Can a lawyer take stock or options in a startup client as payment for legal services instead of a cash fee?
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This page answers the general question as of 2000. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.
Plain-English summary
Against the backdrop of technology and internet startups that often lacked cash, lawyers increasingly accepted securities, including options or equity stakes, instead of cash fees. The Committee examined the ethics of accepting securities in a corporate client for legal services to be rendered, addressing business-transaction rules, conflicts, and fee reasonableness, and stated at the outset that there is no per se prohibition while cautioning that such arrangements can present thorny issues to be resolved before they are entered.
On business transactions, the Committee explained that DR 5-104(A) may be implicated. That rule bars a lawyer from entering a business transaction with a client where they have differing interests and the client expects the lawyer to exercise professional judgment for the client's protection, unless the terms are fair, reasonable, and fully disclosed in writing; the lawyer advises the client to seek independent counsel; and the client consents in writing after full disclosure. The Committee noted that, unlike Model Rule 1.8(a) and other states' rules, New York's DR 5-104(A) has a threshold (the client's expectation that the lawyer will exercise judgment for the client's protection), and that a fee agreement at the inception of a representation is generally not itself a covered "business transaction." But it reasoned that securities-for-fees arrangements often do implicate the rule, because principals in startups may be legally unsophisticated and relying on the lawyer, as the Committee found in Opinion 88-7 regarding a mortgage taken to secure a fee.
The Committee added that such arrangements can raise conflicts of interest, including in some situations non-consentable conflicts that preclude the arrangement (DR 5-101, DR 5-105), and that the lawyer should evaluate, at the time the fee arrangement is agreed to, whether accepting the securities as compensation would constitute an excessive fee under DR 2-106.
Currency note
This opinion was issued in 2000, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules and Ethical Considerations cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. The business-transaction safeguards are now carried in New York Rule 1.8(a). Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.
Common questions
Q: Can a lawyer take stock or options in a client instead of a cash fee?
A: Yes. The opinion concluded there is no per se ethical prohibition on accepting securities, including options or equity, as compensation for legal services to be rendered, though the arrangement must be handled carefully.
Q: What safeguards apply when taking securities in a client?
A: The opinion concluded DR 5-104(A) may apply where the client expects the lawyer to exercise judgment for the client's protection, requiring fair terms fully disclosed in writing, advice to seek independent counsel, and the client's written consent.
Q: Can such an arrangement ever be flatly prohibited?
A: Yes. The opinion cautioned that in some situations there may be non-consentable conflicts of interest under DR 5-101 and DR 5-105 that preclude the arrangement entirely.
Q: How does the lawyer guard against the fee being excessive?
A: The opinion concluded the lawyer should evaluate, at the time the fee arrangement is agreed to, whether the securities as compensation would constitute an excessive fee under DR 2-106.
Background and rules framework
The opinion interpreted New York's then-governing DR 5-104(A) (business transactions with clients, the analog of Model Rule 1.8(a)), DR 5-101 and DR 5-105 (conflicts of interest, related to Model Rule 1.7), and DR 2-106 (excessive fees, the analog of Model Rule 1.5). The analysis turned on whether the client expects the lawyer to protect the client's interest in the transaction and whether the equity compensation is reasonable.
Citations and references
Rules of Professional Conduct (then in effect):
- DR 5-104(A) (business transactions with clients; analog of Model Rule 1.8(a))
- DR 5-101, DR 5-105 (conflicts of interest; related to Model Rule 1.7)
- DR 2-106 (excessive fees; analog of Model Rule 1.5)
Cases:
- Beatie v. DeLong, 164 A.D.2d 104 (1st Dep't 1990), independent-counsel advice and fee interests
Other opinions cited:
- N.Y. City Bar Opinion 88-7 (1988): taking a mortgage to secure a fee as a business transaction
- Utah Opinion 98-13; Pennsylvania Opinion 89-158: accepting client securities under Rule 1.8
See also
- ABA Formal Op. 484: Client Fee-Financing Companies
- CA COPRAC Op. 1999-154: Dual Practitioner as Lawyer and Investment Advisor
Source
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