Key Questions for Lawyers to Consider in Representing an Entrepreneur

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What are the Top 10 legal questions to consider in starting and growing a tech business? I’ve outlined below questions a lawyer asks an entrepreneur to minimize liability and maximize profitability. The questions address legal issues faced by tech companies through the business life cycle. While these questions may not apply to all companies, they’re a helpful road map to address legal pitfalls in building a successful tech business.

With the introduction of the IBM personal computer in 1981, entrepreneurship experienced significant growth. As the entrepreneurial revolution advanced, attorneys confronted the challenge of applying traditional legal principles to technology businesses – in a legal environment largely devoid of precedent.

As a 1981 law school graduate, I had the good fortune of representing entrepreneurs in the early days of the IBM PC revolution. The legal journey has involved applying new legal standards in the packaged software market, into the laptop and tablet world, and now the ecommerce, internet, new media and social media markets. Having represented hundreds of companies in these three decades, I discerned ten most frequently asked questions by entrepreneurs and their legal counsel. These questions provide the foundation of practical legal advice and important pointers for reducing risk for the early stage or start-up entrepreneur.

Starting with Question 1, we’ll add a question each week as we cover the growth timeline for a technology company.

Q1: Who is my client?

The foundation question for a lawyer in representing an entrepreneur is a simple one: who do I represent? While seemingly a simple question, the answer is complicated by the various parties often participating in an entrepreneurial venture. There are several responses to consider in answering the question — who do I represent:

A. The founder who initially contacted the attorney?
B. All of the co-founders?
C. Newco, the legal entity to be formed in which the founder or founders will be equity owners?
D. Angel investors or venture capitalists?

Answer:

In most instances, the attorney will desire the new legal entity, Newco, to be the client. Before the legal entity is formed, the individual entrepreneur/founder may retain the attorney’s services for advice regarding entity formation, ownership and equity structure. After Newco is formed, the law firm will need to decide whether it represents (i) the legal entity and the founder, (ii) the founder only, or (iii) the legal entity only.

In the case of simultaneous representation of the founder and Newco, the attorney engagement letter should clarify the ethical requirements and potential conflicts of interest that could arise. Appropriate conflict of interest waivers may also be required, depending on the scope of legal services provided to the parties.

Additional complications can arise regarding legal representation where multiple co-founders are involved with differing legal and financial interests. The questions become more challenging if one of the co-founders is or will be a majority owner of the voting equity of the entity. In this context, the additional questions are:

A. Do each of the co-founders need to be represented by separate counsel?
B. Can one lawyer represent all of the co-founders and also the legal entity, Newco?
C. Can the attorney represent the angel investor or venture capitalist as well as Newco and the founders?
D. What legal issues arise through simultaneous representation of multiple parties in the formation of the entrepreneurial entity?

 

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