Why Paying Legal Fees with Equity May Not Be the Best Idea

Like many attorneys who work with startups, I’ve been asked if I would be willing to take (non-voting) equity in my client as payment. Even before I went into practice, I decided that it would be my policy to not accept compensation for my fees in the form of a company’s equity. Furthermore, as a matter of personal opinion, I don’t think other attorneys should accept a company’s equity nor should a startup offer their attorney equity (except in certain circumstances), and I’ll explain why I think so.

I should first probably clarify that there is technically nothing wrong (in every state as far as I am aware) with paying legal fees with company equity. However, the major issue with paying your attorney with an equity interest in your company is just that — your attorney now has an interest in your company. A startup normally relies on its attorney for impartial legal (and even general business) advice, but if the attorney has its own interest or agenda in the startup, how can the founders truly trust the advice, or at least not wonder about the attorney’s advice? Even if an attorney who took equity remained impartial (I know I would), if a client were to become unhappy with the result of a matter I could nonetheless be open to a malpractice claim solely on the appearance of possible impropriety.

There generally is no conflict of interest in routine business/corporate matters such as drafting up sales contract templates or employee handbooks. The possibility of conflict of interest generally comes in with financial transactions such as Series A rounds or acquisition. On one hand, in such transactions the interest of the shareholders does not always align with the interest of the business, whose interests the attorney represents (but if given equity is now also a shareholder). Moreover, an attorney equity holder has a direct financial interest in seeing such transactions consummated. In those matters, the attorney should be recusing themselves, leaving the company to have to bring in new counsel to handle that transaction.

This would appear to defeat the effort in building a long-term relationship with legal counsel from the inception of the business. Therefore, it seems that it really only makes sense to compensate attorneys with equity when they are handling isolated matters for your business. As I outlined above, it can constrain the relationship with your company’s regular attorney, which is why I choose not to accept equity for payment — it is my hope to build a regular, long-term relationship with all my clients, so I do not want to create a situation where I would have to withdraw at some of the most important events in the startup’s development, or give my client a reason to question my advice.

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