founder, but the economics need to be transparent at the front end and renegotiable as the venture scales.

Studio Equity: What Range Is Reasonable

Studio equity stakes are highly variable and should be sized to the contribution. Industry-typical bands, with significant variation:

• Light-touch studios (back-office, brand, recruiting support, no operating role): 5–15% of post-formation common, often with vesting tied to ongoing services and a clear sunset.
• Operating studios (deep operator role, pre-product capital, founding-team recruitment): 20–40% of post-formation common, generally with vesting and milestone-based release.
• Hold-co or co-founder studios (the studio is effectively the founding entity that recruits the CEO and assembles the team): equity stakes can be majority at formation, with founder/CEO equity carved in over time as a service-based grant.

The diligence point for prospective downstream investors is whether the studio's stake is operationally productive (the studio will continue to support the company) or purely passive (a static block on the cap table). Productive stakes get accommodated; passive blocks tend to get bought out, restructured, or recapitalized, often at a discount.

Studio Documents

Studio engagements are typically papered through a combination of: (1) a Services Agreement specifying the operator and service scope, (2) a Stock Purchase Agreement issuing studio common (or restricted stock) at par, (3) a vesting schedule that ties the studio's holding to ongoing engagement, (4) IP assignment language confirming that any IP generated during the studio relationship is the company's, and (5) a stockholders' agreement that includes the studio in the standard ROFR/co-sale and drag-along framework.

The two recurring traps: a studio Services Agreement that reads as a perpetual royalty on revenue (problematic for downstream financing); and a studio equity stake that is fully vested at formation regardless of subsequent performance (problematic for alignment). Both can usually be addressed in negotiation if surfaced early.

PE Sponsor Considerations

Private-equity sponsors approach early-stage and growth-stage opportunities through a different lens than venture funds. Sponsors typically want larger ownership positions, board control or near-control, defined exit pathways, and capital structures that anticipate add-on acquisitions. Founders evaluating a sponsor counter-party should be alert to: management equity rollovers (and the QSBS implications of converting common into rolled equity), preferred stock with a coupon (which begins compounding against common immediately), and sponsor consent rights over hiring, M&A, and capital expenditures. None of these are pathological. They are the structure of a sponsor-backed deal. They are also negotiable, particularly on first-money sponsor relationships where the sponsor is buying access to deal flow as much as buying a single position.

Step Eight: Securities Compliance Is Not Optional

Every equity issuance is a securities transaction subject to the Securities Act of 1933, codified at 15 U.S.C. §§ 77a et seq., and to the securities laws of every state where any offer or sale takes place. The default rule is that every offering must be registered, with limited but well-understood exemptions.

The exemptions that matter in private venture financings:

• Rule 506(b) (17 C.F.R. § 230.506(b)) permits unlimited capital from accredited investors and up to 35 sophisticated non-accredited investors, with no general solicitation. The dominant exemption for traditional VC and PE rounds.
• Rule 506(c) (17 C.F.R. § 230.506(c)) permits general solicitation but requires verification (not just self-certification) of accredited status. Used in demo-day and online-fundraising contexts.
• Section 4(a)(2) of the Securities Act covers private placements not involving a public offering. Less commonly used as a primary exemption today because Rule 506(b) provides a more predictable safe harbor.
• Rule 701 (17 C.F.R. § 230.701) covers compensatory stock and option grants to employees, directors, and consultants of non-reporting companies.

Form D filings under 17 C.F.R. § 230.503 are due within 15 days of the first sale in a Rule 506 offering. State "blue sky" filings track Form D in most states. Failure to file Form D is not a registration-exemption killer, but it creates an enforcement risk and is the kind of finding that delays subsequent diligence.

Step Nine: Operating Discipline, Books, and Taxes

The post-formation operating cadence does as much for diligence-readiness as the formation documents themselves.

• Board minutes. Document every material action by board consent or minutes. Issuances of stock or options without a board approval in the corporate record are a recurring diligence finding.
• Stockholder lists and stock ledger. The DGCL right of inspection under Section 220 runs against the stock ledger; keeping it accurate is non-optional.
• Quarterly financials. Even pre-revenue, maintain a balance sheet, an income statement, and a cash-flow statement on a regular cadence. Investors will ask, and the absence of any financial discipline reads as a flag.
• Federal and state tax filings. Form 1120 is the federal C-corp return. Delaware franchise tax is annual and is calculated by the lesser of the authorized shares method or the assumed par value capital method; the difference can be thousands of dollars and is worth modeling once. New York entities operating in New York City are also subject to NYC general corporation tax under the New York City Administrative Code.
• Reasonable-compensation analysis. Founders who are full-time should be on payroll at a defensible salary, with appropriate withholding. Treating a full-time founder as a contractor for ten months and then converting at financing is a recurring source of avoidable IRS exposure.

The Term Sheet Negotiation: What to Push, What to Concede

By the time a term sheet arrives, the founders have already lost most of their leverage on entity choice, IP cleanup, and 83(b). The remaining leverage is concentrated in a small number of provisions. The negotiation almost always rewards founders who know exactly which terms move the math materially and which are governance ceremony.

Push hardest on:

• Pre-money option pool size (each percentage point typically dilutes the founders by approximately the same percentage point post-money).
• Liquidation preference structure (1x non-participating is the modern norm; deviations should be paid for).
• Anti-dilution formulation (broad-based weighted average; resist full-ratchet).
• Board composition (preserving at least two founder seats through the Series A).
• Vesting reset scope and double-trigger acceleration on a change of control.
• Pro-rata rights and major-investor definitions in the IRA.

Often worth conceding:

• Standard NVCA protective provisions (negotiate the major-investor threshold rather than the list).
• Information rights at customary thresholds.
• Drag-along rights, with a reasonable threshold and customary exclusions for bad-leaver scenarios.
• ROFR and co-sale on founder transfers, with carve-outs for estate planning and de minimis transfers.

The Common Failure Modes

The recurring patterns that cause venture financings to slow down, reprice, or break:

• Missed 83(b) elections. No fix exists. The founder absorbs the tax over the vesting curve, sometimes for hundreds of thousands of dollars in incremental ordinary income, and the entire team sees the operational impact as an early-equity question that the founder did not handle.
• IP not assigned. Pre-formation founder IP that lives in the founder's personal GitHub or in the founder's prior-employer code base, not assigned to the company, is a red-flag finding that requires either a mid-financing fix (delay) or a price concession.
• 409A failures. Options issued without a current 409A, or at exercise prices below fair market value, create deferred-compensation exposure under Section 409A and a remediation discussion that almost always pushes the closing.
• Cap table that does not reconcile. The cap-table file does not match the stock ledger; option grants do not match board consents; SAFE counts disagree between the SAFE files and the SAFE schedule. Each is a one-day fix in isolation; in aggregate, they read as operational immaturity.
• Open litigation, prior-employer disputes, or unresolved tax positions. None of these is fatal, but each requires disclosure, scoping, and (often) a specific indemnity or escrow at financing close.
• Wrong entity. An LLC raised on a SAFE is a structuring problem on top of a tax problem. It is fixable, but the conversion mechanic should run before the priced round, not concurrently with it.

A 90-Day Setup Checklist

For founders setting up from scratch with the intent to raise institutional capital within the next 12 to 18 months:

1. Week 1. Form the Delaware C-corp. Adopt bylaws. Appoint the initial board. Authorize founder common.
2. Week 1. Issue founder common against signed Founder Stock Purchase Agreements with vesting (4 years, 1-year cliff) and IP assignment.
3. Week 1. File 83(b) elections (within 30 days, certified mail).
4. Week 2. Adopt the Equity Incentive Plan. Reserve the option pool. Engage a 409A appraiser.
5. Weeks 2–4. Open the corporate bank account. Fund operating capital. Pay for the founder shares.
6. Weeks 2–4. Execute PIIAs with every employee and contractor. Audit any pre-formation contractor work for assignment gaps.
7. Weeks 4–8. Implement bookkeeping, payroll (if applicable), and a cap-table system. Set up the corporate secretary's binder and digital corporate record.
8. Weeks 4–8. Complete the IP audit. File trademarks where appropriate. Confirm that all software-license obligations (open-source compliance, especially) are documented.
9. Weeks 8–12. Prepare the data-room skeleton: charter, bylaws, board consents, stockholder consents, cap table, stock ledger, EIP, sample option grant, PIIA template, FSPAs, 83(b) confirmations, financial statements, key contracts.
10. Weeks 8–12. Identify counsel for the first priced round (the firm running diligence is often the firm running the round). Build the prospective-investor list with introductions, not cold inbounds.

Frequently Asked Questions