Common Mistake No.1: A C-Corp sounds too complicated, so I will form an LLC instead
You may regret it later. It is true that an LLC is a simpler and easier choice when it comes to company formation, but it is not necessarily a better choice. In my past practice, I saw too many companies started as an LLC, but later converted it to a corporation. The reason they converted their companies is venture capitalists normally will not invest in an LLC. Why? The ownership is difficult to divide and there is no ability to create stock options or other incentive plans to support the growth of the company. The tax at the beginning might be lower, but each member of an LLC gets taxed individually, while a corporation gets taxed at a corporate level, and individual founders will be taxed when they receive dividends (many years later). The most common practice is to form a startup as a C-Corp in Delaware because Delaware is a corp-friendly state, both corporation-wise and tax-wise. If you formed your entity initially in California, don't worry, you may convert it to Delaware later. That said, you might as well just form a Delaware C-corp in the first place.
Common Mistake No.2: Issue equity to investors and employees without checking blue sky laws.
If founders do not talk to a startup lawyer before issuing equities to investors and employees, it is highly likely that they are not aware of blue sky laws. Blue sky laws are state securities laws that protect investors from fraudulent sales practices and activities, and they usually require certain registrations or filings with the states. Each state has its own securities laws, and there are certain deadlines to comply with, so founders need to check them before making the offering. This is especially important for companies with investors or employees living in a different state. Not complying with blue sky laws will cause troubles for the company, such as receiving penalties from the state, or spending more money on lawyers to fix it.
Common Mistake No.3: Oops, I forgot to file my 83(b) Election
If this is the case, it will be very difficult to fix. What is an 83(b) Election? It is a tax election that enables a stockholder to be taxed based on the value when you filed it, which is usually nominal, and enjoy the long-term capital gain treatment. Without filing an 83(b) Election, the government will tax you on shares as they vest, regardless of whether you've received money or not. For example, when founders receive their shares, the price per share maybe $0.00001. If the founder owns 100,000 shares, then the consideration they pay is $10. If they file an 83(b) Election in time, they will be taxed based on the $10 worth of stocks. Later, if they sell the stocks, they will pay the capital gain tax but based on the long-term capital gain tax rate. If they fail to file an 83(b) Election in time, and the price per share increases to $0.1, after one year, 25,000 shares are vested, which are worth $2,500, then the founder will need to pay taxes based on the $2,500 worth of the stocks. An 83(b) Election has to be filed with the IRS within 30 days of receipt of the stocks. The timer begins when the founder signs and dates the stock purchase agreement, so DO NOT forget to file it. An exception is that if the shares are fully vested (meaning no vesting schedule), the founder does not need to file an 83(b) Election.