Accepting Ownership Interests

Quite frequently, entrepreneurs who seek your services will ask if they can pay your fees in ownership interests rather than in money. This is not because they don’t think you are worth it but rather because they need to use cash for other expenses, such as marketing, etc. While it may help out your client if you accept an ownership interest in lieu of cash payment for fees, some legal and ethical concerns arise. If an attorney accepts an ownership interest, the attorney now has a dual relationship with the client: one of attorney and one of owner. Does this create a conflict, i.e., will the attorney be materially limited by their financial interest? How does an attorney sell their interest? Will the client be offended when/if the attorney sells the interest?

A look at Rule 1.8 “Current Clients: Specific Rules” is a great place to start. Not only does it help us navigate our question, but it has been copied verbatim by a majority of the states, including Pennsylvania.

Rule 1.8: Current Clients: Specific Rules

Client-Lawyer Relationship

(a)  A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1)  the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2)  the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3)  the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

To fully understand the details and purpose of Rule 1.8, one must consult the Comments under “Business Transactions between Client and Lawyer”

Comment 1

Comment 2

Comment 3

Comment 4

📖 Read Professor Therese Maynard’s article Ethics for Business Lawyers Representing Start-Up Companies (2011).

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To the extent possible under law, Samantha Prince has waived all copyright and related or neighboring rights to Entrepreneurship Law: Operational Issues, except where otherwise noted.

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