Key points
- The seed stage is the period of greatest legal vulnerability: some mistakes made then are costly to correct and can weaken a fundraising round.
- A frequent and serious mistake is intellectual property not transferred to the company: it is a sticking point in due diligence.
- The lack of a shareholders' agreement shows up at the worst moment: a strategic disagreement, the entry of an investor or a founder's exit.
- Articles of association that are too rigid or poorly designed can block later transactions: issuing preference shares, setting up BSPCE (French start-up share warrants), changing the governance.
- BSPCE that are poorly structured or not eligible lose the favourable tax regime; the allocation rules must define vesting and triggering events carefully.
- Contracts signed without review and the lack of confidentiality arrangements with service providers and partners leave the company exposed to unfavourable clauses or disclosures.
The seed stage is when a start-up is most vulnerable legally. Founders move fast, with few resources, and legal questions often come after product, traction and hiring. That is not unreasonable. But some mistakes made at this stage are costly to correct and can weaken a fundraising round, delay a transaction or set shareholders against each other at the wrong moment.
The most common mistakes are not spectacular. They concern specific points, often overlooked for lack of time or information.
Intellectual property not transferred to the company
This is a frequent mistake and one of the most serious. The founders developed the product before or while the company was being set up, but never formally assigned their rights to the company. Legally, they personally own assets that the company exploits without owning them.
During due diligence, this situation is generally identified quickly and becomes a sticking point or a reason to renegotiate the valuation. The fix is simple to put in place from the outset, but more complex to regularise after the fact, especially if relations between the founders have become strained or if one of them has left in the meantime.
No shareholders' agreement
Many seed-stage start-ups have no shareholders' agreement. The founders get on well, trust each other and plan to draft one later. The problem is that tensions arise precisely at the moments when the lack of an agreement is felt most: a strategic disagreement, the entry of an investor, a founder's exit, a buyout offer.
A shareholders' agreement drafted at seed stage does not need to be complex. It must cover the essentials: governance, exit conditions, bad leaver, right of first refusal, decision-making rules on strategic matters.
Articles of association unsuited to the planned trajectory
The articles of association drafted at incorporation define the governance structure, majority rules, shareholders' rights and the terms for changing the share capital. Articles that are too rigid or poorly designed can block later transactions: issuing preference shares to investors, setting up BSPCE, changing the governance.
From the seed stage onwards, it helps to draft the articles of association with some anticipation of the planned trajectory, without overloading the document with premature provisions.
BSPCE poorly structured or not eligible
BSPCE are subject to precise statutory eligibility conditions for the issuing company (Article 163 bis G of the French Tax Code (CGI) (in French)). If the company does not meet these conditions at the time of issue (in particular because it was created as part of a business combination (concentration), a restructuring, an extension or a takeover of pre-existing activities, or because it does not meet the conditions on the holding of its share capital), the warrants issued do not benefit from the favourable tax regime.
In addition, the allocation rules must be drafted carefully: vesting conditions, triggering events, exercise conditions, what happens to the warrants if the beneficiary leaves. Incomplete rules create ambiguities that lead to disputes.
Contracts signed without review
At seed stage, founders often sign important contracts (first customers, first service providers, partnership agreements) without a legal review. The terms proposed by the other party are rarely balanced. Unfavourable intellectual property, non-compete or limitation of liability clauses can have lasting effects.
No confidentiality arrangements with service providers and partners
Discussions with technical service providers, potential partners or job candidates often involve sharing sensitive information. Without a confidentiality agreement signed before these discussions, the company's remedies are severely limited if the information is used or disclosed without authorisation: it will then have to prove, for example, a breach of trade secrets, which presupposes that reasonable protective measures were taken (Article L. 151-1 of the French Commercial Code (Code de commerce) (in French)).
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