Checklist · Business

Forming a Startup and Closing a Financing Round: A Practical Checklist

26 U.S.C. § 351

Type: Checklist
Jurisdiction: National
Date: 2023-11-26
Topic: Business

This checklist runs a startup through the two operations founders actually perform: forming the company correctly, and closing a financing round. Part A covers the first ninety days, item by item, including the thirty-day election that cannot be extended and the intellectual property assignments that cause more diligence failures than anything else. Part B covers early-stage instruments and the conversion modeling that should precede every signature. Part C covers the priced round from term sheet through post-closing filings. Separate parts address employee equity and valuations, the diligence file, founder departures, and the exit waterfall. A final part lists the irreversible mistakes.

Forming a Startup and Closing a Financing Round: A Practical Checklist

Business > Startups and Venture Financing | Published 26 November 2023 - Updated 6 July 2025 | UpLaw - uplaw.us

Part A — The First Ninety Days

A1. Entity

[ ] Decide the entity and jurisdiction. Delaware C corporation if institutional capital is the plan; home-state entity if it is not.
[ ] Confirm the tax consequences before issuing anything: 26 U.S.C. § 351 at formation; 26 U.S.C. § 1202 eligibility, which can be forfeited by a careless structure; 26 U.S.C. § 1045 rollover; 26 U.S.C. § 1244 ordinary-loss treatment; and why 26 U.S.C. § 1361 makes an electing small business corporation incompatible with venture funds.
[ ] File the charter. Authorize enough shares to avoid repeated amendments.
[ ] Adopt bylaws.
[ ] Appoint the initial board and appoint officers with signing authority.
[ ] Register as a foreign corporation wherever you actually operate.
[ ] Obtain the tax identification number, employment registrations, and local licenses.
[ ] Open bank accounts in the company's name and stop paying company expenses personally.

A2. Founder Equity

[ ] Issue founder shares by subscription agreement and board consent, at par or a nominal price.
[ ] Apply vesting: four years, one-year cliff, monthly thereafter.
[ ] Include a repurchase right at cost on unvested shares, and calendar the exercise mechanics.
[ ] Address acceleration: double trigger for founders and key executives.
[ ] ⚠️ File the 26 U.S.C. § 83 election within thirty days of the transfer. No extension exists. Keep certified mail proof and give the company a copy.
[ ] Open the stock ledger and reconcile it to every signed document.

A3. Intellectual Property

[ ] Signed assignment from every founder, expressly covering work created before incorporation.
[ ] Signed assignment from every contractor, freelancer, and designer who touched the product.
[ ] Read each founder's prior employment and invention assignment agreements for competing claims. This is not curable later.
[ ] Confidentiality agreements in place.
[ ] Domains, repositories, and accounts transferred into the company's name.
[ ] Trademark clearance and application for the name.
[ ] Open source inventory and license compliance review before shipping.

A4. Founder Agreement

[ ] Roles and decision-making authority.
[ ] Compensation and expense policy.
[ ] Deadlock resolution: tiebreaking independent director, buy-sell, or shotgun provision.
[ ] What happens when someone leaves — voluntarily and involuntarily.
[ ] Confidentiality, non-solicitation, and the treatment of outside projects.

A5. Housekeeping

[ ] Start the diligence file now and populate it continuously.
[ ] First board meeting with a real agenda and minutes.
[ ] Insurance review, including directors and officers coverage.
[ ] Calendar: franchise tax, annual report, valuation refresh, quarterly board meetings.

Part B — Before Any SAFE or Note

[ ] Confirm the instrument type: convertible note (debt, interest, maturity) or SAFE (no maturity, no repayment).
[ ] For a SAFE, confirm pre-money or post-money form. Post-money means later instruments dilute you, not earlier holders.
[ ] Negotiate the cap first. It determines the dilution.
[ ] Check the discount and how it interacts with the cap.
[ ] Check the qualified financing threshold.
[ ] Check for most favored nation provisions and pro rata side letters, which can crowd out a future lead investor.
[ ] ⭐ Model the fully diluted conversion at a realistic next-round price, including a pre-money option pool expansion, before signing. Update the model at every instrument.
[ ] Confirm the securities exemption under 17 C.F.R. part 230; the registration requirement is at 15 U.S.C. § 77e, with private offering exemptions at 15 U.S.C. § 77d.
[ ] Verify accredited status if relying on general solicitation, with documentation.
[ ] No public statements about the raise unless the offering is structured for general solicitation.
[ ] No percentage compensation to finders.
[ ] File the federal notice and any state notice filings; substantive state regulation is addressed by 15 U.S.C. § 77r.
[ ] Track the record holder count against the thresholds in 15 U.S.C. § 78l.

Part C — The Priced Round

C1. Before the Term Sheet

[ ] Diligence file current — see Part E.
[ ] Cap table reconciles to signed documents.
[ ] Every intellectual property assignment executed.
[ ] Securities file complete for every prior round.
[ ] Financials ready.
[ ] Undocumented equity promises identified and resolved.

C2. Term Sheet Review, in Priority Order

[ ] 1. Liquidation preference. Insist on one times, non-participating. Resist participation and any multiple.
[ ] 2. Board composition. Count seats; identify who breaks ties; ask who nominates the independent and what happens if the seat is vacant.
[ ] 3. Anti-dilution. Accept broad-based weighted average. Resist full ratchet.
[ ] 4. Option pool. Confirm whether it is pre-money; size it from a real eighteen-month hiring plan.
[ ] 5. Protective provisions. Read the whole list. Standard corporate actions are fine; consent rights over budgets, hiring, or ordinary-course debt are not.
[ ] 6. Valuation. Last, deliberately.
[ ] Dividends: non-cumulative. Cumulative dividends increase the preference at exit.
[ ] Drag-along thresholds include a common-stock component.
[ ] Founder vesting: negotiate credit for time already served.
[ ] Pro rata rights limited to major investors.
[ ] No-shop short, terminating if the investor withdraws.
[ ] Expense reimbursement capped.
[ ] ⭐ Run the post-close cap table before signing, not after.

C3. Documents and Diligence

[ ] Stock purchase agreement, restated charter, investors' rights agreement, voting agreement, right of first refusal and co-sale agreement.
[ ] Data room populated: corporate, equity, intellectual property, contracts, employment, tax, litigation, privacy.
[ ] Respond to diligence requests quickly and completely.
[ ] Fix what diligence surfaces: missing consents, unassigned intellectual property, unfiled notices, a stale valuation.
[ ] Disclosure schedules drafted against the representations, accurately.

C4. Approvals and Closing

[ ] Board approval of the financing, the charter amendment, and the pool increase.
[ ] Stockholder approval of the charter amendment by written consent, with required notice to non-consenting holders.
[ ] Preferred consent where prior protective provisions apply.
[ ] Charter filed.
[ ] Signature pages released; funds wired.
[ ] Stock issued and the ledger updated the same day.

C5. Post-Closing — the Week Everyone Skips

[ ] Federal notice filing within the required period under 17 C.F.R. part 230.
[ ] State notice filings and fees.
[ ] Cap table and stock ledger reconciled to the closing documents.
[ ] New director seated; first post-closing board meeting scheduled.
[ ] Refreshed valuation under 26 U.S.C. § 409A before the next option grant.
[ ] Information rights calendar established for financial deliveries.
[ ] Insurance updated for the new board composition.
[ ] Diligence file updated with everything from this round.

Part D — Employee Equity

[ ] Adopt the plan and reserve the pool before granting anything.
[ ] Obtain a valuation supporting the exercise price; grants below fair market value trigger 26 U.S.C. § 409A consequences for the employee.
[ ] Refresh the valuation after each financing, after material events, and at least annually.
[ ] Choose the option type: incentive stock options under 26 U.S.C. § 422 with the related rules at 26 U.S.C. § 421 — employees only, annual limits, holding periods, alternative minimum tax exposure — or nonqualified options.
[ ] Board approval for every grant, individually listed in the minutes.
[ ] Deliver grant documents and track acceptance.
[ ] Decide the post-termination exercise window deliberately; extending beyond ninety days converts incentive stock options to nonqualified treatment.
[ ] Advisor grants on a standard agreement with vesting and an assignment.
[ ] Early exercise elections under 26 U.S.C. § 83 — same thirty-day deadline, same lack of relief.
[ ] No verbal equity promises. Ever.

Part E — The Diligence File

Maintain continuously.

[ ] Charter, bylaws, and all amendments.
[ ] Complete board and stockholder consents and minutes.
[ ] Stock ledger reconciled to the cap table.
[ ] Every issuance document and option grant.
[ ] Equity plan and all valuations.
[ ] Securities file: exemption analysis, notice filings, investor questionnaires, subscription documents.
[ ] Intellectual property assignments from every founder, employee, and contractor.
[ ] Trademark, patent, domain, and open source records.
[ ] Material contracts, flagged for change-of-control provisions.
[ ] Employment agreements, offer letters, and worker classification analyses.
[ ] Tax filings, franchise tax receipts, and state registrations.
[ ] Insurance policies.
[ ] Litigation, demand letters, and threatened claims.

Part F — Founder Departure

[ ] Compute vested and unvested shares as of the departure date.
[ ] Send the repurchase notice within the period the agreement requires. A lapsed right is a permanent gift.
[ ] Pay the repurchase price and record the cancellation in the ledger.
[ ] Separation agreement confirming equity treatment, reaffirming the intellectual property assignment, and addressing confidentiality and non-disparagement.
[ ] Collect company property, including accounts, credentials, and devices.
[ ] Update the cap table and the board composition if the founder held a seat.
[ ] Document the reason for departure where cause is asserted — it may affect acceleration.
[ ] Disclose the departure in the next financing; investors will ask.

Part G — Governance, Every Quarter

[ ] Board meeting held with a real agenda.
[ ] Minutes record deliberation, alternatives considered, and conflicts disclosed — not only resolutions.
[ ] Cap table reconciled to signed documents.
[ ] Valuation refreshed if stale or if a material event occurred.
[ ] Information rights deliveries made on schedule.
[ ] Franchise tax and annual report current.
[ ] Option grants approved and documented.
[ ] Repurchase notices sent for any departures.
[ ] Diligence file updated.
[ ] Conflicts check: any transaction where a director's fund benefits requires independent process.

Part H — Exit

[ ] Run the waterfall: debt and expenses; preferences in charter order; participation if applicable; then common.
[ ] Model the escrow or holdback — commonly ten to fifteen percent for a year or more, out of sellers' proceeds.
[ ] Model retention and transaction bonuses, which come off the top.
[ ] Confirm the treatment of unvested equity under the plan's change-of-control provisions — assumption, cashout, acceleration, or cancellation.
[ ] Run the 26 U.S.C. § 280G analysis and, if a private company cleansing vote is available, run it before closing.
[ ] Check 26 U.S.C. § 1202 holding periods — a sale months before the five-year mark is a decision to make knowingly.
[ ] Consider structure under 26 U.S.C. § 368 for tax-free treatment where available.
[ ] Obtain required stockholder approvals and comply with appraisal notice requirements.
[ ] Confirm drag-along mechanics and deliver required notices.
[ ] Reconcile the payment spreadsheet to the ledger, share by share, before funds move.

Part I — Irreversible Mistakes

[ ] Missing the thirty-day 26 U.S.C. § 83 election. No cure exists.
[ ] Issuing founder equity without vesting.
[ ] Never obtaining intellectual property assignments, particularly for pre-incorporation work.
[ ] Building the product while employed elsewhere without clearing the prior employer's claim.
[ ] Granting options against a stale or absent valuation, triggering 26 U.S.C. § 409A consequences for employees.
[ ] Paying a percentage finder's fee.
[ ] Publicly promoting a raise not structured for general solicitation.
[ ] Failing to file securities notices, federal or state.
[ ] Letting a repurchase right lapse.
[ ] Signing SAFEs without modeling cumulative conversion.
[ ] Accepting participating preferred or full ratchet in exchange for a higher headline valuation.
[ ] Promising equity verbally.
[ ] Forfeiting 26 U.S.C. § 1202 eligibility through a structure chosen without tax advice.

Part J — Deadline Table

Item	Deadline	Consequence of missing it
26 U.S.C. § 83 election	30 days from transfer	No cure; tax at each vesting date on then-current value
Federal securities notice filing	Shortly after first sale	Exemption and state coordination problems
State notice filings	Per state, often 15 days	Penalties; diligence findings
Repurchase right exercise	Per agreement, often 60–90 days	Departed holder keeps unvested shares
Valuation refresh	Annually and after material events	26 U.S.C. § 409A exposure for employees
Incentive stock option exercise window	90 days post-termination	Conversion to nonqualified treatment
Franchise tax and annual report	Annually	Loss of good standing; closing delays
Information rights deliveries	Per agreement	Covenant breach
26 U.S.C. § 280G cleansing vote	Before closing	Excise tax and lost deductions
26 U.S.C. § 1202 holding period	5 years from issuance	Loss of the gain exclusion
Charter amendment stockholder notice	Per statute	Defective approval

Part K — The Fully Diluted Model

Build this once and update it at every instrument. It is the single most useful artifact a founder maintains.

Columns: holder; security type; shares or investment amount; cap or price; conversion shares; percentage before; percentage after.

Rows, in order:

[ ] Founder common, by founder, with vested and unvested split.
[ ] Issued options, by holder or in aggregate.
[ ] Unissued pool.
[ ] Each SAFE or note, separately, with its own cap and discount.
[ ] Each prior preferred series.
[ ] The proposed new round.

Checks to run:

[ ] Does the total equal 100% on a fully diluted basis?
[ ] Does each SAFE convert at its own cap, not at the round price?
[ ] Is the option pool expansion applied pre-money?
[ ] Does the model reflect accrued interest on any notes?
[ ] Does the model reflect most favored nation adjustments?
[ ] What is each founder's percentage after the round?
[ ] What does each holder receive at exits of one, three, and ten times the post-money valuation?

⭐ Run the exit column at a modest price, not an optimistic one. Liquidation preference structure is invisible at a great outcome and decisive at an ordinary one.

Part L — Intake Questions for Counsel

Bring answers to the first meeting.

[ ] Who are the founders, and what has each contributed so far?
[ ] What has been promised to anyone, in writing or otherwise?
[ ] Was any part of the product built while a founder was employed elsewhere?
[ ] What do the founders' prior employment and invention assignment agreements say?
[ ] Has any money been taken from anyone, in any form?
[ ] Has anyone been paid in equity, or promised equity, for services?
[ ] Has any contractor, designer, or freelancer touched the product?
[ ] Does the company use open source, and under which licenses?
[ ] Are domains, repositories, and accounts in the company's name?
[ ] Is there an existing entity, and what is its history?
[ ] What is the hiring plan for the next eighteen months?
[ ] What is the realistic timeline to the next raise?

Part M — The Data Room Index

Build the folder structure at formation and file as you go. An investor's first impression of operational competence is formed here.

1. Corporate

[ ] Certificate of incorporation and all amendments
[ ] Bylaws
[ ] Good standing certificates, all jurisdictions
[ ] Foreign qualifications
[ ] Board consents and minutes, complete and in date order
[ ] Stockholder consents and minutes
[ ] Officer appointments

2. Equity

[ ] Stock ledger
[ ] Cap table, fully diluted, reconciled
[ ] Founder stock purchase agreements with vesting terms
[ ] Copies of every 26 U.S.C. § 83 election with proof of filing
[ ] Equity incentive plan and amendments
[ ] Every option grant with board approval
[ ] Every valuation report
[ ] SAFEs, notes, warrants, and side letters
[ ] Prior round documents in full

3. Securities compliance

[ ] Exemption analysis per round
[ ] Federal and state notice filings
[ ] Investor accreditation questionnaires and verification materials
[ ] Subscription agreements

4. Intellectual property

[ ] Assignments from every founder, employee, and contractor
[ ] Trademark and patent filings
[ ] Domain registrations
[ ] Open source inventory and license analysis
[ ] Any third-party license or technology agreement

5. Contracts

[ ] Customer agreements and form templates
[ ] Vendor and supplier agreements
[ ] Leases
[ ] Anything containing change-of-control, exclusivity, or most favored nation terms

6. Employment

[ ] Offer letters and employment agreements
[ ] Contractor agreements and classification analysis
[ ] Handbook and policies
[ ] Any separation agreements

7. Financial and tax

[ ] Financial statements and management accounts
[ ] Tax returns and franchise tax receipts
[ ] Payroll registrations
[ ] Bank statements

8. Other

[ ] Insurance policies
[ ] Litigation, demands, and threatened claims
[ ] Privacy policies, data map, and any incident history
[ ] Regulatory licenses

⚠️ Two folders decide most diligence outcomes: intellectual property assignments and the stock ledger. If those are complete and reconciled, most other gaps are survivable. If they are not, the round slows and the terms move.

Forming a Startup and Closing a Financing Round: A Practical Checklist

Part A — The First Ninety Days

A1. Entity

A2. Founder Equity

A3. Intellectual Property

A4. Founder Agreement

A5. Housekeeping

Part B — Before Any SAFE or Note

Part C — The Priced Round

C1. Before the Term Sheet

C2. Term Sheet Review, in Priority Order

C3. Documents and Diligence

C4. Approvals and Closing

C5. Post-Closing — the Week Everyone Skips

Part D — Employee Equity

Part E — The Diligence File

Part F — Founder Departure

Part G — Governance, Every Quarter

Part H — Exit

Part I — Irreversible Mistakes

Part J — Deadline Table

Part K — The Fully Diluted Model

Part L — Intake Questions for Counsel

Part M — The Data Room Index

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