A client recently asked me to review a retainer agreement for a matrimonial matter. I made a few edits — as there were terms in there that actually violated the Rules of Professional Conduct — and I told her to forward my comments to her attorney.

Attorney to Client: I am unwilling to make the changes you have suggested; some don’t make sense and some are simply not acceptable. I will return your deposit less the time I spent reviewing all of the pleadings and drafting the initial documents.

Client to Me: I should have spoken to you BEFORE I dropped off the deposit without a signed agreement — I guess I learned an expensive lesson.”

Me to Client: Without a retainer agreement and an understanding of her terms of representation, she should not have started work on your case and she knows it. Let her know you expect a full refund otherwise, if not, I will contact her directly.

Client to Me: Attorney says I can come and pick up my deposit.

This is a good example of why it makes sense to have a legal professional review a retainer agreement.  I’m also wary of any lawyer who gives you their agreement and expects you to sign or hand over a check on the spot.  Here are a few main points I’d like to draw your attention to when reviewing these type of agreements:

1) Billing Increments. Rules of Professional Conduct provide that a lawyer who “has not regularly represented the client” shall give written advice of the “basis or rate” the client will be charged. It is most reasonable to bill in increments of 6 minutes (1/10^th of an hour, rounded up).  However, I have reviewed engagement letters that are as high as 1/4 of an hour, (rounded up that would be 15 min) so, even if your lawyer only spent 4 minutes, say, drafting a quick email, you’d pay for 15 min. To this end, this is an EXTREMELY important point of negotiation. At the same time, it would be advisable to negotiate a project-fee basis (as I do), particularly if the matter is somewhat standard (e.g., corporate set up, trademark or provisional patent filing).

2) Non-refundable Retainers. Believe it or not, some lawyers don’t refund their client’s deposits and if an agreement is vague on this point or states “non-refundable” or “minimum fee”, they are allowed to do this, So, be sure your agreement has a refund provision.

3) Third party costs. One provision I frequently push back on is usually labeled as “Other Expenses and Costs” and requires you to agree to pay them.  To this end, I would request the inclusion of language that requires “(a) those costs to be reasonable and (b) that you are advised in advance of third party costs to determine the reasonableness of such costs.”

4) Record keeping. Many states have no requirements that an attorney maintain for records for a specific period of time.  It is a good idea to have your attorney keep them for at least 2 years – particularly if you don’t back up your computer or prone to losing files.  Otherwise, your attorney is free to destroy your files upon conclusion of her representation.

5) Interest for Late Payments.  A reasonable rate of interest for late payments ranges from 0.5-1.5% per month. I have seen attorneys ask for as much as 10% and find this unconscionable particularly when payment is demanded upon receipt (which you should also try to negotiate to at least 10 days from receipt).

6) Arbitration.  Arbitration clauses should be limited to bill disputes only, and not, “any and all disputes arising out of the attorney/client relationship.” All State Bars have a complaint process to report an attorney’s alleged misconduct/unethical behavior.  While your agreement may not carve out this point, this will not prevent you from filing a complaint where the attorney is licensed.

If a lawyer is not willing to negotiate their retainer agreement and, if requested, give you a ballpark budget for handling a non-litigation legal matter, it’s a good sign that person is not a good fit for you (particularly if cost is an issue, as is the case for most start-ups).

Lastly, when at all possible, try to get a personal recommendation for an attorney rather than finding one on the Internet. I’d also avoid relying on Avvo.com (a privately owned marketer that pulls attorney profiles and posts them on the website with little substance, until an attorney claims their profile). Then, don’t make up your mind about whether to retain someone until you’ve discussed your needs and feel fairly comfortable working with him/her; then read the fine print.

Case in Point:  A company paying thousands per month for advertising/Google adwords was growing their online business exponentially.  Suddenly, sales started to trickle down to almost nil. At the same time, the company began receiving various reports of unauthorized credit card charges.  After the company received notice from a local police department, I was retained by the Board to look into the matter.

 Me:  I have two questions for you – who handles the new customer inquiries? Who takes the payment information   from the customers?

Him:  The same person – our General Manager.

After requesting a customer list and copies of emails reporting credit card fraud, I noticed a large discrepancy – those complaining of credit card fraud did not appear on the company’s client roster.  We soon determined that someone internally was taking customer orders and billing them directly, albeit under the company’s name.  While these customers believed they were being serviced by my client, in reality, their accounts were being diverted elsewhere and subsequently, their credit cards misused.

While we were hopeful that the police investigation would conclusively show the General Manager as the culprit here, it was later discovered that the company emails were set up such that passwords and terminals were used on a shared basis; this means that anyone could have facilitated this fraud under another person’s identify/account. To be sure, I then had PayPal account records subpoenaed. After waiting several weeks, what was ultimately sent were summary account statements that did not provide any level of specificity – not helpful at all.

After reviewing the evidence, the police determined there was not enough to convict any one individual and the investigation was closed.  It was recommended, however, that the company file a civil suit where the burden of proof would be based on a “preponderance of evidence” — much lower than a criminal case which requires “beyond a reasonable doubt.” Suffice to say, by this time, the company was in financial ruins and unable to afford the cost of civil lawsuit.  The story ends like this: The thief got away, the company was ultimately responsible for the credit card theft (due to their lax security policies) and they have now ceased operations.

What can you do to prevent this tragedy from happening in your organization?

First and foremost, common sense would dictate that the practice of allowing the same person who takes orders to also process payment details exposes any company to risk. Without proper oversight and checks and balances in place, lax security procedures enable anyone lacking scruples to sabotage a business. Next, ensure employees/contractors do not share passwords or have access to one another’s passwords or computers – otherwise, fingers can be pointed such that no one person would appear to be responsible in the event of theft. Lastly, if you take customer orders via your website or an 800 number, record those calls and also be certain that there are several people that are copied on the email correspondence (e.g., send to sales@xyz.com) in order to track the progress of the order and payment confirmations.

Advances in technology have made it easier for unscrupulous employees to steal customers and their information – whether changing payment instructions or even using a card skimmer — it is recommended that you implement tactics to prevent internal fraud:

• Reconcile your accounts weekly rather than monthly and by more than one person
• Use authorize.net or your bank to process online transactions so that employees do not get access to customer credit cards.
• Check PayPal accounts or Bank Wiring details regularly– (even if you are not concerned with employee theft, a website can potentially be hacked into and payments diverted).
• Always secure your POS device.
• Have a separate authorizer of credits from the one who onboards the customers.
• Make sure all credits have accompanying internal documentation of customer information (name, contact information).
• Conduct regular internal audits at random times and intervals.
• Review any volume spikes in sales activities and reconcile with website traffic reports and 800 number call volume.
• Protect your passwords and verify internal access controls for online account reporting, email address contacts and checking account change requests.

While an atmosphere of trust is essential for all businesses, protecting the financial stability of your company is just as, if not more important. Hopefully, the suggestions I’ve outlined above will get you thinking about building a plan that will mitigate risk for your company.  If you’ll like further information or a consultation, please email me or leave a comment!

Entrepreneurs face many threats that can affect the timing and the success of their businesses.  The most obvious threats are external ones – the economy, changes in regulations that directly affect your industry, the threat of competition, or worse yet, someone stealing your ideas.   For this reason, most entrepreneurs that come to me for the first time are looking to protect themselves from external threats – a standard non-disclosure agreement, a trademark or patent filing – as it is generally believed that having NDAs in place and IP pending approvals demonstrates the company has created value and is protecting it diligently.

But consider this: most investors would cite as the most compelling reason they invest in a company is the management team yet, strangely enough, these relationships are usually the least protected of all the company’s assets.

According to the National Venture Capital Association, you and your partner will have a falling out within a month of working together and it is commonly known that 9 out of 10 startups fail within the first 2 years.  (as per Forbes Invest In Startups, if You Dare, to Balance Your Portfolio, Sept. 21, 2012).

Over the years, I’ve been asked to intervene on a variety of disputes – worst of which include: one Founder emptying out bank accounts, changing office locks or another taking company equipment to use as negotiation leverage. Fortunately, there are laws to deal with these situations but no one really wants to go there when starting up a new business.

A Founders Agreement is akin to a prenuptial agreement for startups. Without them, points of contention with respect to management responsibilities, share ownership, terminating of employees (or co–founders), contract details, and personal investments can disintegrate great partnerships.

So clearly, a Co-Founder falling out on the eve of signing a Term Sheet with an Investor is probably the worst thing any entrepreneur could imagine.  Yet, this is exactly what happened.

After many months of investor presentations and continuing to personally bootstrap the company, my partner lost faith and patience.  So instead of shaking hands and parting ways, unbeknownst to me, he began to circumvent our business relationships for his own personal gain. He began contacting a couple of my longstanding clients to handle their business directly.  I had just gotten off a phone call with a trusted colleague advising me of this offensive behavior, when a fax came in from an investor I had previously met, setting forth terms of a very attractive offer to fund our company.

The following day I was scheduled to speak at a conference. Afterwards, a banquet was planned and there sat the traitor wearing a name badge with my company’s name. He was smiling and had no idea I knew of the wrong he had done our little company.

As I looked over at his goofy, crooked toothed-smile I felt my blood pressure rise.  I wish I could remember the exact words that set this Entrepreneur into a psycho tailspin but all I can recall is reaching down for the Crème Brulee at my place setting and without so much as a blink, dumping it directly over his head. Seeing his look of astonishment (and the startled expressions of those who witnessed this display of assault).

There was no way we were going to resolve our co-founder disputes.

So that left me with 2 choices:

1.  Fight him in court to enforce the NDA (putting company business on hold and likely losing the investor);
2.  Make him a buyout offer and move on.

I decided to be candid with our investor about our falling out (which, by the way is always good business practice). Turns out, not only were they willing to invest, but they also agreed to buyout his shares.

(On principle, the lawyer in me really wanted to take him to court but the CEO in me had to be commercial and do what was best for the company and the rest of the staff.  All in all, was not an easy pill to swallow).

The take away from all this:
 

Want to read more about Startup Agreements? Here is a blog I like from Simeon Simeonov that talks in more detail about Founders roles and agreements. I also like this book The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton University Press, 2012).

Thanks for stopping by!

As an attorney and executive adviser, I have been regularly called upon by management (or their boards) to manage  crisis.  Whether it is an employee or director matter, a falling out between partners, a threatened litigation, or breach of confidentiality; all companies face crisis from time to time. While external issues are not always in the control of management, internal issues typically are. Whether internal/external, how these threats are handled are indicative of the type of leadership skills management possesses.

In a recent workshop at the Thiel Foundation’s 20-Under-20 Retreat, I asked 30 new entrepreneurs and mentors what they thought was one of the most important qualities in a Leader.  The responses I received ranged from:  a hard worker to a multi-tasker to having a vision.  While these are all important traits, in my opinion, one of the most important ones is compassion and here’s why:

• Employees know whether or not you really care about them – if you listen to their ideas, communicate openly, understand their key strengths, and compensate them fairly.
• Clients will  know if you truly care about them — if you are responsive to their needs, provide proactive customer service and offer solutions that help them work better/smarter/faster.

Sure, management is under a great deal of pressure to meet sales objectives and satisfy their Board of Directors.  At the same time, startups are generally cash strapped and may try to do things on a shoe-string but what are some of the real underlying problems that generally lead to crisis mode?

1. Shutting out those who know the problem best.

Employees are generally aware of the issues at hand and some may have good suggestions on how to turn things around; after all, they are the ones in the trenches who have a vested interest – a continuing paycheck and a potential payout on their stock options. Keeping them in the dark creates an environment of distrust and insecurity.

In one case, the CEO held a weekly conference call with the team. The majority of the time when someone voiced an issue the response would typically be: “This isn’t relevant to the rest of the group; let’s take this out of band.” Needless to say, that offline conversation rarely happened.  After awhile, the weekly conference calls were nothing more than a cheerleading session where most people were on mute (e.g., doing other things) while the CEO congratulated himself and the team or staying in business for yet another week.

2. Promising what you can’t deliver.

Employees and consultants share the same ongoing objective – getting paid for their work and having access to necessary resources. Unfortunately, management doesn’t always get the memo.

In one startup, consultants were rarely paid on time and employees’ expenses were not readily reimbursed.  They’d hear the “check is the mail” and then two weeks later, nothing. “ One employee who reportedly emailed the CEO on a daily basis to let him know there was still nothing in his mailbox finally received his check with an added bonus: a termination notice inside.

In another instance, the product specs were oversold; customer deadlines were not being met and the CEO’s phone went straight to voice mail. Employees had no idea what to communicate to their accounts and so eventually, their business began migrating elsewhere.

3. Gossiping about others.

To me this is probably the worse offense I’ve witnessed in a company — the CEO who gossips about his employees, his board members and even his customers.   Sure it’s hard to be the CEO when you’re at the top of the food chain and no one to gripe to but hey, haven’t you heard…. it’s lonely at the top.

A recent Randstad survey of more than 1,500 U.S. employees found that three out of five workers listed gossip as their top workplace pet peeve. If the CEO is gossiping to me about someone else…what is he saying about me to others?  In that environment of distrust, everyone’s watching his back and not the bottom line.

Compassionate leaders can avoid or manage crisis best when they listen to the concerns/feedback from the team, communicate expectations clearly and honestly and doesn’t disrespect others by gossiping.  A leader that chooses to cultivate compassion will have a significant advantage over those that do not. Business owners may consider this “Dalai Lama approach” to be too touchy-feely, but in truth, cultivating positive relationships is at the core of any successful business or relationship.

What are you thoughts on compassionate leadership? I’d love to hear from you!