Your attorney has been a great help in performing all of the legal services necessary to start your business. Likewise, your attorney has provided excellent business advice and made introductions to potential investors, potential customers, and other high quality advisors.
After developing a strong attorney-client relationship, start-up founders often consider asking their attorney to serve on the company’s board of directors. My advice is simple: don’t do it.
Why not? In some states, a start-up lawyer is prohibited by law to represent a corporation and sit on the board of directors at the same time. If your company falls under the rules of one of these states, the answer is an easy one.
Even when your attorney can simultaneously represent a corporation and serve on the company’s board of directors, there are ethical and other hurdles that need to be overcome. You don’t need a law degree to recognize that these hurdles are difficult—and often impossible—to overcome:
If your attorney represents both the company and sits on the board of directors, then your attorney is effectively representing himself or herself. This is an obvious conflict of interest—how can your attorney provide impartial advice to your company when his or her personal interests are at stake?
Communications between the company and its attorney may not be protected by attorney-client privilege. In many cases, it will be impossible to determine whether your attorney is providing legal advice or business advice. Or both. In these situations, if there is litigation, then there is a strong chance that a court will order that these communications be produced to the opposing party even though you thought they were protected as attorney-client communications.
Your start-up attorney presumably represents other clients in addition to your company. What if there is a dispute between your company and another client of your attorney? If that other client is a “more important” (i.e., greater fee generator) client than your company, then your company’s interests may be secondary to your attorney’s self-interest. Making matters worse, your attorney will not be able to represent your company, which will require the expenditure of additional funds on a non-core line item—legal fees on a new law firm to learn everything your current counsel already knows.
Finally, there is no need to reward your attorney for merely doing his or her job. Your attorney should be providing you with “non-legal” help by making introductions to help you grow your business and answering other questions as a matter of (a) client appreciation; and (b) smart business sense. After all, there are many competent attorneys out there who can assist you with your basic legal needs. And if you are not receiving these ancillary benefits, then quite frankly you are not using the right attorney in the first place. Your hard-earned money is what pays the legal bills. You should be treated accordingly.
Thus, I recommend that start-up companies do not have their attorneys sit on their board of directors. ❒