Emerging Enterprise Center Blog : Boston Startup Lawyer & Attorney : Foley Hoag Law Firm : Startup Financing, Venture Capital

I can’t recall being asked about whether and how to maintain confidentiality of business plans and other information when interviewing possible attorneys whom one might want to retain until very recently, but I have been able to tell from my interactions with potential clients that may of them worry about what is OK to tell the attorney they are interviewing (and might or might not hire). 

Attorneys, as a general matter, have a professional responsibility to keep such information confidential, and reputable attorneys will abide by these rules. Having said that, not all attorneys always meet this standard, so don't take a risk that you don't need to. 

I don't think you need to get very deep into details of your business plan at an initial meeting with an attorney, and, in general, I would advise you not to. Also, don't leave a copy of the plan or your slide deck or other materials that contain sensitive information with any attorney, until you have selected one to work with and he or she has agreed to represent you. 

A general high level description of your business should suffice for the initial meeting. Once you have entered into a formal attorney/client relationship, the matter is different. Once you are in a formal relationship, you should be able to rely on your attorney's duty to keep client information confidential. Attorney's typically do not sign NDAs, and I would not ask for one.

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David Wessel’s recent article in the Journal, “A Prozac Economy has its Costs,” asks: If we were able to invent the economic equivalent of Prozac – something that would take away the high-highs and the low-lows of our current economy (think the tech bubble of the late 90’s and the current recession) – would we elect for a prescription? Would we, given the choice between a dynamic, volatile economy with painful depressive phases, and a more mellow economy with fewer crises but a slower growth rate over the long term than its manic doppelganger, settle for a calmer existence? Though my understanding of economics is limited to my college-level macro and micro courses, from an entrepreneur’s and VC’s point of view, I think my answer would be: give me manic any day.

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Entrepreneurs are risk takers; lawyers risk managers. An inherent tension exists. Take too much risk or over-manage the risk and the results can range from unsatisfactory to disastrous. However, in every venture, there are manageable risks and uncontrollable risks. The trick is to realize which is which and deal with them accordingly. I have met some smart, innovative first-time entrepreneurs with thought-provoking business plans that illustrate foresight and a nuanced understanding of market forces. However, more often than not, these very same entrepreneurs are more than willing to lump all their risks in the “uncontrollable” category.

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Prithvi Tanwar, an associate at Foley who does a lot work with us at the EEC, recently had occasion to consider the General Public License in the context of start-ups.  This resulted in the following comments which I thought would make a useful post.

A start-up wants to develop its online application using scripts licensed under the GNU General Public License (“GPL”). What are the potential ramifications? Any modifications and works derived from a script or product that is licensed under the GPL must themselves be licensed under the terms of the GPL when distributed to third parties (they must be made available in source code, at no additional cost, to anyone to whom you distribute the modifications or derivative works).

There are two questions a start-up building software derived from scripts under the GPL needs to ask: (i) Do we plan to distribute the software? and, (ii) How much of the software do we plan to develop using the GPL scripts? If your business plan requires the sale/distribution of software to customers - move to question two. If however, you plan on providing a service using your web application, where all your software sits and runs on your servers and users access these servers through their computers (be it desktops or smart phones) you might not trigger the distribution requirement under the GPL license. If you are distributing software, the next step of the analysis is to determine whether your product “as a whole” is a derivation of the script under the GPL. If this is the case you might very well have to disclose the source code for your entire product and not just the portion you developed by modifying the GPL script. Not the route you want to take if you view your product as proprietary. Unfortunately, the question of what constitutes “as a whole” is difficult and requires a case-by-case analysis. This might be a good time to call your IP Counsel to get an idea of how much risk you plan on taking using open source software in your development process.

Your choice of a software distribution vs. service provider model will also affect investment and exit events in the future. Using GPL scripts in the development of your website application will raise concerns for potential investors and buyers. If a potential acquirer or investor views your product as the main asset, to be distributed and marketed as a closed-source proprietary product, they might balk at your use of GPL scripts. If however, the buyer or investor view you as a services company where your main asset is your customer base and market presence, the use of GPL scripts might not be a problem. Executing a software development process in tandem with your business plan and still having room for flexibility is a difficult process, but is key to avoid boxing yourself into a corner over the long run.

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One of our partners, Rick Schaul-Yoder tells this story:

When you prepare an IRS Form SS-4 to apply for a taxpayer identification number for an entity formed in the United States, you must use a U.S. address on the form.  If you use a non-U.S. address, the IRS will issue a taxpayer identification number that begins with "98".  "98" numbers are issued to non-U.S. entities.  Having a "98" number will cause significant headaches.  If the entity doesn't have its own U.S. address, use a reliable "care of" address in the U.S.

Sample headache:  a large London-based investment manager client recently formed a new Delaware limited partnership as an investment fund.  The SS-4 for the Delaware limited partnership was incorrectly filed with a non-U.S. address.  The IRS issued a "98" number.  The fund went to open a brokerage account with JP Morgan, and gave Morgan an IRS Form W-9 using the new taxpayer identification number.  Morgan rejected the Form W-9 because it used the same non-U.S. address. (IRS regulations won't allow brokers to rely on a W-9, as certification of U.S. status, if the W-9 shows a foreign address.)  The client contacted us, and we corrected the address, using a U.S. "care of" address on the Form W-9, but Morgan then asked why the fund had a "foreign" 98 number.  We had to say that the IRS incorrectly issued the 98 number, and we assured Morgan -- ultimately by supplying a certified copy of the Delaware certificate of limited partnership -- that the partnership is indeed a U.S. entity.  Dealing with Morgan took several days, with the client understandably more than a bit concerned because the fund was ready to launch and couldn’t do so without the account being opened.  The client also understandably failed to comprehend why it could take so much effort to prepare a simple, half-page IRS Form W-9 consisting of no more than 3 lines (name, address, identification number) and a signature.

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For the most part, the startup companies we represent fit into the tech category in one flavor or other, whether its internet, mobile, cleantech, life sciences, etc.  But like the VCs, we follow the entrepreneurs.  So despite Foley Hoag not being a Hollywood power house, when a great entrepreneur, Marc Fienberg, had the crazy idea that despite having no Hollywood connections he was going to take a script he wrote and somehow manage to start his own production company, raise the money needed to produce the film himself as a first time writer/director/producer, attract top actors and actresses and actually make it happen, I happily signed on.  The culmination of all that happens this weekend when Play the Game, starring Andy Griffith, Paul Campbell, Liz Sheridan, Doris Roberts and Marla Sokolov opens in select cities nationwide today, August 28, including in the Boston area (Kendall Square, West Newton and South Dennis).  I had no idea how long it would take and how much fun it would be along the way...

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