Strengthen Your Startup’s Legal Framework Before Success Tests It
Many early-stage startup teams move fast, fueled by trust, optimism and a shared goal. But what happens when real money shows up? Or when a cofounder wants out?
Without a stockholders’ agreement for the startup or even a basic framework for assigning intellectual property (“IP”) or clarifying voting rights, the very thing you built together can begin to strain under its own momentum. At Crowley Law LLC, we help startups define the legal framework they’ll need before success makes the gaps harder to manage.
The Early Habits That Create Late-Stage Risk
Early-stage startup teams rarely overlook legal structure out of negligence. More often, the delay is practical. The early momentum pulls founders in ten different directions and something always slips down the list.
- Founders are focused on timelines, proof-of-concept milestones and pitching to investors, often without time to fully address the company’s governance or formalize internal agreements
- Legal feels like overhead, something to revisit once the startup gains traction or the founding team grows
- And when early alignment is strong, no one wants to “lawyer up” too soon. It feels counter to the trust that’s helping the company move forward
But when cofounders avoid documenting their rights and obligations, small decisions can snowball into serious problems, especially once the startup begins to scale.
Why Life Sciences Startups Can’t Rely on Trust Alone
In many life sciences startups, the company’s value is inseparable from its intellectual property. That makes early alignment essential and not just between founders, but between the startup and the legal agreements that define ownership, decision-making and responsibilities. Here’s what trust can’t do for your startup:
- Trust won’t vest equity fairly when someone stops showing up
You may trust your cofounder today, but what happens when something changes? They move, burn out, have life-changing family issues or simply stop showing up. Without definitive legal documents in place that include founder vesting and repurchase rights, that person can walk away with a significant equity stake, even though they’re no longer contributing to the company.
A set of properly drafted agreements gives the startup the ability to recover unearned shares and reallocate them to active founders or investors who are still building. - Trust won’t protect intellectual property created before incorporation
You might assume that since you’re building together, everything you create is owned by the startup. But until your company is formally incorporated, that ownership doesn’t exist. Legally, the pre-formation intellectual property belongs to the individual who created it. If that IP forms the basis of your product and was never assigned to the company, you’re operating on borrowed ground.
Investors will flag this during due diligence. Worse, a founder dispute can turn that missing agreement into a source of leverage. A proper stockholders’ agreement, equity incentive plan with associated agreements and IP assignment document make it clear who owns what, removing guesswork and protecting both the startup and its stockholders. - Trust won’t prevent an ex-founder from holding the company hostage
Life sciences startups often operate for years before hitting licensing or clinical milestones. If a founder leaves during that time without clear restrictions in place, they might retain voting rights, a large equity stake or even consent rights over key decisions. That’s how companies get stuck.
A former team member who’s no longer contributing can block a funding round, hold up a sale or demand payout before signing off. A stockholders’ agreement for the startup can fix this. With terms like transfer restrictions, buy-back rights upon departure or when a third-party offers to purchase stock, drag-along rights that require consent to transactions approved by the Board and the majority of stockholders and clearly defined dispute resolution procedures, the company retains control and the leverage stays with the people still building. - Trust won’t convince investors that the company is legally sound
You might trust your cofounder and the two of you might be perfectly aligned. But investors won’t take your word for it. They need documentation. That means a stockholders’ agreement and appropriate arrangements for allocation and control of equity for the startup, IP assignment records and a clear breakdown of who owns what. Without that structure, they see gaps in control, gaps in enforcement and ultimately, gaps in value.
These companies are high-risk by nature. If the legal foundation is missing, potential investors start thinking about all the ways the company could unravel. And then they walk instead of investing. - Trust won’t clarify who has decision-making authority under pressure
In the early stages, when everything feels aligned and decisions are made over text threads and lab benches, trust may seem like enough. But trust isn’t a decision-making framework. It isn’t enforceable and it rarely survives the kind of pressure that comes with a disputed funding round, an FDA surprise or an unexpected acquisition offer.
A stockholders’ agreement for the startup brings clarity where trust falls short. It can define voting rights, board composition, tie-breaking procedures and what decisions require broader consent.
The Paradox of Success
It’s easy to assume that legal conflict comes from failure. But for life sciences startups, the real danger is when momentum hits before the foundation is ready.
- Success brings new money, but with expectations
Early capital may come from friends, family or grant-makers who trust you and your science. But institutional investors operate differently. When the dollars get bigger, so do the expectations. They’ll want to see a stockholders’ agreement for the startup, IP assignment records and agreements covering control of equity interests, board composition, voting rights and clear decision-making protocols.
If your company can’t show that the foundation is in place, the deal slows, if it happens at all. At that stage, missing structure doesn’t just cost time. It can cost you leverage, equity and control. - Success increases the value of equity (Which must now be divided)
Equal equity splits might keep the peace at formation, but they rarely age well. As a startup grows in value, roles evolve. Some founders stay hands-on. Others step away. The problem isn’t the shift in contribution; it’s that nothing in writing reflects it.
Without vesting schedules or repurchase options laid out in formal agreements, the startup may find itself negotiating with inactive founders whose stock is now worth real money. That’s not the conversation you want to be having during a funding round. - Success tests relationships with real pressure
What felt like minor differences in the early days can become real points of tension once funding is on the line. Imagine a situation where one founder wants to pivot, another wants to license and a third refuses to give up a board seat.
Without a shareholders’ agreement to define voting thresholds, lay out board composition or offer buy-back rights for inactive co-founders, there’s no playbook for resolving the conflict. The result? Stalemates, lost time and decisions made under duress instead of strategy.
How to Protect Your Startup Before Success Tests It
We’ve worked with startups across three decades and seen how quickly momentum exposes gaps. But when the right documents are in place early, everything that comes later becomes easier to manage. Here are the foundational structures that we recommend:
Stockholders’ Agreements and Operating Agreements
Many early-stage life sciences startups begin as limited liability companies (“LLCs”) because the structure offers flexibility in how ownership is divided, how profits are allocated and how taxes are handled. In the early days, when losses are expected and operations are lean, an LLC can offer real advantages.
But as the company matures, brings in external investors or prepares for a possible acquisition, most startups convert to a Delaware corporation that has chosen to be taxed as a separate entity under Subchapter C of the Internal Revenue Code. These are commonly referred to as “C Corporations”. This corporate structure supportst multiple classes of stock, stock option plans and the type of equity structure institutional investors expect.
If your company is still operating as an LLC, your operating agreement is the governing document. It lays out who owns what, who manages the business and how major decisions are made. It addresses voting rights, economic interests, how members can exit and how ownership can be transferred.
For science-driven startups where intellectual property is central, it can also define how IP is assigned to the company and how new contributions are treated. Without it, key issues like decision-making and transfer of shares remain unresolved.
Once a startup converts to a corporation, the governing documents shifts. Another set of documents is required. A stockholders’ agreement for the startup becomes the tool that defines rights and responsibilities among the company’s shareholders, including founders, investors and board members.
An equity incentive plan establishes rules for the grant and retention of equity interests. The bylaws establish norms for meetings and decision-making, among other matters. Add to that IP assignments that clearly transfer ownership of all IP to the corporation.
This set of documents, and related agreements, set rules around voting thresholds, unvested shares, drag-along rights and how shares can be sold or transferred. The legal structure may change, but the need for alignment doesn’t. Whether you’re operating as an LLC or a corporation, you need a clear agreement that protects your company’s governance and future.
Here is how these agreements can protect your startup:
- It prevents the wrong people from holding power in your startup
In a startup, power lives in three places: voting rights, board seats and equity ownership. A set of agreements like those described above (for corporations) or an operating agreement (for LLCs) brings structure to each.
They can protect against early exits by applying vesting schedules and repurchase rights, so founders earn their stake over time. They can define voting thresholds so that major decisions reflect real participation, not just past involvement. And they can lay out board composition rules, making sure those guiding the company are still present and contributing. - Anticipate and contain disputes
Disputes don’t usually destroy a startup. But the lack of a plan to handle them can. A well-drafted set of corporate agreements or operating agreement builds in mechanisms for handling conflict when it arises. Whether it’s a disagreement over equity splits, transfer of shares, board composition or decision-making authority, such agreements can include vesting schedules, drag-along rights, right of first refusal and dispute resolution provisions that give the company a way forward. It’s about being prepared to resolve it without stalling the business. - Blocking bad exits and unwanted transfers
What if a founder gets divorced and his or her “ex” is suddenly a stockholder? What if someone dies and shares go to a child who has no stake in the science or the mission? What if a co-founder sells his or her stake to someone the rest of the team has never met? These things happen when startups grow before the legal framework catches up. A stockholders’ or operating agreement can stop unwanted share transfers before they happen, by putting in place transfer restrictions, right of first refusal and consent rights.
IP Assignment Agreements
The next document worth your attention is the IP assignment agreement. This is a formal transfer of intellectual property from the person who created it to the company. That distinction matters, especially in early-stage startup environments where research, data or code created before incorporation may still sit in a gray zone. Without this transfer in writing, the company doesn’t truly own what it’s building on.
There are critical junctures where failing to execute this agreement could expose the company:
- At or immediately after company formation (Founders)
Most early-stage startup founders begin building before the entity even exists. That’s normal, but it also means the company doesn’t automatically own the intellectual property created during that time. To avoid confusion later, each founder should sign an IP assignment agreement as soon as the company is formed. This document formally transfers rights to the company in all relevant prior and future IP, so that the value the co-founders are building actually belongs to their company. - Upon hiring employees or contractors
Before any work is performed, you’ll want any employee or contractor to sign a written agreement that includes an intellectual property assignment, a duty to disclose inventions and a waiver of moral rights, among other matters. Without this, your company may not legally own the intellectual property it paid for. These terms are especially important in life sciences and other technology companies, where even one line of code or lab procedure can underpin your core business.
Confidentiality and Invention Agreements
The next document worth your attention is the confidentiality and invention agreement. It’s a written contract that each founder, employee or contractor should sign before beginning work.
These agreements contain two key elements: a confidentiality clause that prohibits disclosure or misuse of sensitive company information and an invention assignment clause that transfers any relevant discoveries or improvements to the company.
Final Word to Founders
If you’ve read this far and your startup is still relying on trust alone, you’re already behind. The science may be sound, the team may be tight, but without a legal structure, none of that is protected.
Before you take another step, ask yourself:
- Have all founders signed an IP assignment agreement that assigns ownership of all relevant IP to the company?
- Does your stockholders’ agreement or operating agreement clearly address voting rights, exits and unvested shares?
- Do you have confidentiality and invention agreements in place for every employee, contractor or advisor handling sensitive information?
- Can your company respond if someone leaves, sells his or her shares or challenges the board’s composition?
FAQs
What Is a Stockholders’ Agreement and Why Do We Need One?
A stockholders’ agreement is a document that defines the rights and obligations among your company’s stockholders. It typically addresses voting rights, ownership percentages, transfer of shares, dispute resolution and more.
For startups, it’s the framework that holds things together when the founding team expands, roles evolve or outside investors join. Without it, decisions often get made in confusion or under conflict.
When Should We Create These Agreements? Before or After We Raise Funding?
Before. Once a funding round begins, investors expect to see that the legal structure is already in place. That includes a stockholders’ agreement (for corporations), IP assignment agreements and confidentiality documents. Waiting until the round is underway puts you in a weaker position and may delay or even jeopardize the deal.
What Happens if One of Our Co-founders Leaves Before Vesting Is Addressed?
If there’s no vesting schedule or repurchase rights, the departing cofounder may keep all of their shares, even if he or she is no longer contributing. This can skew ownership percentages, limit your ability to raise capital and create long-term governance problems. A stockholders’ agreement can prevent this by defining how unvested shares are handled and giving the company the right to buy them back.
We All Trust Each Other, Do We Really Need Formal Agreements?
Yes. Trust is essential, but it’s not a legal structure. Agreements like IP assignments, operating agreements and stockholders’ agreements are not signs of mistrust; they’re how you protect the business from misunderstandings, memory gaps and unexpected changes.
And with outside vendors and independent contractors, your company won’t own any IP it pays them for without a written agreement transferring all right to the work. Even the best teams hit friction. These documents give you a framework to work through it.
Will Not Having These Documents Hurt Our Chances With Investors?
Most likely, yes. Investors, especially institutional ones, look for companies that are investment-ready. That includes a stockholders’ agreement, board composition, IP ownership records and clear decision-making authority. If those aren’t in place, the deal will either slow down or shift leverage away from the founders.
What if We’re Still an LLC? Do We Need These Agreements Now
Absolutely. If your company is an LLC, your operating agreement plays a similar role to a stockholders’ agreement in a corporation. It should address management authority, ownership percentages, transfer of shares, voting rights and how intellectual property is assigned to the company. These terms protect your startup’s business and can be crucial if you later convert to a corporation.
Doesn’t the Company Automatically Own Whatever We’ve Built Together?
No. Unless there is a signed intellectual property assignment agreement, the default rule is that a person who is not a formal employee (i.e. receives salary or wages reported on IRS Form W-2) who created the work owns it.
This includes code, research data, inventions and product designs. To avoid ownership disputes, each contractor, and to avoid disputes founders and employees as well, should sign a written agreement that transfers to the company rights in all IP they create for the company.
How Does Crowley Law LLC Help Founders With This Process?
We work directly with startup teams to draft and review the foundational agreements that protect what they’re building. That includes stockholders’ agreements, operating agreements, IP assignment forms, confidentiality agreements, dispute resolution provisions and related agreements as needed. We don’t just offer templates. We tailor each document to your team, your equity structure and your goals.
