Why is this topic relevant?
A common misconception we see in practice is that startup founders focus entirely on product development, followed by the business and financial aspects and securing investment, while legal matters are often overlooked. They are seen as secondary – something to “sort out along the way” once the product is ready.
But a product is not developed in a vacuum. It is developed by a business entity that, in order to grow, generate revenue and become attractive to investors, needs to operate with an appropriate level of legal certainty and predictability.
The decisions made “on the fly” during the first 12 months – agreements made in a chat, over coffee or on a piece of paper – can later either open the door to investment, partnerships and an exit, or irreversibly lock founders into costly, lengthy and painful processes once it is already too late.
What Is Most Often Misunderstood?
Typical mistakes founders make stem from the belief that “everyone is on the same boat”, that everyone shares the same fate and is equally invested in solving the problem at hand, so things will work themselves out along the way.
The three most common mistakes are:
- Failing to regulate the ownership structure and founder exits (vesting): Founders split the company equally without putting protective clauses in place. If one founder leaves the team after six months, they retain their entire stake indefinitely. The consequence? When an investor comes along, they may refuse to invest in a company where a significant percentage of the ownership is held by someone who is no longer contributing to its development.
- Failing to properly address intellectual property (IP): Using code or designs created by external contractors, or even work developed by founders while they were employed elsewhere, without a clear written transfer of rights (IP assignment). The result is that the startup may not formally own or be able to prove that it owns, its core product, which can significantly reduce its valuation or cause investors to walk away from the deal altogether.
- Failing to close out existing contractual obligations: Relying on “verbal agreements” to terminate contracts with early partners. If an investor discovers active agreements during due diligence that could represent a financial risk, they may walk away until the risk is fully resolved and properly documented.
My Take on the “Legal Stack”
Every startup should start building its “legal stack” from day one – a foundational set of rules and documents that enables the company to operate quickly and efficiently while providing maximum legal certainty. This legal “stack” is not there to slow down innovation, but to preserve the company’s operational freedom as it grows.
The stack primarily consists of five layers: (1) establishing ownership of intellectual property, who owns what and on what basis; (2) corporate structure and equity allocation; (3) a set of agreements between key stakeholders, including co-founders, employees and advisors; (4) compliance with applicable regulations, such as GDPR; and (5) clear rules for decision-making within the company.
This documentation does not have to be complex and can be quickly tailored to the specific needs of each startup. What matters is not leaving these questions to “sort themselves out” later.
Real-World Examples
We recently encountered a situation involving a startup that had entered into an agreement with a business partner at an early stage. When the collaboration proved unsuccessful, the parties verbally agreed to terminate the relationship, but the startup never obtained written confirmation of the termination.
Some time later, when a major investor was ready to invest, the due diligence process raised a critical question: was the agreement still in force, and could the former partner claim any equity or payment? The investment was completely blocked for weeks, with a significant risk of falling through, until the former partner fortunately agreed to sign the necessary documentation.
An even more striking global deep-tech example is the development of Oculus VR. Founder Palmer Luckey and renowned programmer John Carmack worked on early prototypes of the Oculus headset. The problem was that Carmack was still employed by gaming company ZeniMax Media at the time and had signed an NDA, while Luckey was collaborating with the company on testing.
They went on to establish Oculus and develop the prototype, but never clearly addressed the ownership of the product’s IP, assuming that the work they had created was theirs.
When Oculus became successful and Facebook acquired it for $2 billion, ZeniMax raised the issue during the deal process. They claimed that key parts of the code belonged to them because Carmack had worked on it while employed by ZeniMax. The dispute ultimately resulted in a Texas court awarding ZeniMax $500 million in damages for breach of contract and copyright infringement.
In both examples, the startups had strong products with proven market potential. They expected investment and acquisition processes to move smoothly, but the lack of a basic legal “stack” in the early years turned into an existential risk later on.
How Can Readers Apply This?
If you are a startup founder, ask yourself these three questions to assess your legal risk:
- “If my co-founder decides to leave the company tomorrow and never responds to an email again, will they retain their 40% stake forever?”
If the answer is yes, you urgently need to put appropriate vesting mechanisms in place. - “Can I prove right now, through a written agreement, that every line of code and every element of design exclusively belongs to our company, rather than to the freelancer who created it?”
- “Do I have any verbal agreements with early clients, investors or advisors that have not been formalized in a clear written contract?”
This is absolutely critical at the early stage, particularly during the first year of the business. When there is not much money at stake and the team is still small, these arrangements can be structured calmly and consensually, because the interests and financial stakes are still relatively limited.
If these issues are ignored at an early stage, resolving them later during the scale-up phase becomes significantly more expensive. It often involves difficult negotiations, as the company is worth considerably more and there are more stakeholders involved, and can ultimately become one of the main reasons why major investment or acquisition deals fall through.
Conclusion
If there is one thing I would like you to take away, it is an analogy I have heard in practice.
A good company is like a good building in which you would want to buy an apartment: a good and innovative product is like a beautifully designed building with a great view. Finance and revenue are the building materials and electricity that make it possible to construct and operate the building. Legal relationships and the “legal stack” are the clean title deed and solid foundations of that building.
Even if a building is exceptionally well constructed, ready to move into and in an ideal location, no serious buyer or investor will put their money into it if it does not have a clean title deed and solid foundations.
Legal foundations may not make your startup look more attractive, but they are what ensure that no one can take it away from you or bring it down tomorrow.
About the author
Marko Mećar is an attorney with over 12 years of experience in commercial and corporate law. Throughout his career, he has gained extensive experience advising domestic and international clients on a wide range of legal matters related to establishing, developing and conducting business in Croatia.
His areas of expertise include corporate law, mergers and acquisitions (M&A), financial projects, real estate development, and dispute resolution, including arbitration and mediation. He advises clients across various stages of their business lifecycle, from company incorporation and structuring to complex transactions and other commercial law matters.
Marko graduated from the Faculty of Law at the University of Zagreb in 2008, where he received his degree cum laude. In 2011, he passed the Croatian Bar Exam with distinction and was admitted to the Croatian Bar Association. He subsequently completed a postgraduate degree in International Business Law at Central European University (CEU), where he obtained an LL.M.
Marko regularly lectures and participates as a speaker and panelist at domestic and international conferences and round tables addressing current topics in commercial law. He is also the author of academic and professional articles published in Croatian and regional legal journals, including Pravo u gospodarstvu, Croatian Arbitration Yearbook and Slovenian Arbitration Review.
