In this talk, Kathryn McCall outlines the most common legal mistakes that early‑stage startups make and offers practical guidance to avoid them. She begins by stressing the importance of assigning all intellectual property to the newly formed corporation and then explains how vesting schedules work—typically a four‑year monthly vesting plan—and why they should be applied to every co‑founder and later to employees to protect equity and keep founders motivated. McCall warns against ambiguous role and ownership structures, advising founders to decide on a CEO early, to think in percentages rather than share counts, and to avoid 50/50 equity splits that can create deadlocks. She discusses entity formation, recommending a plain‑vanilla Delaware corporation over less‑common structures like a Wisconsin LLC, and notes that the entity can be changed later but at a cost. The bulk of the talk covers securities law compliance: the illegality of selling unregistered shares, the reliance on exemptions such as accredited‑investor rules and Regulation D 506, the limits of Title III crowdfunding, and the practical reasons to target accredited investors who understand startup risk. McCall highlights the severe consequences of non‑compliance, including lawsuits and potential criminal liability, and stresses that many of these issues are far cheaper to address correctly at the outset than to fix retroactively. The overall message is to get the legal foundations right early—IP assignment, vesting, clear roles, proper entity, and securities compliance—to avoid costly, time‑consuming fixes and to present a professional, investable company to potential investors.
Chapters
So, failing to set up vesting schedules. This is really something that is important if you've got 2 or 3 co-founders or more than one of you. And what does this mean? This essentially means that, you know, we talked about when you set up your corporation, you assign all your intellectual property over to the corporation, you get shares in exchange. Now you're a shareholder. Vesting means your ownership of those shares vests Over time. So it might vest over 4 years in equal monthly chunks. So that means if in 6 months, let's say you've got 4 co-founders and co-founder Bob over here has always been a problem. After 6 months, you're like, we got to get rid of him because he's just disruptive and we don't want him anymore. Well, at that time he's only got 6 months' worth of vesting. So 6/48ths Of his shares if it's a 4-year vesting schedule. And you can buy back all of the other shares. So let's say you guys just divided up the company in equal 20, you know, quarter chunks amongst the 4 of you, 25%. If there was no vesting and you voted Bob out, Bob could disappear with 25% of your stock. If you have vesting, he's only going to get that one little chunk and you get— can get the rest back.
This is a good question.
This also ensures that people are, again, vested in the startup. They're dedicated to the startup. They want to wait till all their shares vest in ownership. Yes?
Do you need to do this vesting for every single one?
I would do it for everybody if you've got more than one co-founder.
And what if we hire someone later on that is not a co-founder?
For your employees, yes. Later on, you'll do it for them too. Yes?
And not for myself?
And for you, if you're a co-founder, generally if there is more than one co-founder, you'll do vesting. You'll want to do vesting. And investors will want to see that there is vesting because your investors are investing in you. So they want you to stick around. So you might as well put the vesting in place and put it in place in a way that you like it versus an investor coming in and saying there is no vesting. Well, we want you to start vesting. And then you look at the vesting provision they've given you like 6 years, like we don't want this. This is bad. Whereas they might say, oh yeah, that's a fairly standard vesting provision. OK, we'll just keep that in place. And your employees that come on later when you give them a stock option, they're going to vest too. All right. Thanks. We've got 10 minutes. So I'm going to quickly go through the rest of this. Failing to define roles and ownership. I'm always amazed when I sit down and I say, Who's going to be the CEO? And 3 hands go up. Like, you guys never talked about this? I'm going to be the CEO. I am. It's going to be me. Or no hands go up. No, no, no, I'm not doing it. So think about who's going to take the leadership role. How are you going to divide up your equity? And don't think— when you start talking about shares and dividing up equity, don't think about numbers. Think about percentages. You've got 100%. out there. Who's going to get 40%? Who's going to get 30%? What sort of percentages are different people going to get? And never, ever go 50/50 because if you reach an impasse, you can be dead in the water if you're 50/50. There's got to be— if you've got 3 co-founders and you're all going to be 33 and a third, then you got 2 to gang up against one. But if you're 50-50, you can be dead in the water. And these conversations are difficult. I don't want to downplay how difficult they can be, but they're going to be a lot easier if you do it from the outset than they are later on after people have put their heart and soul into this idea and then they sit down with an attorney and decide who is going to be the CEO and 3 hands go up. Failing to comply with securities laws. All right. This gets really technical and could be a little boring. But essentially it's illegal to sell shares in the United States unless they're registered with the SEC. Registered means going public. So how do people do it? Because going public and registering with the SEC is insanely expensive and takes a long time. There's exemptions that are available from the securities laws, but to claim those exemptions you need to make certain filings and you need to to a certain type of investor. Now who is that type of investor? It's the accredited investor. Who is an accredited investor? Basically rich people. You want to sell your shares to these rich people who make— meet this requirement. So these are people who can afford to lose the entire investment. Why do you want to sell to accredited investors? Because that's how you get one of these exemptions from the securities laws and one of the easiest exemptions to get Can you now do that under Title III as well for unaccredited investors? There's different things with the crowdfunding and different portals that are going on. The rules and regulations under those are fairly convoluted and there's limitations on how much you can raise under those. And you have to have audited financials. You have to essentially provide almost the same things that you would have to provide the similar type of information that you would have to provide if you were going public. So, you had the JOBS Act and all, they're like we created this thing, it's going to be great and then us lawyers looked at it and we're like under this one you can only raise $1 million, under this one you can only do $5 million. But if you stick with the accredited investors and go out under 506 Reg D, which I know doesn't mean anything to anybody, but if you go out that way you can raise unlimited funds. from as many accredited investors. And you— and when you think about it, you want to invest in people who are used to investing in startups. You don't want to go to Uncle Charlie. Uncle Charlie might be really rich, but Uncle Charlie might also be used to getting a return on his investment. So he gives you $1 million and then a year later he's like, where's my money? I want my return on my investment. Whereas if you go to accredited investors, who play in the startup space, they know I need to invest in 30 startups and one of them might pay off. So they're not hounding you and banging on your door in a year or 2 years wanting their money back. They know they're in it for the long haul and they know they could lose their entire investment. That's who you want to invest in your company. So again, why do the securities laws matter? You know, if you have a disgruntled investor and especially an unaccredited investor who's not used to playing in the startup space, if they get disgruntled and you haven't complied with every single aspect of the securities law, now they're pissed off at you. They go to an attorney. An attorney looks in— looks through the cracks, reviews the paper, finds the hole where you didn't comply with the securities law and you get sued. The securities laws, you know, I do corporate law, I do transactional law, I don't do criminal law, I don't do litigation. Securities laws is where some of my clients could end up in jail. That's sometimes the only way I can get my clients' attention. If you don't sign this, you could go to jail. They're like, really? Like, okay, not really, but under the securities laws, there's securities fraud, you know. I mean, some big-name people went to jail over securities fraud. So, there is that possibility that's out there. So, summary: forming the wrong entity, failing to protect your IP, failing to set up vesting schedules, failing to define the roles and ownership, failing to comply with securities laws. Again, a lot of these things, if you do them wrong, are fixable. Some of them aren't. Some of them, it's just going to cost you time and money to fix. fix them. But again, never give an investor a reason to say no. So, if they're looking and they're like, looks like all the IP wasn't assigned or they held back some of the IP or they want a license back, there's no vesting schedules, they're an LLC formed in Wisconsin, like what the heck, I didn't know Wisconsin had LLCs. You're like, oh, next. Don't give them that reason. You want to be like, what is this? Plain vanilla Delaware. Boom, boom, boom. Ticks all the boxes. And I know they talk about, you know, you want to be disruptors and you want to, you know, be creative and be a force to be reckoned with. Don't do it in your legal documents. Don't you— don't give anybody a reason to say no to you just because of the way you set up your company and your legal documents. And some of these, yeah, you can reincorporate in a different state. You can convert from an LLC. You can find all those people, track them down, get that IP. You know, you can fix some of the securities laws requirements that you haven't complied with. You might have to pay extra. You might have to pay a fine or something. You can put vesting schedules in place. You can do all this and fix it. But again, it's just more time and money later on and more difficult, more cumbersome to do when you're trying to run a company. Get it all done correctly in the beginning and go out and run your company.
