I'm dealing with a situation and need some guidance.
bootstrapped to funded transition. I've been dealing with this for about 5 months now and the situation isn't improving.
I have already tried to resolve this directly but got conflicting advice.
What are my legal options here? Is it worth pursuing?
Have you tried reaching out to your state's legal aid society? They sometimes have free resources or mediation services.
NAL, but from what I've read, you should check your state's specific laws. But don't just take my word for it, get real legal advice.
So this is more common than people think.
Don't make the same mistake I did -- is having everything documented. I'd recommend keeping a detailed timeline instead.
The bootstrapped-to-funded transition is one of the most common issues I see founders struggle with, so let me lay out the key legal steps. The core challenge is that a bootstrapped company typically has a simple ownership structure, perhaps an LLC with two members splitting profits 50/50, and that needs to be converted into an investor-ready corporate structure.
Step one is almost always converting from an LLC to a C-Corp, usually incorporated in Delaware. VCs strongly prefer Delaware C-Corps because of the well-developed corporate law, the Court of Chancery, and standardized investment documents. The conversion can be done as a statutory conversion or as a new entity formation with an asset transfer. Your tax advisor should weigh in on which approach minimizes tax liability.
Step two is cleaning up your cap table. This means formalizing any informal equity arrangements. If you promised a cofounder 30 percent equity with a handshake, that needs to become a proper restricted stock agreement with vesting. If early employees were promised equity, you need to issue proper stock or options. Any IP created by contractors or employees needs to be properly assigned to the company through written agreements.
Step three is establishing an option pool. Most investors expect to see a 10 to 20 percent option pool carved out before their investment. This pool comes entirely from founder dilution, so negotiate the size carefully. A common mistake is agreeing to a pool larger than you need for the next 18 to 24 months of hiring.
If you're thinking about an S-Corp election, run the numbers first. It only makes sense once your net income is above ~$40-50k. Below that, the payroll costs eat up any tax savings.