Did you know 9 out of 10 startups in Europe don’t make it? And the surprising part – it’s not always because of a bad product or poor product–market fit. Very often, it’s because the legal foundations were never set up right.

As founders, we tend to put all our energy into building the product and chasing funding. But the best founders treat the legal setup as part of the product itself. In Europe, getting this right isn’t just about compliance; it can become a real competitive edge.

Recently, in one of our Squads webinars, we had the privilege of hosting Marilia Aires, a Senior Legal Counsel, Certified Chair of Advisory Boards, ICA Professional Member, and an expert in Data Protection Law.

Marilia took us through the must-know legal essentials for any founder launching a startup in Europe. It was a practical and eye-opening session, filled with stories from real founder journeys.

Here are some of the key takeaways that stood out for me:

• Jurisdiction choice impacts everything – from tax efficiency to investor expectations

• Founder agreements prevent costly disputes – even between close friends

• European vesting is more complex than US models due to employment law

• Cross-border structures require careful planning from day one

Most startups begin with a spark, friends or colleagues coming together around a bold idea to change the world. In that early rush, all the focus goes into building the product, pitching, and dreaming big. What often gets left behind is the boring (but critical) part: the legal foundations.

And here’s the catch, those gaps don’t show up right away. They surface later, at the worst possible time: when a co-founder decides to walk away, or when an investor is ready to commit but discovers the structure is too fragile to support growth. By then, what could have been a smooth journey becomes a costly and painful lesson.

If you’re thinking, “We’ll fix legal later”, you’re already carrying invisible risk – personal liability, IP disputes, grant ineligibility, investor rework, and cross-border tax traps.

Take this story: three brilliant founders built a fintech startup in Berlin. Two years in, they received an acquisition offer. Everything looked perfect, except that during due diligence, the buyer found no proper incorporation, messy ownership, and undocumented IP. The deal collapsed.

Lesson: “We’ll sell first, formalize later” is not a strategy; it’s a deal-stopper.

That’s why the bottom line is simple: treat legal constraints like design constraints. The earlier you design around them, the faster (and cheaper) you move.

In her session, Marilia unpacked what this means in practice and walked us through the initial legal essentials every founder should know. Here are some of the highlights:

Day 0: When should you incorporate?

You don’t need to rush into incorporating the moment you scribble your idea on a napkin. But once you’ve locked in your problem, approach, and target market, it’s time.

Incorporate before you:

• Sign anything with customers or suppliers (yes, even “friendly” pilot contracts)

• Hire anyone—including co-founders

• Create or file IP (we have seen examples when co-founders runs with IP in absence of NDA, founders agreement)

• Apply for grants (many require EU presence and specific entity types)

Why is this all important? Because then we'll have all the compliance related to this - GDPR, AI Act, tax complications, and employment law issues which can cost you millions. So we need to start thinking before starting.

Think of your legal strategy as part of your go-to-market strategy. Wait too long, and you’ll box yourself in.

Brexit and EU: what founders often miss

Going international? Many founders still assume a UK Ltd gives them enough credibility and reach. It does—but only up to a point.

Since Brexit, a UK company may still need an EU presence for certain activities—whether it’s accessing grants, serving EU customers, or hiring talent. That’s why many scale-ups now run a dual structure: UK for international recognition, EU for local compliance and funding access.

One detail that trips up even seasoned founders: data transfers. Moving customer or employee data between the UK and EU isn’t automatic. It requires the right agreements and compliance in place. Ignore it, and you’re building risk into your product from day one.

Action: If you haven’t incorporated yet, do it now. And don’t pick your jurisdiction in isolation, choose based on your target markets, grants, and expansion plans.

Picking your first jurisdiction: where to plant your flag

Not all European jurisdictions are created equal. Where you set up matters for customers, hiring, grants, investors, and how much admin you’re signing up for.

Here’s the quick cheat sheet:

• UK (Ltd): Common law, strong IP, investor familiarity. Great for B2B/fintech, international expansion. Caveat: thanks to Brexit, some grants and EU activities still require an EU subsidiary.

• Netherlands (BV): Flexible, favourable tax treaties, investor-friendly. A favourite for EU HQ/holdcos, tech startups. Popular with Uber, Booking.com, Spotify European operation

• Germany (GmbH): Rock-solid legal framework, credibility and EU market access. Strong for deep tech/manufacturing, but expect heavy admin and higher (€25k) minimum capital. Best for deep tech, manufacturing, enterprise software

• Estonia (OÜ): Digital-first, e-residency programme, great for remote-first and crypto/early stage. Reinvestment-friendly tax model.

Here's a scaling pattern that works - create a holding company in NL or UK, with local subs where you hire or sell. Decide this before the first euro hits your bank account.

The Founders’ Agreement: your insurance policy

When startups begin, the story is almost always the same: a few friends, full of trust and energy, decide to build something together. “We don’t need paperwork, we’re friends.” I hear this line from founders all the time.

But reality bites. European courts are full of ex-friends fighting over equity.

Take this case: three university friends in the Netherlands started an AI company. They split equity equally – verbally. A year later, one founder decided to move to Silicon Valley. What followed was two years of litigation and hundreds of thousands in legal costs. The company never recovered. A promising startup collapsed, not because of the product, but because the basics weren’t in place.

That’s why I call the Founders’ Agreement your insurance policy. It doesn’t feel urgent when everyone is aligned, but it becomes priceless when conflicts appear.

Why it’s even trickier in Europe

Unlike the US, Europe has multiple overlapping systems: civil law, common law, and EU law on top. Employment protections are stronger too—sometimes founders are considered employees, which makes termination complex. Add tax variations across countries, and suddenly a “simple agreement” becomes essential to survival

What to include in a Founders’ Agreement

Don’t just focus on “who owns what %.” Cover the full picture:

1. Equity & contributions

   • Record what each founder puts in – cash, IP, time, even physical assets – and convert them into fair equity.

   • Factor in tax realities (a founder in Portugal vs. UK vs. US will be taxed differently).

2. Governance & decision-making

   • Define CEO authority, spending thresholds, and what needs board approval.

   • Set voting rules, board composition, and an internal dispute process so you don’t jump straight to court.

3. IP ownership

   • Assign all IP – existing and future – to the company.

   • Decide protection scope: EU vs. worldwide, depending on risk and budget.

4. Roles, commitments & comp

   • Spell out part-time vs. full-time, relocation rules, salary timelines, and even KPIs (yes, founders too).

   • Set non-compete terms (not all enforceable across EU countries).

5. Departures & transfers

   • Define good/bad leaver rules, drag/tag-along rights, and performance-based exits.

   • Cover geographic relocation (remote founders can trigger unexpected tax obligations).

Cross-border teams: today’s reality

Modern founding teams are rarely in one country. A German technical founder, a British business founder, and an Estonian product lead create complexity:

• Different tax residencies

• Different employment laws

• Visa and work permit considerations

• IP created in one country but used elsewhere

All of this must be factored into the agreement from the start.

Why investors care

When you raise, investors will check:

• Is the equity split fair and clean?

• Is IP actually owned by the company?

• Are governance processes defined?

• Are international founders compliant with tax and visa requirements?

If the answer is “no,” you’ll either scare them off or face heavy legal rework.

Action: Sit down early. Map everyone’s contributions, tax realities, and expectations. Write it down. Sign it. A founders’ agreement doesn’t just prevent conflict – it keeps your company investable.

Vesting that actually works in Europe

Here’s the problem: without guardrails, what if a co-founder walks away six months in and still holds a huge chunk of equity. That kills morale, scares off investors, and can even block future hires.

Vesting is the fix. It’s a simple rule: equity isn’t handed out all at once, you earn it over time as you keep contributing to the company.

The standard model investors in Europe expect is:

• 4 years total, with a 1-year cliff (if you leave before year 1, you leave with nothing).

• After year 1, equity starts unlocking month by month until the 4 years are up.

Why it works:

• It ties ownership to actual contribution.

• It reassures investors you won’t end up with “dead equity” on the cap table.

• It protects the company from the “40% equity disappears with a co-founder in month six” disaster.

When it comes to exits, use double-trigger acceleration: equity only accelerates if the company is sold and your role is terminated. It’s fair to founders and acceptable to investors.

One more thing: don’t just copy a US template. Vesting, options, and tax treatment vary country by country in Europe. Localize it early.

Option pools in Europe: what they are and why they matter

Here’s a common founder dilemma: “How do we attract great talent when we can’t pay Google-level salaries?”

The answer most startups use is equity. Instead of paying everything in cash, you give employees a small slice of ownership in the company. That way, if the company succeeds, they share in the upside.

This pool of equity reserved for employees is called an option pool. Think of it as the company’s stock of “thank-you chips” for future hires and advisors.

In Europe, the idea is the same as in the US – but the implementation is different. Taxes, structures, and employee protections vary by country, so you need to set it up carefully.

How big should the pool be?

• At Seed, investors usually expect 15–20% set aside.

• At Series A, you may need to top it up so there’s still enough for new hires.

What does it look like in practice?

• UK: EMI (tax-friendly for employees), CSOP, SIP.

• Netherlands: Options/certificates, sometimes carried-interest-style setups.

• Germany: Often VSOPs (virtual shares that pay out cash on exit, instead of true equity).

• France/others: Country-specific incentives, sometimes with works councils involved.

The paperwork matters - option plan rules, grant letters, contract integration, tax elections, and, in some cases, regulatory or works council notifications. Miss one, and you could end up with an expensive mess.

Compliance from Day 1: the iceberg you don’t see

Most founders ignore compliance because it feels abstract – until it suddenly blocks a deal, an investment, or even hiring. Think of it like an iceberg: most of the risk sits below the surface, invisible until you hit it.

Here are the big four areas you can’t afford to overlook:

1. GDPR (data protection law)

   • If you’re collecting customer data, employee data, or even running a simple email list – you’re in GDPR territory.

   • You’ll need basics like a privacy policy, contracts with your vendors (called DPAs), and a way for people to request their data be deleted.

2. AI Act (coming soon)

   • If your product uses or builds AI, the EU will classify you into a “risk category.” The higher the risk, the more controls you’ll need.

   • It’s not live everywhere yet, but smart founders are already designing for it.

3. Employment law

   • In many European countries, firing someone – even a co-founder – is much harder than you think.

   • Build contracts that respect local law so you don’t end up stuck with “dead weight” you can’t legally remove.

4. Cross-border data transfers

   • Moving data between the EU, UK, and US isn’t as simple as flipping a switch. You’ll need agreements (like SCCs) and proper assessments to stay compliant.

The bottom line is - compliance isn’t just about avoiding fines. It’s about being funding-ready. Investors in Europe will ask: “Show me your GDPR setup. Show me your employee contracts. Show me your data transfer agreements.” If you can’t, it slows or kills the deal.

Your 90-Day European Legal Action Plan

If you’re launching in Europe, think of the first 90 days as your legal sprint. The goal isn’t to become a lawyer—it’s to set up enough structure so you can focus on product and growth without hidden landmines.

Here’s a practical playbook:

Week 1 – Foundation

Get the basics in place:

• Pick the jurisdiction(s) that match your target customers, grants, and hiring plans.

• Incorporate, get your company number, and open a business bank account.

• This step alone moves you from “idea among friends” to a real entity investors can back.

Weeks 2–3 – Core Agreements

Now that the company exists, lock down your relationships:

• Sign a Founders’ Agreement covering equity, roles, governance, and IP.

• Stand up a cap table on a compliant platform (no messy spreadsheets).

• Define your board/advisor setup – even if it’s just you and your co-founders now, investors expect clarity.

Weeks 4–6 – IP & Compliance

Protect what you’re building:

• Execute an IP assignment so the company – not individuals – owns the code, designs, or patents.

• File trademarks if your brand is core to your strategy.

• Put GDPR basics in place: privacy policy, vendor contracts, and a simple system for handling data requests.

Weeks 7–12 – Scale Prep

Lay the groundwork for growth:

• Design your equity/option plan (EMI, VSOP, or local equivalent) and draft grant templates.

• Create advisor agreements and NDAs.

• Build an investor-ready data room: cap table, contracts, IP docs, compliance files.

• Identify local legal/tax advisors in every country where you’ll operate or hire.

Think of this as getting your legal hygiene in place. It doesn’t make you bulletproof, but it makes you investor-ready, partner-ready, and scalable.

Anti-patterns to avoid (a few scars to learn from)

Over the years, I’ve seen brilliant teams stall or collapse because of mistakes that looked small at the start. Here are the patterns that keep repeating:

• “We’re friends. We don’t need paperwork.”
  Until one co-founder walks away with equity and no accountability. Courts across Europe are full of ex-friends fighting over verbal promises.

• Copy-pasting US documents.
  A Delaware-style SAFE or vesting schedule may look neat, but in Europe it can trigger unexpected tax bills or run afoul of employment law. One founder told me, “We thought we saved €5k on legal fees. It cost us €500k later.”

• Delaying vesting.
  Skipping vesting “for now” feels easier—until someone leaves early and freezes your cap table. I’ve seen investors walk away from otherwise great startups because of this.

• Ignoring Brexit realities.
  Some founders still assume a UK Ltd is enough for EU grants or customers. It isn’t. A few startups have had deals blocked simply because they didn’t set up an EU entity in time.

• Adding the option pool after the term sheet.
  Rookie mistake. If you wait until after negotiations, dilution hits the founders, not the investors. Seasoned VCs expect you to set it up earlier.

These aren’t just “legal footnotes.” They’re deal-breakers. Avoid them early, and you’ll save yourself from painful, expensive rework later.

Your short checklist (print this)

• Entity/holdco chosen with a scale path (subsidiaries later)

• Founders’ Agreement signed (equity, IP, governance, exits)

• 4-year / 1-year cliff vesting live for founders & first hires

• Option pool sized and localized (EMI/VSOP/etc.)

• IP fully assigned to company (past & future)

• GDPR ready: DPA, privacy policy, vendor reviews, data map

• Cross-border tax/work permits thought through for remote team

• Data-room ready for investor diligence

• Local legal/tax advisors identified in each active jurisdiction

Final Word

You don’t need to become a lawyer. But you do need a legal strategy as sharp as your product strategy.

Think of it this way: code without architecture leads to technical debt. A startup without legal architecture builds legal debt – and that debt compounds faster than you think.

In Europe’s patchwork of laws, good legal foundations aren’t just about staying safe. They’re a competitive edge. They make it easier to hire across borders, raise clean rounds, close enterprise deals, and eventually exit on your terms.

So, set it up early. Don’t over-engineer, but don’t leave gaps either. The founders who treat legal as part of design – not an afterthought – are the ones who scale faster, raise smoother, and sleep better.