Common Mistakes to Avoid When Incorporating a Startup
Incorporating a startup is not just a formality. It shapes ownership, investor readiness and long-term flexibility. This article covers the five biggest legal mistakes founders make and how to avoid them from the start.
Structure & Ownership: Choose the Right Entity, Name & Beneficial Owners
Choosing the right legal structure is one of the most important pre-incorporation decisions a founder makes. It affects your ability to raise capital, maintain control, comply with tax rules, and onboard investors smoothly.
Common missteps include selecting a jurisdiction without considering your fundraising or tax strategy, registering the company under someone else’s name, or failing to file required beneficial ownership disclosures. To get it right from day one:
- Choose a jurisdiction that fits your business model, investor base, and relevant tax treaties: not just what’s fast or cheap.
- Register the entity in the names of the actual founders.
- File required beneficial ownership (UBO/BOI) reports, where applicable.
A thoughtful setup today saves legal and operational headaches tomorrow.
Explore our article Startup Jurisdictions by Industry (Use Cases) to compare top jurisdictions and pick a structure aligned with your roadmap.
Founder Stock Purchase Agreement & Proprietary Information and Inventions Assignment Agreement
Early-stage disputes often stem from unclear expectations around equity and IP. When a founder leaves without vesting or retains rights to pre-incorporation work, it can jeopardize fundraising and long-term ownership integrity. To prevent this:
- Sign a Founder Stock Purchase Agreement that clearly defines equity, vesting schedules, roles, and share buyback rights. Looking for those essential legal documents every founder needs? Check out our article 5 Legal Templates Every Founder Must Have (and Where to Get Them) on the Skala blog.
- Execute Proprietary Information and Inventions Assignment Agreements with all founders, advisors, and contractors even for work created before incorporation. Generate Proprietary Information and Inventions Assignment Agreement at Skala.
- Issue founder shares only after agreements are finalized and, if required, formally approved by the board.
Laying the legal groundwork early protects your cap table and your startup’s future.
Keep Your Data Room Neat from Day One
Investors expect clear corporate records. Missing approvals or messy cap tables can cause delays or even derail a deal. To stay organized and due-diligence-ready:
- Prepare and sign board resolutions for every equity event: share issuances, SAFEs, option grants, conversions.
- Keep resolutions, agreements, and other key docs in one place (ideally a digital minute book).
- Maintain an up-to-date cap table: even a spreadsheet works if it reflects all changes.
Skala helps you generate the right documents and stay on top of corporate housekeeping.
Close your rounds properly with Skala’s SAFE templates, adapted for your jurisdiction:
Early Tax & Accounting Structure
Many founders wait too long to handle tax and accounting until penalties show up or due diligence exposes gaps. Problems often start with mixing personal and business funds, misclassifying contractors, or assuming early-stage companies don’t have tax obligations.
In reality, startups can face dozens of tax and reporting requirements, even in the first year. To stay compliant, you’ll often need a licensed accountant familiar with cross-border operations and startup needs.
Key steps:
- Open separate business accounts from day one.
- Work with a qualified accountant early.
- For multi-country operations, consider a holding structure with local subsidiaries to separate risk, revenue, and tax exposure.
- Stay compliant with registration, reporting, payroll, and indirect tax obligations in every country you work.
Capitalization Table, Option Pool & Governance Rules
A clear and well-maintained capitalization table builds investor trust and reduces the risk of internal conflict. Early equity arrangements that are vague or undocumented can create confusion, misalignment, and obstacles during fundraising or due diligence. To stay on track:
- Model dilution across future funding rounds, including SAFEs, priced equity, and option pool changes.
- Set up a board- and shareholder-approved option pool in advance, typically 10 to 20 percent before a funding round.
- Define vesting schedules with standard cliff periods for all founders, employees, and advisors receiving equity.
- Document all equity-related decisions through board meetings or written consents, including formal minutes.
Final Thoughts
Getting your incorporation right from day one isn’t just paperwork. It’s how you protect your equity, set the rules, and earn investor trust. Skip the basics, and you could lose control before you even start scaling.
Ready to turn these lessons into real board approvals, a clean cap table, and documents investors will take seriously? Skala gives you everything you need to do it right.
