Meaning
Work performed by the founders before the official registration of the company builds the initial value of the venture. Tracking pre-incorporation labor is necessary to determine how much equity each founder should receive once the legal entity is created. This work includes product design, market research, and initial coding.
Ownership Claims
Founders who work without a contract before incorporation may believe they own the work they did. When the entity is registered, they must transfer this work to the company to avoid future ownership disputes. This step ensures that the company owns all of its core assets.
Deferred Pay
Early team members often agree to work for no immediate pay on the understanding that they will receive equity later. This deferred compensation must be documented carefully to avoid disagreements about how much equity is owed. This documentation protects the company from retroactive wage claims.
Investor Analysis
Venture capitalists will review the work done before incorporation to make sure there are no outstanding claims. They want to see that all early work has been assigned to the company and that all early contributors have been paid or given equity. This cleanup prevents issues that could disrupt the business later, ensuring that the company has a clean title to all its technology and intellectual property before any funds are invested.