I was recently approached by a company that wanted to pay me with a share of profits from the sale of their goods. I have debated this potential fee structure many times in the past so I decided to do the research to figure out if a fee agreement like this was permitted.
This answer is a bit tricky. Yes, you can structure a fee agreement where an attorney is paid with shares of a company (and probably shares of profits), but as with everything in the law, the exact rules are complicated.
As an Illinois lawyer, I will only discuss the Rules of Professional Conduct from our Supreme Court. Two such rules are of utmost importance here: Rule 1.8 and Rule 5.4.
Professional Rules of Professional Conduct – Rule 1.8
Rule 1.8 deals specifically with what, if any, conflicts of interest exist in entering into a business transaction with a client. The Rule specifically states that “a lawyer shall not enter into a business transaction with a client” unless certain conditions are met. Those conditions are:
- The terms are fair and reasonable to the client and are fully disclosed in writing;
- The client is informed in writing that they may acquire independent counsel; and
- The client gives informed consent to the transaction, including the attorney’s role in the transaction.
When we review the comments to the Rule, we see why this rule exists. The Court’s concern is that the attorney will have too much power in the relationship, which could lead to overreaching on the part of the lawyer. Further, the Court discusses how the risk to the client is great because the lawyer’s financial interest may differ from the interest of the client.
Therefore, the Court’s primary concern is that the client is fully informed about the fee agreement, the transaction, and the amount of fees ultimately being paid to the lawyer.
Rule 1.8 further states that “a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation” except by contracting for reasonable contingent fees.
This brings up an interesting point: can a lawyer be paid a contingent fee for transactional work? That is essentially what is happening when a lawyer is paid with shares of the company. He or she is hoping that, through their efforts, the company will have value that can be obtained by selling the shares.
The Court is concerned that if the lawyer is paid on a contingent basis, the company won’t be able to fire the lawyer without a lot of headaches. If the company wants to enter into this kind of arrangement, the Court wants the company to be fully informed of the consequences.
That brings us to another point: the reasonableness of the fee. The Professional Rules state that fees must be reasonable, and the American Bar Association issued an opinion on the issue as well. The main worry is that shares of a company are difficult to value. This is especially true when a company is young, which is precisely when a fee agreement involving the transfer of shares would occur.
Let’s say that I do some legal work for a startup. The value of the legal work is around $20,000. I acquire some shares in the company, it’s not clear what the shares are worth. Six months later the company has exploded with growth and the shares are worth $200,000. Were my fees reasonable?
Well, it’s not clear. I had to wait six months to get paid, and I certainly contributed value to the company. The ABA also mentioned that the risk I took by doing the work for shares is a factor to be considered. The fee is probably reasonable.
However, the ABA mentioned that a better solution would be to agree on the value of the services now and then pay the attorney a number of shares of equivalent value when they are valuable.
This isn’t to say that there is a right way to do this or a wrong way. I’m merely pointing out that there is no clear answer about transactional work paid for with shares of a company.
Professional Rules of Professional Conduct – Rule 5.4
Rule 5.4 states that lawyers cannot share legal fees with nonlawyers, nor can they enter into a partnership with a nonlawyer if the partnership consists of the practice of law. Essentially, if a lawyer is a partner with a nonlawyer, they better not be practicing law.
Seems straightforward. I include it to point out that if a lawyer is being paid with shares of a company, they are becoming co-owners with people who may not be lawyers (in fact, they are almost certainly not, otherwise they wouldn’t need the lawyer). Therefore, the business they are working in should not conduct itself in any way that would appear to be practicing law.
But that wouldn’t happen, right? Don’t be so sure.
There are organizations where the practice of law could occur without intending to. For example, if I partner with a financial planner to offer financial advice to families, and as part of my role, I also give advice on estate planning. That could be considered the practice of law, and I may be in violation of Rule 5.4.
The Impact of a Multi-Tiered Business Structure
Let’s say I function as a co-counsel to Company A. Company A owns Company B, Company C, and Company D. Essentially, A is a shell company that holds intellectual property and whatnot. Can I be paid for my work with shares from Company B?
I think there is a serious conflict of interest here. My client is Company A, but I’m being paid by the success of Company B. This gives me a tremendous financial incentive to boost B over C, D, or even A. Classic conflict. I don’t think this system would be permitted by our ethical rules.
Can a lawyer work for shares of a company? Yes, but they better make sure everything is documented very clearly. The scope of the lawyer’s representation should be clear and the fee paid should be fully disclosed to all parties. Further, the fee agreement should include disclosures to the client covering their right to independent counsel.
There is a place for this kind of fee arrangement, especially when dealing with start-up companies, but everyone should proceed with caution.