Setting Up Your Startup for VC Success: How to Structure Your Initial Company
Getting the first legal and equity foundations right is critical for any startup that plans to eventually raise venture capital. A clean, well-documented initial setup prevents headaches and signals to investors that you are organized and founder-aligned.
The Foundation for Success
A clean, well-documented initial setup not only prevents headaches down the line—it signals to investors that you are organized, thoughtful, and founder-aligned.
Here's a roadmap for a smart initial company setup:
Key Components of Initial Structure
1. Authorized Shares and Founder Allocation
Start with a reasonable number of authorized shares, commonly around 10 million, to give you flexibility for future grants, option pools, and fundraising rounds.
From this authorized pool, founders typically purchase only a portion of the shares upfront—commonly 50% of the reserved amount. This is enough to document meaningful ownership and limit early cash outlay. The remaining shares are reserved for future issuance (option pools, advisors, etc.), so even though founders haven't bought all the shares yet, they effectively own 100% of the company at this stage.
Pro tip:
All founder shares should be issued at par value, which is usually a nominal amount (e.g., $0.0001 per share) to minimize tax consequences.
2. Use a Stock Purchase Agreement (SPA)
Each founder should sign an SPA for their shares. This formalizes the purchase, sets the price (par value), and protects both the company and the founders legally.
It ensures that founders have proper ownership documentation from day one, which is a must for future investors.
3. Founder Vesting
Even if founders are issuing shares to themselves, it's highly recommended to implement a vesting schedule. A common structure is four years with monthly vesting and a six-month cliff.
Protection
Protects both co-founders and future investors
Commitment
Ensures long-term founder commitment
Vesting ensures that if a founder leaves early, the company can reclaim unvested shares.
4. File Your 83(b) Elections
For founders receiving shares at par value, filing an 83(b) election within 30 days of issuance is critical.
Critical timing:
This locks in any potential tax liability based on the nominal par value rather than the fair market value at a later date, which could be significantly higher as the company grows.
5. Sign Key Agreements: PIA & NDA
Founders should also sign:
PIA Agreement
Ensures all intellectual property created by founders belongs to the company
NDA
Protects sensitive company information from external sharing
Both agreements reinforce the company's legal and intellectual property position, which investors will scrutinize during diligence.
6. Establish an Option Pool
From day one, set up an option pool for future employees, advisors, and consultants. A typical size is 10–15% of the fully diluted cap table.
Options should also have vesting, similar to founders—commonly four years with monthly vesting and a six-month cliff. Vesting aligns incentives, ensures commitment, and protects the company if someone leaves early.
Benefit:
This allows you to grant options without repeatedly amending the charter or diluting founders unpredictably.
7. Determine Exercise Price Using a Board-Approved GFE
Option grants should have a fair market value (FMV) exercise price determined by a board-approved Good Faith Estimate (GFE).
Important:
Do not set options at par value (e.g., $0.0001), even though founder shares were issued at par.
A meaningful FMV ensures that anyone exercising options puts real financial "skin in the game," aligning incentives and maintaining fairness, while satisfying IRS requirements for non-qualified options.
Key Takeaways
A clean initial setup signals that your company is investor-ready and reduces future legal and tax headaches. In summary:
- Authorize enough shares (commonly around 10M) and issue a meaningful portion to founders at par value
- Execute SPAs and implement vesting for founders (four years, monthly, six-month cliff)
- File 83(b) elections immediately
- Sign PIAs and NDAs to secure IP and confidentiality
- Establish a properly sized option pool with vesting and a board-determined FMV exercise price, not at par
Even if founders purchase only part of the reserved shares, the remaining shares are for future issuance, so they own 100% of the company at this stage.
By taking these steps, founders create a solid foundation that is attractive to VC investors and positions the company for smooth growth, fundraising, and team expansion.
Final Thoughts
Setting up your initial company structure correctly is one of the most important investments you can make as a founder. It's not just about compliance—it's about creating a foundation that will support your growth and make you attractive to investors.
The time and effort you invest in getting this right upfront will pay dividends throughout your company's lifecycle, from your first employee hire to your Series A and beyond.
If you'd like to connect with Bob to discuss your fund raising strategy, you can connect with him below – because every point matters.