Wednesday, April 27, 2016

Who's your lawyer. Insights & Wisdom via HBO's Silicon Valley (S.3, E. 1)

The company's attorney may be your friend, but they're not your lawyer.  In this guest post, friend of Errata Elizabeth Wharton (@lawyerliz) looks at the common misconception highlighted in this week's Silicon Valley episode.

by Elizabeth Wharton

Amidst the usual startup shenanigans and inside-valley-jokes, HBO's Silicon Valley Season 3, Episode 1 contained a sharp reminder: lawyer loyalty runs with the "client," know whether you are the client.   A lawyer hired by a company has an entity as its client, not the individuals or officers of that company.  If you want an attorney then hire your own. 

Silicon Valley Season 3, Episode 1- Setting the Scene (without too many spoilers, I promise)
Upon learning of a board room ouster from the CEO to the CTO role, the startup company's founder Richard storms into the meeting with two board "friends" in tow (one, Ron, is the company's counsel).  As Richard burns the bridges of the offered CTO position and prepares for his dramatic exit, he turns to Ron and asks if he's ready to leave the meeting.  To the Richard's surprise, Ron calmly reminds Richard that he hired Ron to serve as corporate counsel on behalf of the company.  Ron goes further, explaining that their (the company's and Richard's) interests became adverse as soon as Richard included threats of litigation and payback against the board and the company  in his epic "From CEO to CTO? I Quit!" rant only a few moments before.   After letting this news sink in, Richard storms off to continue his rant elsewhere.

Insights from Richard's Gaffe (Don't be Richard)
While harsh, Ron's response highlights a common overlooked issue in startup companies:  a company and each of its founders and officers are treated as separate and distinct from the other.  This distinction, that a company is a separate entity from its individual co-founders, provides the basis for the liability protections and tax benefits with forming the company in the first place.  The layer of insulation between the company and the individuals extends both ways. Once a founder's idea or concept becomes a company, the idea's creator (the founder) and the company no longer share the same interests.  What benefits the individual founder may not be in the best interest of the company and vice-versa. As Richard discovered during the board room exchange, a board of directors must put the interests of the company above personal friendships with one of the company's founders.

Similarly, an attorney hired to form a company or provide corporate counsel for the company represents the company's interests and not those of the individuals who make up the company.  If the parties intend for the attorney to represent an individual co-founder instead of the company then the documents and engagement letter must reflect this distinction.  Understanding the attorney-client relationship and duties of loyalty is key when reviewing a term sheet, operating agreement, or any other agreement between individuals and/or a company.  Perspective and point of view in preparing and interpreting agreed upon terms revolve around the bias of the drafter.  The company's lawyer does not have a duty to point out to an individual founder, officer, or investor if the deal terms that benefit the company overall would in turn diminish an individual's personal interests.  If they're not your lawyer, then you're not the client that they're protecting.

Silicon Valley's Wisdom Takeaway: A lawyer's professional loyalty runs with their client. Even if they called you "Richie" only moments before, when you're not the client then counsel won't join your dramatic exit or  advise you on your next move. 

Elizabeth is a business and policy attorney specializing in information security and unmanned systems.  While Elizabeth is an attorney, nothing in this post is intended as legal advice.  If you need legal advice, get your own lawyer.  (An earlier version of Elizabeth's post first appeared via LinkedIn Pulse but has since been updated and expanded.)


Fazal Majid said...

Richard was lucky Ron informed him that they were now on opposing sides. Compare that with Larry Sonsini's questionable ethics when advising Walter Hewlett to vote for HP's acquisition of Compaq:

Elizabeth Wharton said...

Agree - more often than not the issue isn't directly addressed until it's too late.

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