Should You Take an Equity Interest as Your Fee?


Should You Take an Equity Interest as Your Fee?

James Abels
Small Firm Business
March 23, 2006

“Because pets don’t drive.” Remember such slogans from the dot-com era when so many people became speculators? They readily bought into dot-com marketing campaigns and accepted stock options as part of their compensation package or in lieu of fees.

Well, we all know what happened. But does that mean that lawyers should not consider such payment arrangements today?

Is it appropriate for attorneys to take an equity share in a client’s business in lieu of fees?

YES

Michael Membrado
M.M. Membrado, New York City

There’s a perception that a multimillion-dollar payment to a law firm via equity ownership for a certain set of services may be excessively high. But there is a premium to be paid for the risk associated with the arrangement. There is also a risk of nonpayment or significantly less payment.

If you look at the cases, the only lawyers who have a problem are the ones who didn’t make an effort to get the appropriate consent. There’s no magic to it — informed consent is what’s required. Bear in mind that it’s true that businesspeople are quite savvy at managing negotiations. So discussing what can transpire, including the potential value of the equity, is enough.

Day-to-day representation is not usually a problem. In the vast majority of circumstances, the interests are aligned. And the benefit is that a lawyer with a stake in the client is more apt to get under the hood and make a big difference on things clients wouldn’t pay for him to do.

The credibility issue is often overlooked. When a firm, particularly a prestigious one, takes equity in a client, it speaks volumes within the marketplace about the integrity and opportunity represented by the client and its business.

NO

Philip Toomey
Carico Johnson Toomey LLP

Under California law, the risk of nonpayment is not a factor that can go into assessing the reasonableness of fees. Trials against lawyers for doing this — anywhere — are driven by the numbers. When it turns out that the lawyer who set up the corporation and acted as general counsel walked away with $5 million, that’s a problem for fact finders.

There are so many variables, you can’t ever advise a client of all the conflicts for purposes of sufficient business consent. And businesspeople are often better negotiatiors than lawyers are, yet, when they’re all sitting in front of a jury, the accusation is always that the lawyers were the more sophisticated party.

For the most part, the alignment of interests between lawyer and client is the same. The problem arises at the liquidity event, or IPO. Either the equity interest is worth a fortune or it’s worth nothing and the client says it’s the lawyer’s fault for missing something. Or worse, the liquidity event never occurs, and the lawyer ends up unable to exit gracefully before a real conflict situation arises.

The exit of a high-profile attorney by selling off shares may itself send a message that is objectionable to the client — violating an attorney’s duty to do the client no harm.

Posted in: Articles

Leave a response