Founders Agreements

When Founders Should Retain Separate Legal Counsel

When a company is formed, the founders typically retain a law firm to advise them in connection with setting up the company. Most law firms that advise founders will require that they sign an engagement letter acknowledging that the company and not they are the client. This means simply that the founders do not have legal counsel that are protecting their individual interests. Founders typically conclude that there is no need for separate representation because, as the sole stockholders and directors, they essentially are the company, and what is good for the company is therefore good for them.

While this is true for many purposes, it is not true in all situations. Moreover, as the company grows and adds employee and investor stockholders, founders often lose voting control of the company and blend into the broader class of common stockholders. At the same time, the issues that affect the founders as common stockholders become increasingly complicated.

While in some situations the founder will be told by company counsel to retain separate counsel, it is not company counsel’s obligation to do so unless a conflict exists. In addition, even when the founders may decide to rely on company counsel, this only works well when all founders are privy to the same conversations with company counsel, a dynamic that rarely exists in practice.

There are many situations in which separate legal counsel may be able to assist founders in bringing about a more favorable result. In these cases and others that might arise, founders should seriously consider retaining separate counsel to advise them.

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