

Ask HN: Do you recommend giving out equity for legal services? - legally

I've read that Mint gave equity to lawyers in exchange for deferred legal fees [1]. Is that a standard practice? If you have the money, do you recommend investing the money in customer and product development instead of legal services?<p>[1] http://michaelbungartz.wordpress.com/2009/10/13/mint-com-a-step-by-step-guide-to-a-web-startup/
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grellas
I think the issue needs to be decided case-by-case, and it depends on the
early-stage legal needs of the startup.

A few thoughts on what to consider:

1\. As indicated by jacquesm, you should never do this where the amount of the
equity will cause the attorney to have a conflict in the representation. A
rough rule of thumb in the profession is that less than 2% is acceptable for
this purpose but I use a less-than-1% measure when I occasionally do these.
Very important to keep this part clean.

2\. A deferred-fee deal is based on an extension of credit by the attorney
performing early-stage services. For example, the attorney might extend up to
$20K in fees prior to the earlier of 6 months or first funding in exchange
for, say 0.5% of the company. There is real credit risk associated with this
because, if the company fails, the attorney has no recourse except against a
dead entity. In such a context, it might make sense for a founding group to
want to do such an arrangement to avoid having to require members of the
founding team to pay their share of such fees and to cut the risks of the
formation and company launch.

3\. Given the rationale in point 2 for when this might make sense, there are
various situations where it obviously does not: (a) where the company does not
expect to have too much in the way of early-stage fees (e.g., if it will incur
incorporation expenses and not too much more in the early phases, particularly
where it will not be going for outside funding - in such a case, the
anticipated legal expenses at this stage may be a low as a few thousand
dollars); (b) where the deal among the founding team assumes one lead founder
will advance such costs and the lead founder is willing and able to do so; (c)
where a sole founder is willing to incur the early costs and can comfortably
do so; and (d) where a founding team is willing to incur the up-front costs
among themselves and does not want to give up the equity.

The prototypical case where deferred fees make sense is a founding team going
out quickly for VC funding. This is the "big firm" model. In such cases,
unless the founders are serial entrepreneurs or otherwise quite capable of
paying the rather high up-front fees of such firms, they should at least
seriously consider doing a deferred-fee deal. In all other cases, do so only
with caution, as the deferred-fee arrangement often makes no sense for the
startup (I can say this from the attorney side as well).

General rule: always consider it as an option but be careful before entering
into such a deal.

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jacquesm
Definitely not. Mint did it, it worked for them but there is a very good
reason not to go this road. As the proverb says 'a lawyer representing his own
interests has a fool for a client'.

By having your legal representative be a part of your business you may skip a
bit on legal fees, but in the end the lawyer may not have the exact expertise
that a certain situation requires, may be required to represent both the
company _and_ himself, will not have the distance required to keep his head
cool, or will always be in a conflict of interest situation and so on.

It's a recipe for trouble.

Legal advice is best contracted out on a per-case basis.

Maybe Grellas or some other legal eagle on here can comment on what they think
of that, this is just my $0.02.

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newy
This is pretty standard in SV (the #'s mentioned by Mint are market).

