Who Represents Whom: A Common
Sanjay Kutty, Lawyer & Co-Founder | September 23, 2022
Are your interests as a founder being protected by company counsel? Not necessarily.
This past week, the tech and entrepreneurial world descended upon Toronto for Elevate, an annual tech and arts festival that brings together creatives and innovators from all over the world. Conferences like Elevate provide ample opportunities for founders to be connected with investors and secure the financing needed to make their entrepreneurial dreams a reality. Those founders fortunate enough to find investors willing to take the next step will then face the hefty task of reviewing a (likely lengthy) package of documents to formalize the investment.
Navigating investment documents has its challenges, regardless of whether you’re starting your first or tenth venture. But carefully reviewing and understanding the terms that you are agreeing to is critical to protecting your rights as a founder. Usually at the bottom of these legal agreements is a clause that says that the founder has had the opportunity to seek legal representation. This clause is often ignored or overlooked, and in many cases, misunderstood.
Many founders will have already found a lawyer to help them get set up – perhaps subscribing to a “Founders’ Packages” that many law firms offer to onboard companies at the ground level. The common misconception here is that this lawyer is also the founders’ lawyer and will advise them on issues and risks on a personal level.
However, this is not the case. This lawyer is the company’s lawyer, and as such represents the company. What this means is the lawyer will advise on what is in the best interest of the company, taking into account the positions of the various stakeholders: the directors, the officers, and most importantly, the shareholders. While the interests of the company and the founders often overlap, they will not always – especially when a major investor becomes involved.
For example, a common provision seen in these founders’ or investment packages is a restriction on the founder’s ability to sell their shares back to the company or transfer their shares to another party in an exit scenario. The company’s lawyer will not necessarily flag this for the founder’s benefit, since it is in the company’s best interest to dictate the terms of the exit. But for an exiting founder, this leaves them very little recourse or opportunity to be compensated fairly for their time and effort in starting the company.
Too often, I’ve talked to founders who are in the process of being ousted from their company and are shocked that the shareholders’ and investment agreements they signed are the very documents being used to oust them. Founders expect the company’s lawyer to have represented their individual interests as the initial stakeholders of the company. But the company’s lawyer is exactly that: the company’s lawyer.
When setting up key documents like a shareholders’ agreement or investment agreement, it is imperative that founders seek independent legal advice. Even if the investment offer is too good to refuse, founders should at a minimum have someone other than the company’s lawyer explain what the agreements actually say, as well as the rights and remedies available to them as a founder.
Having these documents explained up front can help founders understand how to properly protect their interests down the line, especially if their interests conflict with those of their co-founders and investors.
If you need help interpreting or negotiating founders or investment documents, drop us a line – we’re happy to help.
Sanjay is a lawyer and co-founder at Spark Law. Sanjay spent most of his career as in-house counsel at Bell Canada and CIBC before escaping to work instead with dynamic and innovative businesses, helping them to build interesting and exciting solutions for their customers. Sanjay travels a lot, so is the Chief Location Scout for Spark Law.