Open Access University
Every founder deserves equal opportunity
Open Access University
Every founder deserves equal opportunity
How to Structure your Startup for Fundability
A Guide for Early-Stage Founders
Launching a startup is thrilling, but setting up the business structure early is just as crucial as building your product. This guide breaks down the essentials for U.S.-based founders at MVP or early revenue stage. We'll keep it simple and actionable, covering everything from incorporation and cap tables to what venture capital (VC) investors expect.
Part of the Open Access University curriculum - empowering founders with essential business knowledge
Early decisions about legal structure, equity, and finances can make or break your startup's trajectory. Getting these basics right will protect you and set you up for smooth growth.
Incorporation & Legal Basics (LLC vs C-Corp, State Selection, EIN)
Choosing a legal structure is one of your first big decisions. For high-growth startups seeking investors, the typical choice is to incorporate as a C-Corporation. While you can now incorporate in states like Texas or Wyoming, Delaware has been the standard due to its business-friendly laws and investor familiarity. In fact, many venture capitalists expect a Delaware C-Corp (LLC or S-Corp structures can complicate VC investment). It's best to double check what's best for your specific situation before deciding.
Key Benefits of C-Corp Structure:
- Easy to issue stock to investors and employees
- Separates personal and business liabilities
- Protects founders' personal assets from business debts
- Preferred by venture capitalists
- K-1s are not required for shareholders (unlike LLCs)
If you're just testing the waters or running a small side business, other structures like an LLC can work initially (they're simple and have pass-through taxation). But know that raising VC money usually requires converting to a C-Corp eventually.
State of Incorporation
Delaware remains the gold standard for startups, though Texas and Wyoming are emerging options. Many accelerators and major investors still prefer Delaware due to clear corporate governance and legal precedents.
⚡ Get an EIN
Obtain an Employer Identification Number (EIN) from the IRS immediately. It's your business's Social Security number and required for banking, taxes, and payroll.
Open Access University Pro Tip: Ensure that any important intellectual property (code, product designs) is owned by the company through IP assignment agreements. This way, the company truly owns the product/technology it's building.
Cap Table Basics & Equity Splits
Your capitalization table (cap table) is a document that lists who owns what percentage of your company. It includes every shareholder (founders, investors, employees with equity) and how many shares or what percentage each one holds.
Example: Early-Stage Cap Table
| Shareholder | Shares | Percentage |
|---|---|---|
| Founder A | 4,500,000 | 45% |
| Founder B | 4,500,000 | 45% |
| Employee Option Pool | 1,000,000 | 10% |
Key Cap Table Elements:
- Initial Equity Splits: Split based on expected contributions. Equal splits work for equal commitment, but adjust based on roles and resources.
- Founder Vesting: 4-year vesting with 1-year cliff protects the startup if a founder leaves early. Vesting can be based on time milestones or performance milestones. Set this up at incorporation.
- Option Pool: Reserve 10-20% for future employees. This pool is crucial for attracting talent when you can't pay big salaries.
Hiring Early Employees & Contractors
As you grow, you'll likely need help beyond the founding team. Early hires can be either employees (on payroll) or contractors (freelancers/consultants).
Hiring Without Revenue:
When you don't have revenue, focus on equity compensation, deferred compensation agreements, or revenue-sharing arrangements. Consider offering higher equity percentages in lieu of salary, or create milestone-based compensation that kicks in when certain revenue targets are met.
Employees
- • Work full-time under your direction
- • Require payroll and tax withholding
- • Eligible for equity compensation
- • Tightly integrated into the team
- • Standard: 0.5%-2% equity via stock options
Contractors
- • Project-based or part-time work
- • Invoice you directly
- • Handle their own taxes
- • Smaller equity grants (if any)
- • Must classify correctly to avoid legal issues
- • Track 1099s and send them out during tax season
Equity Compensation Basics
Stock options give employees the right to purchase shares at a fixed "strike price" after they vest. These terms are negotiated based on role, experience, and market conditions.
- Standard vesting: 4 years with 1-year cliff
- Strike price set at fair market value when granted
- Requires proper Stock Option Plan (ISO/NSO)
- Need board approval and possibly stockholder approval
Business Banking, Accounting & Budgeting Basics
Don't mix your personal and business finances. Open a business bank account using your company's EIN to maintain the corporate liability shield and make bookkeeping easier.
Business Banking
Separate business account with EIN
Accounting System
Track all income and expenses
Budget Planning
12-18 month financial plan
Critical Stat: Nearly half of startups fail in the first five years largely due to cash flow problems. Know your runway (months of cash remaining) at all times.
If you plan to raise money from venture capitalists or angel investors, you'll need more than a cool idea. You need the right structure and documentation.
What VCs Look for Structurally in Early-Stage Startups
Beyond team and product, investors care a lot about startup hygiene and structure. A messy corporate setup can scare investors away.
C-Corp
Standard for VC-backed companies due to familiar legal framework
Clean Cap Table
Founders own majority, minimal "dead equity" or complicated agreements
Founder Vesting
VCs want assurance founders won't disappear with large equity stakes
IP Ownership
Company owns all intellectual property through proper assignments
Legal Compliance
Proper corporate formalities, tax filings, and necessary permits
Financial Discipline
Clean financials, understanding of burn rate and budget planning
Key Insight: "VCs don't just fund great ideas — they fund clean vehicles." Show investors a solid foundation to give them confidence that an investment won't be derailed by legal or structural issues.
Board Structure & Governance Basics
When you incorporate, you'll appoint a board of directors. The board is legally responsible for major decisions and overseeing the company's interests.
| Stage | Board Size | Typical Composition |
|---|---|---|
| Pre-Seed | 1-3 members | 1-2 founders only |
| Seed | 3 members | 2 founders + 1 external investor (syndicate or not) |
| Series A | 5 members | 2 founders + 2 investors + 1 independent |
Board Responsibilities Include:
- Setting broad strategy and major decisions
- Hiring/firing the CEO (usually not an issue when founders lead)
- Executive compensation and major financings
- Ensuring legal compliance and fiduciary duty
- Approving acquisition offers or major partnerships
🎓Empowering Yourself with KnowledgeYou don't have to become a lawyer or CFO, but understanding these fundamentals will give you confidence in building your startup. Many first-time founders shy away from "business stuff," but learning a bit of it now will save you headaches and protect your company's future.
Key Takeaways from Open Access University
- • Legal Foundation: C-Corp with proper IP assignments
- • Cap Table Management: Clean ownership structure with founder vesting
- • Financial Discipline: Separate business banking and budget planning
- • VC Readiness: Understand term sheets and dilution mechanics
- • Team Building: Proper equity compensation for early employees
Keep this guide handy, and remember that thousands of founders have navigated this before. Leverage startup attorneys, startup communities, and OAU's alumni network. You're not alone!
By covering legal basics, organizing your finances, and preparing for investment, you're setting the stage for your startup to grow and thrive. With a solid business structure in place, you can focus on what you do best: building an amazing product and company.
Open Access University
Every founder deserves equal opportunity
Good luck, and happy founding! 🚀
• Silicon Valley Bank – Startup incorporation guide
• Venturion Ventures – What VCs Expect (Legal Structure)
• Upcounsel – EIN for Startups guide
• Carta – Cap Tables comprehensive guide
• Justin Kan (LTSE) – Co-Founder Equity Split Guide
• Mercury – Early-Stage Board Composition
• SVB – Understanding VC Term Sheets
• FasterCapital – Liquidation Preference Examples
• Brex – Startup Budget Guide
• Stripe – Startup Accounting 101