Legal and Compliance
This domain covers the legal structure a company sits inside: how it is incorporated, who owns what, what you have promised customers about their data, and which rules apply to your particular business. None of it is a substitute for a lawyer. It is the vocabulary that lets you have a useful conversation with one, and recognize the moments that call for it before rather than after.
36 concepts in Legal and Compliance
- Employee vs. Independent ContractorThe legal test that determines whether a worker must be treated as a payroll employee, with tax withholding and benefits obligations, or can be engaged as a self-directed independent contractor, and misclassifying someone exposes the company to back taxes and penalties.
- Incorporation Basics and the 83(b) ElectionIncorporating creates the legal entity that issues stock to founders; the 83(b) election is a filing, due within 30 days of receiving restricted stock, that lets founders pay tax on it now at its (typically negligible) current value instead of later as it vests and appreciates.
- Delaware C-Corp vs. LLCThe Delaware C-corporation is the near-universal entity choice for venture-backed startups because it supports preferred stock, option pools, and the standardized deal structure investors expect; an LLC's pass-through taxation and flexible membership structure make it a poor fit for the same path.
- IP Assignment AgreementA signed agreement, from every founder, employee, and contractor who touches the product, assigning to the company any intellectual property they create in connection with the work, without it, the company may not actually own its own code and inventions.
- Terms of Service and Privacy Policy BasicsThe terms of service set the legal rules for using the product (liability limits, what users may and may not do, dispute handling); the privacy policy is a legally required disclosure of what personal data is collected and how it is used. Both need to reflect what the product actually does, not a generic template.
- Data Privacy Basics (GDPR/CCPA)The baseline legal obligations for handling personal data (what you may collect, why, how long you keep it, and what rights the person it describes has over it) set for EU residents by GDPR and for California residents by CCPA.
- Asset Sale vs. Stock SaleThe two basic ways to structure an acquisition, the buyer purchases specific assets and liabilities out of the company (asset sale), or the buyer purchases the company's equity itself, liabilities included (stock sale), and the choice changes who owns what, who owes what, and how much tax each side pays.
- Letter of Intent (LOI)A short, mostly non-binding document signed early in an acquisition that lays out the proposed price, structure, and timeline before either side commits to full due diligence and definitive legal documents.
- EarnoutA portion of an acquisition's purchase price paid only if the acquired business hits agreed-upon milestones, usually revenue or profit targets, after closing, rather than all being paid upfront.
- Representations and WarrantiesFactual statements the seller makes in the purchase agreement about the state of the business (ownership of assets, accuracy of financials, no undisclosed liabilities) that the buyer relies on in deciding to close, and that create liability if they turn out to be false.
- IndemnificationThe contractual obligation for one party in a deal, usually the seller, to compensate the other for losses caused by a breach of the agreement's representations, warranties, or covenants, discovered after closing.
- Escrow HoldbackA portion of the purchase price, typically 5 to 15 percent, withheld at closing and held by a third party for a set period to fund any indemnification claims the buyer later makes, rather than paid out to the seller immediately.
- Acqui-hireAn acquisition primarily motivated by hiring the target's team rather than its product, revenue, or customers, usually structured with most of the deal value going to retention packages for key employees rather than to shareholders at closing.
- Non-Compete and Non-Solicit AgreementsContractual restrictions, common in acquisition agreements and senior employment contracts, that bar a person from competing with the business (non-compete) or from poaching its employees and customers (non-solicit) for a defined period after leaving or after a deal closes.
- Material Adverse Change (MAC) ClauseA provision letting the buyer walk away from a signed acquisition agreement, without penalty, if something happens to the target business between signing and closing that significantly and adversely affects its value, operations, or prospects.
- Working Capital AdjustmentA post-closing true-up to the purchase price based on the difference between the target's actual working capital at closing and an agreed-upon target level (the peg), designed so the seller cannot strip cash or inflate receivables right before the deal closes.
- No-Shop and Exclusivity ClauseA binding commitment, usually the only truly binding part of a letter of intent, that the seller will not solicit, negotiate with, or accept offers from other buyers for a fixed period while the current buyer completes diligence and negotiates definitive documents.
- Break-Up FeeA fee, agreed in the definitive acquisition agreement, that one party pays the other if the deal fails to close for a specified reason, most often the seller taking a better competing offer, or the buyer failing to secure financing.
- Drag-Along RightsA provision letting shareholders holding a specified majority force all other shareholders to participate in, and not block, a sale of the company on the same terms, so a small minority cannot hold up an acquisition the majority wants to accept.
- Tag-Along Rights (Co-Sale Rights)A provision letting minority shareholders participate in a sale that a majority holder is making, selling their own shares on the same terms, rather than being left behind holding stock in a company now controlled by a new, unknown buyer.
- Fairness OpinionA written opinion from an independent financial advisor stating whether the financial terms of a proposed transaction are fair, from a financial point of view, to a specified group of shareholders, commissioned mainly to protect a board against later claims that it breached its duty in approving the deal.
- Disclosure ScheduleA detailed set of exhibits attached to the purchase agreement that lists every specific exception to the reps and warranties (pending litigation, contracts requiring consent to assign, known liabilities) so the seller is not making a false statement by omission.
- IP Diligence and Freedom to OperateThe review a buyer or investor performs to confirm a target actually owns its intellectual property free of gaps (unsigned assignments, open-source license obligations) and that using it does not infringe a third party's existing patents or IP rights.
- Change of Control ProvisionsClauses embedded in a company's customer contracts, leases, loan agreements, and employment agreements that are triggered specifically by an acquisition, most commonly requiring the other party's consent before the contract can transfer to the new owner, or granting them a right to terminate.
- Litigation DisclosureThe requirement, in both financing and acquisition diligence, to disclose any pending, threatened, or settled legal disputes involving the company (lawsuits, regulatory investigations, employment claims, IP disputes) so a buyer or investor can assess the actual and contingent legal risk they are taking on.
- Corporate Governance DiligenceThe review of a company's formal corporate records (board minutes, written consents, stock issuance approvals, bylaws and amendments) to confirm that major company actions were actually authorized the way corporate law requires, not just informally agreed to.
- Regulatory and Compliance DiligenceThe review of whether a company holds the licenses, permits, and registrations its industry requires, and whether its operations actually comply with the specific regulatory regime it operates under, healthcare, financial services, and other regulated sectors carry the heaviest versions of this.
- HR and Employment DiligenceThe review of a target's employment practices during diligence, worker classification, offer letters and employment agreements, unpaid wage claims, benefits compliance, and equity grant documentation, to surface liabilities that transfer with the workforce.
- Voting AgreementA separate agreement, signed alongside a financing round, in which specified shareholders commit to vote their shares a particular way on defined matters, most commonly to elect specific people to board seats designated for each investor class and for the founders.
- NVCA Model Financing DocumentsA set of standardized, publicly available term sheet and definitive financing document templates published by the National Venture Capital Association, widely used as the starting point for priced venture rounds so both sides negotiate deviations from a known baseline rather than drafting from scratch.
- Founder Lock-UpA restriction, negotiated as part of an acquisition or IPO, preventing a founder or major shareholder from selling their remaining stock in the acquiring or newly public company for a set period after closing, distinct from equity vesting, which governs whether unvested shares are earned at all.
- Director and Officer (D&O) IndemnificationThe company's contractual and insurance-backed commitment to cover legal costs and damages for its directors and officers if they are personally sued for decisions made in that role, protecting them from bearing the company's legal risk out of their own pocket.
- Mutual Non-Disclosure Agreement (NDA)A confidentiality agreement in which both parties, not just one, commit to protect information the other shares during a negotiation, deal discussion, or partnership conversation, as opposed to a one-way NDA that only protects one side's disclosures.
- Qualified Small Business Stock (QSBS)A federal tax provision (Section 1202) that lets founders and early investors exclude a substantial portion, often all, of their capital gains from selling qualifying startup stock, provided it's held long enough and the company met specific eligibility criteria when it was issued.
- Successor LiabilityThe risk that a buyer in an asset sale, despite structuring the deal to leave certain liabilities behind, can still be held responsible for some of them under exceptions courts recognize, such as when the deal looks like a de facto merger.
- Cybersecurity and Data Privacy DiligenceThe diligence workstream, distinct from a company's public-facing privacy policy, that examines a target's actual security practices, past breach or incident history, and data-handling compliance ahead of a financing or acquisition, because a buyer is inheriting both the data and the risk of how it has been protected.
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