NYSBA 2012-03-22

Can a New York lawyer accept stock or an equity interest in a client as payment for legal services?

Short answer: Yes. A lawyer may take an equity interest in a client or the client's company as a fee if the deal satisfies Rule 1.8(a)'s business-transaction safeguards, is not excessive under Rule 1.5(a), and does not create a disabling conflict under Rule 1.7.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 913: Acceptance of Securities as a Legal Fee

Short answer: A lawyer may accept an equity interest in a client or the client's company as compensation for legal services if the arrangement complies with Rule 1.8(a), is not excessive under Rule 1.5(a), and does not create a conflict the lawyer cannot manage under Rule 1.7.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

View original opinion

Plain-English summary

A lawyer asked whether a fee could combine a reduced hourly rate with an equity interest in the client or the client's company. The committee concluded the Rules do not invariably prohibit such a hybrid fee, but the lawyer must satisfy more than the general fee rule (paragraphs 1, 15).

The committee started with Rule 1.5(a): a fee is excessive when a reasonable lawyer would have a definite and firm conviction that it is excessive, judged on the factors the rule lists (time, skill, customary local fee, results, and so on). A fee need not be time-based, so an equity component is not categorically barred (paragraph 2). But Rule 1.5 alone does not govern. Taking stock as a fee is a business transaction with the client, and the committee held Rule 1.8(a) applies, relying on Comment [4C], which says the rule's requirements ordinarily must be met when a lawyer accepts an interest in the client's business as payment (paragraphs 3, 6). The committee noted New York's version of Rule 1.8(a) turns on whether the client expects the lawyer to exercise independent professional judgment on the client's behalf, and found that in the typical case (a cash-poor startup offering illiquid stock of indeterminate value) the client does look to the lawyer for that judgment (paragraphs 5, 7).

Rule 1.8(a) therefore requires that the terms be fair and reasonable, fully disclosed in a writing the client can understand, that the client be advised in writing of the desirability of seeking independent counsel and given a chance to do so, and that the client give informed written consent describing the transaction and the lawyer's role (paragraph 10). Whether terms are fair and reasonable is fact-specific; the committee pointed to factors such as the stock's liquidity, present and anticipated value, restrictions, and the ownership percentage, judged on circumstances reasonably ascertainable at the time of the transaction, not with hindsight (paragraphs 11, 12).

Finally, the committee addressed Rule 1.7: holding an equity stake can create a significant risk that the lawyer's judgment will be affected by a personal financial interest. If the lawyer reasonably believes he or she can still provide competent and diligent representation, the lawyer may proceed with the client's informed consent, which may require disclosure beyond what Rule 1.8(a) demands (paragraphs 13, 14).

In practice

The opinion holds that, under the New York rules as they stood at the time, a lawyer may take an equity interest in a client as a fee, but the arrangement is governed by Rule 1.8(a) in addition to Rule 1.5(a). The committee made compliance with Rule 1.8(a)'s written-disclosure, independent-counsel-advisory, and signed-consent requirements the operative condition, treated fairness and reasonableness as a fact-specific inquiry measured at the time of the deal, and identified Rule 1.7 as a separate conflicts question the lawyer must clear before proceeding. The committee expressly declined to opine on whether accepting securities as a fee raises securities-law or other statutory issues, calling that beyond its charter (paragraph 3).

Common questions

Q: Does taking stock in a client as a fee fall only under the excessive-fee rule?

A: No. The committee held that Rule 1.5(a) governs whether the fee is excessive, but accepting an equity interest is also a business transaction with the client subject to Rule 1.8(a), citing Comment [4C] (paragraphs 3, 6).

Q: What does Rule 1.8(a) require for an equity-fee deal?

A: The terms must be fair and reasonable and fully disclosed in writing, the client must be advised in writing to consider independent counsel and given a reasonable chance to do so, and the client must give informed written consent describing the transaction and the lawyer's role (paragraph 10).

Q: How is the fairness of the equity measured if the company later succeeds or fails?

A: By the circumstances reasonably ascertainable at the time of the transaction, not with hindsight. The committee agreed that a stake that looks excessive only after success would ignore the risk the lawyer assumed that the venture (and the stock) might be worthless (paragraph 12).

Q: Is a conflict of interest a separate concern from the fee itself?

A: Yes. Rule 1.7(a) flags the significant risk that the lawyer's personal financial stake could affect professional judgment; the lawyer may proceed only on a reasonable belief of competent, diligent representation plus the client's informed consent (paragraphs 13, 14).

Background and rules framework

The opinion interprets New York Rule 1.5(a) (excessive fees), Rule 1.8(a) (business transactions with a client), and Rule 1.7(a) and (b) (personal-interest conflicts), corresponding to ABA Model Rules 1.5, 1.8, and 1.7. The analysis rests on the New York-specific feature of Rule 1.8(a): its application turns on whether the client expects the lawyer to exercise independent professional judgment on the client's behalf in the transaction.

Citations and references

Rules of Professional Conduct:

MR 1.5 / NY Rule 1.5(a): a fee may not be excessive
MR 1.8 / NY Rule 1.8(a): business transactions with a client (fair terms, written disclosure, independent-counsel advisory, signed consent)
MR 1.7 / NY Rule 1.7(a), (b): personal-interest conflicts and informed consent

Cases:

Matter of Ioannou, 2011 NY Slip Op 7942 (1st Dep't 2011), lawyer suspended for a loan from a former client without DR 5-104(a) compliance
Schlanger v. Flaton, 218 A.D.2d 597 (1st Dep't 1995), client rescinded equity interests obtained in violation of DR 5-104(A)
Iowa Supreme Court Attorney Disciplinary Bd. v. Kaiser, 736 N.W.2d 544 (Iowa 2007), suspension for acquiring an equity interest without DR 5-104 compliance

Other opinions cited:

ABA Formal Op. 00-418: accepting equity in lieu of fees; fairness measured at the time of the transaction
ABA Formal Op. 11-458: factors bearing on the reasonableness of a fee
N.Y. City 2000-3: equity-for-services fees and the hindsight problem
D.C. Op. 300 (2000); Pa. Op. 2001-100; Utah Op. 98-13: equity-as-fee criteria

Source

Landing page: https://nysba.org/ethics-opinion-913/