Representing Company Founders

    Founders of companies face unique legal issues and have unique needs. We provide tax, corporate, and related advice to founders during the many stages of their careers, from start-up to expansion to IPO, from venture funding to merger or sale. We often represent founders and chief executives of companies. Founders have unique legal and tax needs that often cannot be satisfied by the counsel representing the company. Often, corporate counsel is ill-equipped to handle the legal (and particularly the tax) needs of the founders. And, in cases where corporate counsel could provide appropriate tax and legal advice to founders, conflict of interest rules frequently prevent it, especially in the post-Sarbanes-Oxley era.

    Accordingly, we find that we often represent founders distinct from their companies. Generally, such representations arise when there is some fundamental change afoot with the founders' company structure. For example, the founders may need separate representation when their company is in the process of being acquired by another company. Perhaps the company may be resolving legal disputes with others, possibly even including the founders. Alternatively, the founders may be transitioning out of the company, or transitioning to a quite different role as their company grows.

    Representing a founder in any of these circumstances does not necessarily mean there are overt conflicts of interest between the company and its founders. There may be conflicts of interest between the founders and their companies that are plain to everyone. However, we normally find no overt conflict of interest, but one that is decidedly subtle. We find that founders are often slighted in the process of any of these organic changes.

    In representing founders during the process of their company being acquired, for example, we frequently work closely with company counsel as part of the same team. The founders have their own unique tax and legal issues in such acquisitions, which may include on or more of the following:

    • Founders may be in different positions from that of other shareholders, vis-à-vis, the tax character of gain on the sale of shares.

    • Founders may need to separately negotiate employment packages and fringe benefits.

    • Founders may be expected to negotiate and abide by covenants not to compete.

    • Founders may be asked to make representations and warranties that are different from the representations and warranties made by other executives. Sometimes founders will be asked to make these representations and warranties jointly and severally, and their magnitude may be out of all proportion to the founders respective economic interests in their company.

    • Founders may find their shares locked up (ineligible for sale) for extended periods.

    • Founders and acquiring corporations may differ in their view of the proper tax characterization of certain consideration paid in the transaction.

    Examples of significant matters in which we have represented founders include:

    • Represented one of the founders of Epinions, Inc. against several prominent venture capitalists concerning founder and employee stock valuations in the merger of Epinions with Dealtime Ltd., forming

    • Represented the founders of an automobile supply company in structuring the termination of major litigation with a big three auto maker and rights to patented auto parts and the tax treatment of same.

    • Represented the founders of NASSDA corporation during the sale of NASSDA to Synopsys Software (NASSDA was represented by Wilson Sonsini Goodrich & Rosati and Synopsys was represented by Cooley Godward).

    • Represented the founders of Blue Pumpkin Software with respect to the acquisition of Blue Pumpkin by Witness Software (Witness was represented by Weil Gotshal & Manges and Blue Pumpkin was represented by Wilson Sonsini Goodrich & Rosati).

    Founders often have unique tax problems and issues. Today, there is increased governmental scrutiny on founders and executives. In fact, the IRS has begun targeting executives for examination. The initiative is part of a broader IRS focus on high income and highly compensated executives, entrepreneurs and others. Various corporate scandals caused the IRS to target a range of executive compensation issues, including stock options, deferred compensation, golden parachutes and fringe benefits. After an IRS pilot program exposed problems with executives tax returns, the IRS now routinely examines the compensation of executives as part of their audits of large corporations. In fact, in large corporate audits, the IRS now asks its agents to specifically request the tax returns of key executives.

    Occasionally, tax issues for founders arise primarily because of their significant shareholdings in ways that technically do not implicate or involve the company. For example, we represented founders or key insiders of a number of companies with respect to certain particular tax issues.

    Representations include:

    • Settled a multi-million dollar tax dispute between the foreign founder of a major public software company and taxing authorities over his move immediately preceding an IPO.

    • Represented founders of Excite in connection with certain California tax issues.

    • Represented certain founders of Seibel Systems in connection with stock transfers under California tax law.

    • Represented senior executives of a Silicon Valley technology firm in connection with issues resulting from its acquisition by JDS Uniphase.

    • Represented founders of Cisco Systems, Inc. in connection with a variety of tax planning, acquisition and disposition structuring and charitable contribution planning.

    • Represented a founder of Hotmail in various tax matters arising out of his receipt of Microsoft stock.

    • Represented a founder of Objective Systems Integrators, acquired by Agilent Technologies, Inc., in a state income tax controversy.

    • Represented a founder of Micro International Systems (MIS) in tax issues arising out of the sale of MIS to Medtronics, Inc.

    • Represented founders of QDM Company, Inc. and Solar Planet in resolving tax disputes to facilitate a sale to SunErgoline, Inc.

    • Represented one of the founders of Pixar Animation Studios in certain tax and estate planning matters.

    References available on request.