Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, December 4, 2011

Maynard on The Ethics of Taking Stock in Start-Ups

Ethics for Business Lawyers Representing Start-Up Companies, by Therese H. Maynard, Loyola Law School Los Angeles, was recently posted on SSRN.  Here is the abstract:

Starting in the 1990’s, it became an increasingly common practice for lawyers - particularly Silicon Valley lawyers - to take an equity investment in the business ventures of their new clients. While the practice lulled somewhat in the aftermath of the burst of the bubble, it is becoming relevant again as the market for stocks of high-tech companies has been gaining strength in the wake of the economic recovery from the recent Great Recession. This Essay explores the ethical issues as well as the general business considerations that arise in connection with the practice of taking stock in lieu of payment of legal fees in cash, which has long been the traditional billing practice for legal services. For reasons that are described in detail in this Essay, many academics and experienced venture capital lawyers believe that taking stock in a client presents significant potential to strengthen the lawyer’s relationship with the new business client. At the other end of the spectrum, there are others within the legal community (both academics and practicing lawyers) who just as strongly believe that these equity investment arrangements significantly undermine time-honored ideals that have long guided the legal profession in determining how corporate lawyers should go about fulfilling the ethical and fiduciary obligations that they owe to their business clients. This Essay describes the advantages and disadvantages of these equity fee arrangements in order to address the fundamental public policy concerns presented by the growing practice of taking stock in payment of legal fees - namely, whether this practice serves the client’s best interests, and separately, whether these arrangements also serve the best interests of the legal profession.

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