1. A lawyers acquisition of a clients
stock in exchange for legal services should be fair and reasonable to the client.
2. Valuation of stock should be set by some objective measurement
such as the price set for founders shares, or friends and family shares or by
3. Another method of valuation is to value the stock at the amount
per share that cash investors, knowledgeable about its value, have agreed to pay for their
stock about the same time.
4. Since the value of stock to be issued is always reasonably
ascertainable, the lawyer can easily set the price of the stock to be exchanged for legal
5. The percentage of stock agreed upon should reflect the value, as
perceived by the client and the lawyer, at the time of the transaction.
6. When the value of the stock is not reasonably ascertainable, a
lawyer is required to engage an investment professional to advise the client regarding the
value of the securities.
7. Vesting of the stock is never a consideration in determining
fairness and reasonableness.
8. Since all the principles of start-up companies are sophisticated,
no writing other than the transfer of stock is necessary to comply with the writing
requirement of rule 3-300.
9. Another means of compliance with the writing requirement of rule
3-300 is to have the terms of the transaction and the consent of the appropriate directors
or officers recorded in the corporate minutes.
10. The client must be advised in writing of the opportunity to seek
independent counsel of the clients choice, even though the client is sophisticated.
11. The written advisement to seek independent counsel is only a
formality for the sophisticated client; the sophisticated client need not be afforded an opportunity to seek the
advice of independent counsel on the transaction.
12. It is not necessary to document which independent counsel the
13. It is also good risk management to document the clients
acknowledgement that the client did not desire to seek independent counsel after being
advised in writing to do so and after having been afforded an opportunity to do so.
14. After full compliance with the first four steps, the clients
written consent to the terms of the transaction is really unnecessary.
15. A lawyer must determine whether an ownership interest in the
client reasonably might affect the exercise of independent professional judgment on behalf
of the client.
16. Where it is possible that the lawyers interest may create
economic pressure to get the deal done, and that this pressure in turn may
impact the lawyers independent judgment on disclosure issues, the lawyer should
orally explain the conflict to the client.
17. One practical method of lessening the diminution of a lawyers
independent judgment is to limit the firms stake in its clients to 1 percent or
18. Preserving independence of judgment in taking equity in client
companies involves lawyer consideration of the size of the investment in proportion to the
holdings of other investors, the potential value of the investment in relation to the law
firms earnings or assets, the possible impact on the lawyer of levels of risk
involved, and whether the investment is active or passive.
19. In ensuring that taking stock in client companies in lieu of
legal fees does not violate the prohibition against unconscionable fees, a lawyer must
consider the estimated current and future value of the equity [i.e., securities] interest
considering all the normal risks of a start-up business and any specific risks to the
business or its assets.
20. The value of the lawyers interest in client stock will be
determined at the time the client makes a claim of misconduct against the lawyer.