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Question of the day: Should I accept an offer of equity in a client in lieu of fees?

Fees

An attorney considering whether or not to accept an offer of equity in a client should keep a number of issues in mind.

Insurance.  Lawyers’ Professional Liability Insurance often does not cover matters in which lawyers have a business interest. Check with your carrier and read your policy before deciding to invest.

Loss of privilege.  When a lawyer has a role in a matter other than that of being the lawyer, attorney client privilege may be lost. This could be a blow to the client that would be avoided if the lawyer only acts as a lawyer.

Loss of credibility. Lawyers are often called upon to testify as fact witnesses for clients. In one case, a lawyer who invested in a client’s business was required to testify regarding fact issues in the development of the client’s technology.  When testifying, his credibility was challenged because of his financial interest in the client’s success.

Ethics.  When a lawyer accepts an offer of equity in a client, the lawyer is often engaging in a business transaction with the client during representation.  Rule 1.08(a) of the Texas Disciplinary Rules of Professional Conduct prohibits business transactions with clients, other than standard  commercial transactions, unless the transaction is fair and reasonable to the client, the client consents in writing after disclosure, the client has adequate opportunity to consult with other counsel regarding the transaction. Keep in mind that whether the transaction was “fair and reasonable” may be judged in hindsight in later litigation.