As a start-up, a preliminary concern might be to keep expenses on the low especially in bootstrapped business. Services of a legal professional is an unavoidable element of the process, especially during the establishment. Several things in the preliminary stages are done by lawyers or with the help of lawyers, making their service irreplaceable.
Hiring a legal professional, is part of the process. Lawyers or law firms offer their services on multiple levels to their clients. From the setting up of a new business, to acquiring the necessary licenses, to finalizing the nature of the business and incorporating the same, the roles lawyers carry out make them indispensable. This also means that they will be charging you fees for the services rendered. This can vary according to the amount of work they have done or based on the experience and reputation of the lawyers engaged.
So, is it possible to offer equity to your legal professional as fees for their services? Globally this is a popular practice, with the first appearance occurring in the United States of America, as firms started accepting equity as remuneration in return for legal services rendered. Given that most start-ups go through a boom which exponentially raises their stock value, the practice accepting equity as fees seems more profitable for law firms. With this method being established, the European legal giants have also started accepting this practice.
By accepting equity, it becomes rather apparent that the lawyer is also a stakeholder who will be affected by the business’s outcome. This leads to a conflict of interest that may potentially dilute the ability of your lawyer to be objective and critical. Therefore, to avoid conflict, most lawyers keep their equity holdings within the business to less than 5%. If the stakes for the lawyer or the law firm, in the business are high, it might prove difficult to maintain an impartial focus on being an objective voice of reason.
It also depends on the position the appropriate Bar holds, concerning this. If the Bar has stricter rules that mostly frown upon such a practice, then the ability to offer equity might not be possible. But if the Bar has placed regulatory limitations on such practices and has allowed it in the past, it is a viable option. An alternative route that can be adopted by the law firm or legal professional is to make the business or founders sign a waiver that states there is no conflict of interest by the legal professional accepting equity as fees. Since it is a matter that also includes professional ethics, there is a fine line between conflict and conforming to the rules.
In India, the Bar Council has laid down some rules that deal with professional ethics and code of conduct, specifically the following applies in this scenario,
An advocate should not appear in or before any judicial authority, for or against any establishment if he is a member of the management of the establishment. This rule does not apply to a member appearing as “amicus curiae” or without a fee on behalf of the Bar Council, Incorporated Law Society or a Bar Association.
An advocate should not act or plead in any matter in which he has financial interests. For instance, he should not act in a bankruptcy petition when he is also a creditor of the bankrupt. He should also not accept a brief from a company of which he is a Director.
An advocate should not trade or agree to receive any share or interest in any actionable claim. Nothing in this rule shall apply to stock, shares and debentures of government securities, or to any instruments, which are, for the time being, by law or custom, negotiable or to any mercantile document of title to goods.
This is the Bar Council rules as far as Lawyers in India are concerned. This covers matters in which they have a pecuniary interest, matters in which the lawyer may be a part of the management of the establishment, and concerning the acceptance of shares. The Bar Council Rules make it abundantly clear that stringent limitations exist only with regard to court appeareances by lawyers with interests in the business.
The general take on the question depends on the business landscape in the area and whether or not it is a common norm. In the US, this is an accepted practice, the Bar is also lenient and the rules tolerate the same. In the UK or more broadly in the European market, it is slowly starting to gain traction. Although caution exists and it is viewed as an inappropriate method which causes conflict, this is further backed by the Bar, who has stricter rules governing the same.