A conflict arises when a law firm represents both the startup and the investors who fund it — or maintains ongoing fund formation and investment relationships with those investors. The firm's economic interest in preserving the investor relationship creates a structural loyalty problem, even when the engagement letter identifies the company as the client. This conflict is often invisible to founders until a dispute arises.
The conflict almost always originates at the same moment the company is most vulnerable and least skeptical: the closing of the first institutional round. A major venture fund introduces its portfolio company to a preferred law firm. The firm, which has a long-standing relationship with the fund and may have represented it in dozens of deals, agrees to represent the company on the financing. The engagement letter includes a waiver allowing the firm to continue representing the investor on other matters — including future matters adverse to the company — and sometimes to represent both parties on the current transaction itself. Founders, eager to close the round and grateful for the introduction, sign. They have no reason yet to imagine that the firm's loyalty structure will ever matter.
A conflict waiver typically acknowledges that the firm has existing or anticipated relationships with investors who may participate in the company's financings, and asks the company to consent to the firm continuing to represent those investors in unrelated matters. What founders often miss is that the waiver may also cover future transactions where the investors' and founders' interests diverge — including down rounds, board disputes, and M&A.
A well-drafted conflict waiver is specific about what the founder is giving up. A poorly drafted one — or one that was drafted with the firm's interests in mind — is broad enough to permit the firm to take positions that would otherwise require them to withdraw entirely. The key provisions to understand are the scope of concurrent conflicts being waived, whether the waiver covers future disputes between the waiving parties, whether the firm has agreed to screen attorneys handling the conflicted matters, and what the firm's withdrawal obligations are if a material dispute arises. In Gurpreet Bal's experience, founders rarely receive advice from independent counsel before signing these waivers. The engagement letter arrives as an administrative document. It is signed the same afternoon.
Large law firms derive significant, recurring revenue from fund formation work — representing VC funds in their formation, LP agreements, and investments. This creates a financial incentive to protect those relationships that can subtly influence advice given to founders who are clients in a single transaction. The revenue imbalance means the firm has more to lose by angering a fund client than by losing any individual startup client.
The economic reality of a large law firm's Silicon Valley practice is that a major venture fund is worth many multiples of any single portfolio company as a client. A fund may send the firm dozens of financings per year across its portfolio, generate institutional matters, fund formation work, and secondary transactions, and provide a pipeline of future company clients. A single startup is a single matter, often with uncertain ability to pay until a liquidity event. When a dispute arises between a portfolio company and its lead investor — over a bridge financing, a board seat, a down round, a proposed sale — a firm navigating these loyalty relationships faces pressures that are not always visible to the founders. The advice that emerges from that firm may be technically competent and formally neutral, but the subtle calibration of what to fight for and what to accept is not always the calibration an unconflicted advocate would make.
Founders most often discover conflicts in three situations: a down round where investors and founders have opposite interests over repricing; a founder separation where the company's counsel is advising the board on removing the founder; and an M&A transaction where the acquirer is a strategic investor who is also a client of the firm. In each case, the conflict was created at the original engagement but only becomes visible under adversarial conditions.
The pattern Gurpreet Bal has observed is consistent. A dispute arises — the investor wants terms the founders believe are unfair, a financing is structured in a way that wipes out common, a board majority authorizes a transaction the founders oppose. The founders call their company counsel expecting a vigorous advocate. Instead, they find a firm that is suddenly focused on mediation, emphasizing the legal risks of fighting, and recommending that the founders accept something. In some cases, the firm quietly recommends that the founders retain separate personal counsel for the dispute — which is the right advice, but delivered too late, after the waiver has already been signed and the conflict has already affected the advice given. In the most problematic situations, founders discover that company counsel has taken positions that protected the investor's liquidation preference and board rights at the expense of founder equity.
Founders should ask their counsel directly whether the firm represents any of their investors, review the conflict waiver carefully before signing, and retain separate personal counsel for any transaction involving their individual equity — including vesting negotiations, separation agreements, and M&A. In contentious situations, independent counsel is the only reliable protection against a conflict that the firm itself may not even acknowledge.
The protection is not complicated but it requires discipline at the moment when founders are least inclined to be skeptical. First, read the engagement letter before signing it. If a conflict waiver is present, ask specifically who the firm represents in the current transaction and what other ongoing representations involving the lead investor the waiver is intended to cover. Second, retain independent personal counsel to review the term sheet and the stockholder agreements — not company counsel, not investor counsel, an independent attorney who is paid by you and loyal to you. Third, understand that company counsel represents the company as an entity, not the founders as individuals. When the company's interests and the founders' interests diverge — which happens in down rounds, insider-led transactions, and disputed exits — company counsel's obligation runs to the company, not to you. Fourth, at later financing stages, revisit the question of whether company counsel is still unconflicted. A firm that represented the Series A investor may be conflicted from providing vigorous representation against that same investor at Series C. Gurpreet Bal's recommendation is direct: the most important time to have independent legal counsel is before you sign anything, and the most important thing to be independent from is the investor who just led your round.
Gurpreet's rule: do not choose counsel because they regularly represent your target investor. If they represent venture investors generally, that is fine — depth in the space is valuable. But if you are raising from a specific investor or a specific set of investors, find counsel who does not have that particular relationship. This seems obvious, but it is a genuine blind spot for a surprising number of companies. The caveat — and it matters — is that there are real exceptions to this rule, and they are easy to identify. The first words out of that lawyer's mouth will be the existence of the conflict and a specific explanation of how they compartmentalize it. Lawyers who lead with that conversation, unprompted, are sometimes excellent choices. Lawyers who never raise it are not.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on SAFE financings, venture capital rounds, mergers and acquisitions, acquihires, and IPOs. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm.