Attorney Ethics and Your Start-Up

Against popular belief, attorneys must actually follow certain rules
of ethical conduct.  In New York, these rules are set forth in 22 New York Codes, Rules and Regulations Part 1200.

One set of rules requires attorneys to avoid conflicts of interests among their clients.  Attorneys are not allowed to accept or continue representation of a client that will adversely affect the attorney’s judgment on behalf of or dilute his or her loyalty to another client.  In addition, when an attorney is retained by an organization (such as a corporation), the organization is the client and not its members, mangers, shareholders or partners. 

These issues regularly arise for attorneys when they are asked to represent a start-up, because often they are asked by the unsuspecting founders to represent each of them individually and the to be formed entity.  As an example,  two founders may want to hire one attorney to form the corporation, draft a shareholder agreement between them and review a lease that the corporation is about to enter into.  That makes for three clients, each of the founders and the corporation.  Even if all interests are aligned at the moment, conflicts between the parties could arise at any point in time.

In an ideal world of free legal representation, each founder should have their own attorney and the new business entity should have its own attorney. Well, that’s not the real world.  It’s hard enough to convince start-ups to get an attorney early on in
their business venture, try convincing them to spend the little cash they have on several attorneys!

Having said that, your attorney may be able to represent multiple clients with differing interests if (and that is a big if):

a disinterested lawyer would believe the lawyer can represent both
clients competently and the parties consent after there has been full
disclosure of the implications, advantages and risks.

So if your start-up agrees to be represented by one attorney, be aware of the potential conflicts and expect your attorney to explain and disclose these conflicts to you. Unless you specifically consent to multiple representation, your attorney is not authorized to represent you and the other clients.   Know also that anything you tell your attorney will not be confidential from the other respective clients.  If you feel at anytime that your interests are not represented fairly due to the multiple representation, you should seek out independent counsel.  However, you should also expect the first attorney to point out such conflict the moment it arises and withdraw from the multiple representation at such time.

For an in-depth discussion of the ethics issues involved in multiple representation regarding corporate and transactional matters, look at the  Formal Ethics Opinion 2001-2   issued by the Association of the Bar of the City of New York.


About Imke Ratschko

Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

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