Should I give my lawyer equity stake in my startup?

Is it a good deal to give sweat equity in exchange for expertise?

It is uncommon for startup lawyers to get equity stake in exchange for legal services, but we may be open to accepting small percentages for startups (if your business is exciting enough). As a founder, you need to consider not just the dilution to the equity pie, but if the lawyer you are offering equity is aligned with your company in the long run.

How do lawyers usually get paid?

The universal classic model for paying a lawyer is usually on an hourly rate model. A lawyer will let you know his or her hourly rate upfront, and then track the amount of time he or she spends working on your behalf as you go. Then, every month you’ll get presented with a bill that represents the hourly rate multiplied by the number of hours of work you’ve received. A client that decides to take up this model is expected to pay a “retainer” before any legal work is done.

New “boutique” law firms changing the way how lawyers work and charge

In the past decade, new types of law firms (also known as “boutique” law firms) led by younger generations of practitioners who themselves usually come from “big law” are offering a mixed or hybrid option such as charging a fixed fee model to clients. 

In a fixed fee model, you pay a single upfront cost for a predetermined amount of work to be performed. This model is appealing to entrepreneurs as you get cost certainty and budgeting legal services as simple as a single line item. 

So why don’t lawyers accept equity stake for legal services?

Deciding what is a “reasonable” stake

Deciding what equity stake to be a “reasonable” stake is challenging as we need to determine the market value of the equity stake at the time of the deal. When a founder offers to me a 10% stake in his or her startup, I wonder if the founder actually knows how much the 10% stake is worth. Chances are, I won’t be the only person that the founder has offered such a deal. 

Unless the startup is an established entity like Carsome, it may be hard to come up with a  baseline on what is an “acceptable” stake. 

Bread and butter issue i.e. “I can’t eat equity”

Apart from the inherent risks that come with holding unlisted shares such as illiquidity issues, I may end up getting stuck together with other shareholders in the cap table until there is an “exit”. 

If the investment goes kaput, the lawyer’s equity stake may even turn to nothing. Lawyers are generally risk averse people so unless you are dealing with a young startup lawyer who has a strong risk appetite, it isn’t a deal that lawyers usually consider at the table.

What do I need to know before issuing shares to a startup lawyer?

If you plan to give an equity stake to a lawyer, you want to treat him or her as an adviser and follow the industry practice. A typical advisor grant is 0.10% to 2.00% (depending on the stage of the company). The equity stake will then vest over typically 2 years from the date of the grant. 

Beware of “dead equity”

I hear about people trading off equity for office space, legal fees, consultants and a slew of other “one time” services. These equity stakes are also known as “dead equity”, and it may likely drag down your company, and make further rounds of financing much more difficult.

So is it a good idea to have a lawyer on my cap table?

This falls under “it depends”. 

Is the lawyer willing to take equity in exchange for retainer fees, and agrees to provide a discount on all further legal advice and filings in the future? If so, that may be a reasonable deal if the equity ask isn’t “too high”.

If the lawyer wants equity in exchange for a “one time” service then it may look like a horrible deal. As a general rule, founders should never ever give equity to someone who does not have an active role in the running or operation of your company.

Conclusion

I feel that having a lawyer as an investor in any early stage company is usually risky. You have no idea the trouble a lawyer can stir up as a shareholder if they feel like it, especially if the lawyer is unfamiliar with the startup world. 

In fact, you may end up with a shareholder with a huge conflict, and with the power to “self-deal”. 

For all these reasons, your lawyer is maybe the one person you may want to pay in cash.