Launching a startup is exciting—but it's also a process littered with misconceptions. As an attorney for startups and new businesses, I see founders consistently get tripped up by common myths that can not only hamper their business’s trajectory but can skyrocket legal costs down the road. Here are the five biggest myths of launching a business direct from an attorney for startups.

Myth #1: I Need to Give Away Equity

This is a big one. Many founders rush to hand out equity to investors or early employees immediately in order to gain traction and attract the best talent. I recently worked with an organization that was poised to give 5% equity to one of their C-suite executives. Even if they vest that over four years with a one-year cliff, if that person leaves after three years and 75% of their equity is vested, that person owns 3.5% of your company. For simply working for you for three years. So when you sell your business for $10 million, that person is going to get about $350,000 of that money.

While equity can be a powerful incentive, it’s also one of your most precious assets. You don't have to feel forced to give away significant equity from the outset. Milestone-based bonuses or deferred compensation can be alternatives worth exploring for your leadership team. If equity has to be on the table, there are ways to structure safeguards around it. For example, some founders consider extending the vesting window to five years or have a two-year cliff. The goal is often to stretch out incentives as long as possible to push that jump point as late as possible. And when that time comes, putting parameters around departure may be worth considering. Most structures provide that if someone is terminated for cause or breach of contract, they forfeit unvested equity. If you were happy with their work but they decide to leave, the business might buy them out at a discount. While an equity stake is a valuable negotiating chip, especially for your leadership team, there are ways to soften the long-term impact on your business.

Additionally, many founders feel that they need to set up an employee option pool right away. While option pools are important, many employees don’t necessarily expect one from the outset.

I have worked with a lot of startups that rush to grant equity without a long-term plan in place. That can be a costly mistake. Equity is your control; working with an attorney to structure options wisely can help align them with your short- and long-term business goals.

Myth #2: Securities Rules Don’t Apply to Me

Related to giving out equity shares, many startups don’t think securities regulations apply to them yet. Securities rules don’t apply only to big companies. In reality, the moment you issue equity which can be shares, stock, rewards, options, a safe agreement, a simple agreement for future equity, a convertible note, all of these things are securities. People think because they are giving it away and not receiving money in return that there is no transaction. That is not true, and ignoring these rules can result in penalties or even litigation.

Myth #3: I Can Figure Out My Business Structure Later

“I just created an LCC; I’ll figure out the structure later.” I cannot tell you how many times a founder has told me this without prior consultation.

Putting off the decision about your business structure (LLC, C-corp, S-corp, or partnership) can create significant obstacles. This decision affects taxes, liability and even fundraising. Many founders form an LLC thinking it’s always the best option, but it can be short-sighted. While LLCs are relatively easy to set up, are flexible, and offer tax benefits and liability protection, they aren’t universally the best fit, especially for startups seeking venture capital. If you will eventually go after funding, especially if you are in the tech space thinking you will do multiple rounds with multiple investors, those investors typically want to work with a C-corp, not an LCC. Private investors often require C-corp structures because they allow for multiple classes of stock, offer potential tax advantages like Qualified Small Business Stock (QSBS) treatment, and provide a cleaner path to an IPO or acquisition. While it is possible to make the change from an LLC to a C-corp down the road, those extra steps, at a minimum, result in increased attorney’s fees and, at worst, result in missed funding opportunities (not to mention how a conversion can threaten the company’s QSBS status). Taking the time to get advice tailored to your future plans before making this foundational decision is almost always worthwhile.

Myth #4: The Legal Paperwork is Separate From Day-to-Day Business Operations

Some founders believe that legal documents are simply a formality and can be set aside once business operations start. Your governing documents (whether simply an operating agreement or a more complex collection of bylaws, shareholder agreement, and certification of incorporation) should match how the business actually wants to operate.

I have worked with business that have been around for years, and they knowingly do not follow their own operating documents. For one company, their governing documents say that the CEO cannot make decisions that are over $100,000 without getting shareholder approval. That CEO doesn’t make decisions that are under $100,000. He is making decisions like whether the company should enter into a new lease agreement for a large commercial warehouse, if it’s best to break a key vendor agreement and make the products inhouse, or sue a competitor for trademark infringement. These are decisions a CEO must make. And while he (and the company’s shareholders) know that he is not following the company’s governing documents, no one is concerned because the business is doing well. But if that company hits rough waters, that’s when the long knives can come out, and now all of those $100,000 decisions are put under a microscope.

Lots of people rubberstamp their governing documents because they are excited to get to the task of doing business, but they are not talking about how they are going to do business. Your paperwork should be tailored to accurately reflect how you are conducting business. And as your business grows, if those documents are not updated to reflect reality, you may be setting yourself up for disputes later.

Myth #5: We Planned for Failure, We Don’t Need to Plan for Success

The beginning of a business is fun and exciting. It is a time full of dreams and aspirations. And this is exactly the time, the time when everyone is getting along, that you need to plan for your business divorce. Founders are oftentimes focused on what is directly in front of them: the cool solution or invention that doesn’t exist on the market. But what if that cool solution is successful? And what if it is really, really, really successful? Now, everyone wants to get paid, and you have no plan.

This happens. I was once working with a company that was breaking even until it wasn’t. They sold for a healthy eight figures. It wasn’t until that moment that everyone started wondering how they all were going to get paid. Thankfully, they had good enough relationships amongst the executive leadership that there was not a real dispute, and we got the payouts papered, but it cost the shareholders 10% of the net purchase price. When there are loose agreements or ranges of equity promised, after you’ve won the lottery is not the time to decide who gets what. Having clarity from the very beginning, and planning like you are going to be wildly successful, can be just as important as planning for failure.

Final Thoughts

For startups, especially ones that will eventually seek out venture capital investment or a private equity exit, having your legal house in order from the start can make a significant difference. PE firms have a lot of options on where to invest. While legal paperwork is likely not going to make the deal (the financials will), it could break it. Founders have a laundry list of decisions to make when starting a business, and this list of myths is far from exhaustive. Proactively seeking out an attorney from the start can help you get tailored advice for not just the business you have in front of you but the one you want to build in the future.

This article is for informational purposes only and does not constitute legal advice. Every business situation is unique, and readers should consult with a qualified attorney before making legal or business decisions.