I typically start thinking about my last day representing entrepreneurial clients on the first day I am retained. Although this sounds a bit cynical, bear with me, as some of this is due to the nature of my practice.

I am often retained to represent companies who are seeking investors to help fund their company's launch, growth or expansion. I also represent investors in the same type of activities (although not at the same time!). While some might think that the objective is to build a company that will last for decades, from both the founders' or investors' point of view, most simply want to achieve a faster return on their investment. This trend may be more applicable to technology or private equity backed companies, as opposed to service businesses or family-owned businesses, which may think longer term, but as I have learned, it's better to be prepared.

While keeping that ultimate goal in mind for the majority of my clients, I came up with a set of questions that every general corporate practitioner needs to know the answer to about their client to best assist them. Most of these are not first day questions (no client will want to pay to teach you these), but I have found it useful to keep them in mind during the first few months in order to be better prepared down the line.

These questions arise out of the criteria that most investors look for when doing legal and business due diligence about a company and not coincidently, these are the very same questions asked by business buyers (often in even more excruciating detail).

• Where does the technology (or more specifically, the intellectual property) come from?  

• Did the founders of the company come up with it over coffee?
• Was it developed in a university lab?
• Was it licensed from another company?

You (or your client) will one day have to provide a legal paper trail showing how the client owns its IP. This often takes the form of an agreement among founders who contribute their intellectual property to the new company in exchange for equity, or other forms of IP assignments.

If the technology came out of a university development program, the company will need to have an agreement with the university, many of which will require long-term royalty or equity payments, or a combination of both. If a company relies on outside developers or consultants, there will need to be agreements with those as well.

Some nontransactional lawyers and some of my less experienced clients are often surprised at the level of due diligence involved in demonstrating the provenance of IP rights. Sometimes I ask them if they would buy a house without knowing that it has clear title. For those of my clients who have no idea what that means, I tell them to watch the movie “The Social Network” and mind the story line about how Mark Zuckerberg came to own Facebook. As a refresher, the Winklevoss brothers hired Zuckerberg to write code for a website, which eventually became Facebook. Too bad for them, Zuckerberg didn't sign a consulting agreement assigning the intellectual property rights to them as a “work for hire.” Oops.

Company counsel does not want to be in the unenviable position of having to delay an investment or sale of a company while the company founders track down an ex-partner and ask him to sign an assignment of IP rights. Setting aside any need to revisit the circumstances of their departure, which may have been unpleasant, it can become expensive. This is particularly true if the person you need a signature from senses that they are the only thing standing between you and the great American payday (or the short-term investment needed to make payroll).

• Who owns the company?

For well-established companies, this is an easy question. The founders have typically been represented by counsel from day one, there are only a few of them, they have signed a shareholders or operating agreement and their entity was professionally formed.

I also have clients who have been running a company for years, with greater or lesser success, who took the DIY approach and self-filed a certificate of incorporation with their local secretary of state's website, or used LegalZoom or other services. This approach is probably fine for many companies, but founders are famous for promising equity to employees, executives or advisers in exchange for their work or support. Sometimes these documents consist of oral promises or email (or text) exchanges. As years pass, employees and executives change or leave, and they can often be hard to find, leaving behind a cloudy cap table, a situation investors (and their counsel) love to hate.

Again, new investors or purchasers (or their counsel) will want 100 percent clarity on who are the equity holders. Large transactions will request counsel to the company (you) to issue a legal opinion on various corporate formalities and more importantly the accuracy of the ownership table.

Separate from the aforementioned employee and executive issues, the equity ownership question also comes up when founders haven't adequately documented cash invested in the company. I have seen companies that have accepted continuing support from the founders themselves, or wealthy friends or family members, sometimes with promissory notes or subscription agreements, some of which are also DIY. I have others who have accepted funds for years and never accurately reflected whether those amounts are loans, equity purchases (or convertible notes, where a loan turns into equity) or a combination. Investors are not big fans of seeing their new cash investment going to repay an unwritten promissory note to a founder—they really want to see the capital going to work to grow the company.

I have been involved in numerous transactions that incurred extra tens or hundreds of thousands of dollars in legal fees trying to clean up these messes, especially under the time pressure and tension of getting to a closing. Failing to properly document equity grants to employees, aside from the issues it raises at the time of transaction, can also often result in significant tax consequences. Finally, savvy purchasers or investors who sense some weakness in documentation or structure will often use that as an opportunity to adjust the purchase price or impose more onerous terms.

• Who has worked at the company?

I am typically asked to answer this question before a client sells their company or raises money from a professional investor, such as a private equity fund. I try to ask this closer to the beginning of the engagement rather than just before closing for a few reasons: everything is more emotionally and economically expensive during that time, it takes more legal effort, and the company is in a weaker negotiating position. While payroll records and consultant payments are important from a tax compliance perspective and clients are likely already keeping track of those, it's equally critical to have a record of nondisclosure, invention assignment and other employment records. Following state rules regarding termination and severance are key from a risk management perspective, as is having a paperwork trail. Nobody wants to hear from an ex-employee claiming severance or promised equity just after a company has announced that they raised a million dollars.

• Where are the contracts with the company's suppliers, customers or distributors?  And are there even any? 

Many businesses operate on the basis of purchase orders, handshake agreements, email agreements or short form contracts, all of which are fine and fully enforceable. However, as counsel to a company, you should have some sense for what the most significant contracts look like, and you should start thinking about them on day one. These are not just contracts measured by dollar value, but those with key providers, executives or suppliers. If there is a single-source supplier for a $100 part, that can be even more important than a $100,000 a year equipment lease. I am no longer surprised when I find a client who has signed away exclusive distribution rights, agreed to some kind of expensive auto renewal provisions with an overpriced service provider or discovered that their biggest customer has inserted a non-assignment clause. These can always be dealt with at the time of investment or closing, but it's much easier if counsel to the company knows about them and can manage how they are disclosed.

• And what about the lease?

With the possible exception of real estate lawyers, everyone hates to read leases. They're written in a kind of language that closely resembles Olde English, a few are still printed on legal size paper (why is that even still a thing?) and they are filled with clause after clause of landlord-friendly terms. But a lease can be one of a company's biggest expenses, and if you are a business where location is everything (retail or restaurant), the ability to extend, assign or terminate a lease can be a make or break proposition. For example, if you are trying to sell a restaurant in New York City and you have a below market lease with another ten years to go, you can be sure that a landlord would like to prohibit the assignment and try to extract a market-rate rent.

The Takeaway

More often than not, a client may seek counsel to represent them immediately before a sale or investment transaction, and if experienced, that firm will figure out the answers to all of these questions, but it can be expensive and unnecessarily complex. If, however, you have been retained for smaller matters or a smaller client, and either the client grows into a bigger company or your representation grows into a more comprehensive role, you should always be trying to figure out the answers as you go along. That way, when your client is sold or the founders are diluted to a minority stake, you have the opportunity to remain as counsel, because you knew everything you needed to know about the last day starting on the first.

Aaron Polak is the founder of Aaron Polak Law, a corporate and transaction firm that represents businesses, owners and investors in private equity, M&A, and general contract, executive employment and commercial matters. His clients include start-up ventures and more mature businesses, generally in the technology, life science, software, restaurant and entertainment industries. He is also a lecturer at University of Pennsylvania School of Law and previously served as an adjunct at New York Law School for over a decade. He can be reached at [email protected] or 646-789-4272.