I. Introduction............................................4
A. Positive Treatment of Using Client Equity as Attorney Compensation.........................................4
B. Opponents of Accepting Client Equity as Compensation.........................................5
II. Advantages for Start-Up Companies to Use Stock as Payment for Legal Services......................................6
A. Cash is Not Available Prior to an Initial Public Offering.............................................6
B. Complex and Expensive Legal Services Needed for a One-Time Transaction.....................................7
III. Reasons Why Attorneys Accept Equity Instead of Cash Compensation............................................8
A. Profits of the Initial Public Offering Motivate Attorneys............................................8
B. Firms Retain Associates by Offering Higher Salaries.............................................9
C. Establish a Relationship with a Newly Formed Corporation.........................................10
IV. Societal Benefits of Allowing Attorneys to Accept Stock..................................................11
A. Examples of Past Efforts to Promote Equal Access to Legal Services......................................11
B. Start-up Companies Need Access to Legal Services....12
C. Attorneys Absorb the Risk...........................13
D. Encourage Public Market Activity....................14
E. Value is Added to Society...........................15
V. Ethical Approval by Professional Bar Associations......16
A. American Bar Association Model Rules................16
B. New York Bar Association Applying the Model Code....18
VI. Satisfying Sections of the American Bar Association Model Rules..................................................19
A. No Conflict of Interest Under the American Bar Association Model Rules Section 1.8(a)..............19
B. Attorney Fees Received Are Reasonable Under American Bar Association Model Rules Section 1.5.............21
C. Attorney Exercises Independent Professional Judgment Under American Bar Association Model Rules Section 2.1.................................................24
D. Addressing Other Criticisms of Ethical Concerns.....25
VII. Conclusion.............................................27
A. Professional Bar Should Encourage Risks by Attorneys...........................................27
B. Uncertainty Should Not Breed Distrust of Attorneys' Professional Judgment...............................27
I. Introduction
A. Positive Treatment of Using Client Equity as Attorney Compensation
Many lawyers, seeing the enormous profits made by start-up companies, began accepting compensation in the form of equity rather than conventional fees.1  "Doing well by doing good," these lawyers help companies tight on cash while helping themselves to the possibility of great riches.
There are two major themes that run throughout this article.  First, corporate attorneys who take equity in their clients as compensation should not be held to a higher ethical standard than the attorneys who take cases where they have an economic stake in the outcome.  Second, the professional bar should encourage attorneys to take equity as compensation so that start-up companies can have access to quality legal services.
This article is limited to the practice of accepting stock as compensation for initial public offerings.  There are law firms that take equity in clients for other services.2  Also, some law firms take client equity as an investment in addition to their fees.3  These two situations pose different ethical and legal obstacles that are beyond the scope of this article.  Some of the arguments for allowing start-up companies to pay for its initial public offering with stock do not hold any merit without the service of an initial public offering.  For instance, when a law firm invests in its client in addition to its legal fees, then the client can afford access to legal services because it pays for the services in cash.  These companies have money for services as contrast to clients who have no cash available and must depend on equity as attorney compensation.
When clients are public corporations or wish to remain private, they do not usually purchase legal services for equity for two main reasons.  First, thriving corporations that are public do not ordinarily have major cash-flow problems like start-up companies.  Plus, attorneys are less eager to be paid in stock by a public company that has cash flow problems because cash flow problems often indicate an unhealthy business.  Second, attorneys cannot reap the monetary benefit of the equity acquired in non-public companies because there is no liquid public market to sell the stock.  In a non-public company, the lawyer would be a minority shareholder with little voting power.
B. Opponents of Accepting Client Equity as Compensation
This article addresses the three major arguments against taking equity in clients as compensation.  First, opponents of this practice claim it is unethical because it creates a conflict of interest.4  Second, the opponents claim that the attorneys' fees violate professional ethics because their fees are not reasonable.5  Third, these critics claim that attorneys' professional judgment is clouded by the large monetary benefit of a successful initial public offering.6
The attorney submits an opinion letter as part of the initial public offering.  Opponents believe that the opinion letter is the main reason that attorneys should not accept equity as compensation.7  A negative opinion letter could cost a start-up company its initial public offering as well as cost the attorney his fee.
II. Advantages for Start-Up Companies to Use Stock as Payment for Legal Services
A. Cash is Not Available Prior to an Initial Public Offering
Entrepreneurs in start-up companies spend a lot of time soliciting for money before they attempt to go public.8  Start-up companies' entrepreneurs are delighted when a savvy corporate attorney will take a chance on their business plan by accepting equity as compensation.9  The entrepreneurs save cash by compensating the attorney with stock.  Client equity for legal services benefits both the attorney and the start-up company if the initial public offering is successful.10
The savings from not paying expensive legal fees allow the start-up company to invest its money in improving the condition of the company.11  If the company's condition improves before the initial public offering, the price of the stock will increase.12  The increase in the stock price at the initial public offering will benefit the holders of private equity, including the attorney.13
B. Complex and Expensive Legal Services Needed for a One-Time Transaction
Legal services for initial public offerings are extremely time consuming.14  Attorneys spend several months planning, preparing documents, and filing with the correct agencies prior to an initial public offering.15  Attorneys spend about fourteen intense weeks filing and complying with Security Exchange Commission regulations and state law regulations in order to make an initial public offering.16  (This fourteen-week figure does not include the earlier months of planning and preparing documents.)17  Also, the time estimate assumes that the process is running smoothly.18
Since an initial public offering is a sophisticated one-time transaction, the start-up company hires outside counsel.19  Attorneys who have expertise in the area of securities law are a vital necessity.  Legal mistakes can cost a company not only the initial public offering, but render the company liable to third parties or investors.20  The company may even get sanctions or fines as a result of legal mistakes.21
Attorneys who specialize in the area of securities law invest a lot of time to learn the intricacies of the process.  Due to the specialization, these attorneys charge a higher fee per hour.  The high fees do not leave a start-up company that is low on cash a way to fund its first big step into the public arena.22
III. Reasons Why Attorneys Accept Equity Instead of Cash Compensation
A. Profits of the Initial Public Offering Motivate Attorneys
Corporations give employees stock options so that the employees have an economic interest in the company's profits.  The employees' stock options increase in value when the corporation's profits increase.  Corporate boards believe that the economic incentive will motivate the employees to work harder.  Similarly, if the attorney has a stake in the outcome of the initial public offering, the attorney may work harder to achieve the end result.
Claiming that stock ownership will motivate an attorney in preparing an initial public offering is a double-edge sword.  Critics claim that attorneys will be tempted to compromise their professional legal judgment.23  These opponents argue that large monetary gains from an attorney's favorable opinion letter will distort her professional judgment in writing the opinion letter.24
This proposition is unpersuasive because attorneys often have monetary incentives from clients to accomplish the clients' preferred end result.  For example, a common practice by corporate attorneys is to receive a bonus from a client upon a successful closing of a merger.25  In a merger, attorneys are required to give an opinion letter.  If the opinion letter is not favorable to the merger, then the merger may fail to occur.  (Note that the attorney involved in the merger receives his fees, but not the closing bonus.)  Likewise, an unfavorable opinion letter for an initial public offering may halt the process.  In both cases, the attorneys lose out on a large part of their fees.
Some commentators may argue that both closing bonuses and equity as compensation are inappropriate.  This argument leads to the old adage that two wrongs do not make a right.  It is important to note that both practices can be ethically carried out.  Attorneys are not going to risk their professional career with a false or misleading opinion letter for money.  This risk does not benefit the attorneys because a false opinion letter may invalidate their fees.
B. Firms Retain Associates by Offering Higher Salaries
Associate salaries have increased dramatically over the last few years.  Some attorneys point the finger at California law firms in Silicon Valley.  The Silicon Valley firms compete with the dot.com companies that offer lucrative stock options in addition to high salaries.26  Salaries were raised forty-five percent in 1999, by some firms in Silicon Valley.27  In 1999, this trend of increasing associate salaries swept the nation in five months raising salaries in major legal markets across the nation.28
Law firms lose good talent to dot.coms or other companies that offer stock options.  Despite the downturn in the economy, some sources report that associates are still choosing to go in-house at dot.com companies.29  The increase in associate salaries helps the law firms to retain their associates, but it costs the firm a substantial monetary price.30  The Silicon Valley firms use their business skill to make the bottom line higher by taking equity in their clients.31
Attorneys' fees should be reasonable, but firms should be able to earn enough revenue to compete in the legal market.  Large dot.com clients frequently recruit the big firms' prized associates.  One firm reports that ten percent of their associates left the firm to be in-house counsel in 1999.32
C. Establish a Relationship With a Newly Formed Corporation
After a successful initial public offering, an attorney can refer a client to other attorneys within the same firm for other legal services.  A newly formed public corporation has many legal needs such as employee benefits, tax advise, asset purchase, contract negotiations, and maintaining securities compliance.  These services provide revenue and a continuing business relationship for the law firm.  Unlike the initial public offering, the corporations could pay for these services in cash by hourly billing.
Clients are likely to stay with a firm if they have a positive experience.33  Clients have no way of knowing ahead of time the quality of legal service that they will receive until after the legal service is rendered.34 Accordingly, some scholars think that the reason for the longevity in an attorney-client relationship is due to the certainty that comes with knowing the law firm has done a good job in the past.35  The positive experience of the initial public offering can provide a stable long-term relationship that is comfortable for both the law firm and the client.
IV. Societal Benefits of Allowing Attorneys to Accept Stock
A. Examples of Past Efforts to Promote Equal Access to Legal Services
Economic forces drove to the formation of client equity as compensation just as similar historical forces drove to civil rights fee-awards and contingent fee arrangements.  In the past, attorneys primarily billed hourly and plaintiffs often could not afford to pay the hourly rates.36  Usually, the plaintiffs were injured or wronged and could not bear the financial risk of losing a claim.37
The Supreme Court found that the private market could not be relied on to pursue civil rights litigation without fee-awards.38  The Supreme Court has held that court-awarded attorney fees in civil rights cases do not have to be proportional to the plaintiffs' recoveries.39  The Court recognized that compensation must be sufficient to attract competent attorneys.40  An attorney receives a court awarded fee if he wins and no fee if he loses.41
Just like the peril of civil rights plaintiffs, the injured or harmed tort plaintiffs could be left without a remedy, but for the contingent fee system.42  Contingent fee is referred to as "the little guy's key to the courthouse."43  Tort plaintiffs gain access to talented personal injury lawyers that would otherwise be too expensive.
The use of client equity as compensation for attorneys is the start-up company entrepreneur's key to the office door of corporate attorneys.  If the attorneys do not take equity, then many start-up companies would not have adequate legal advice to engage in an initial public offering.
B. Start-up Companies Need Access to Legal Services
Under-financed start-up companies have an economic predicament similar to that of contingent fee plaintiffs and civil rights plaintiffs.44  All of the forgoing need, but cannot afford, legal services.45
Access to legal services is crucial for people and organizations that need legal services, but cannot afford them.  Giving stock as compensation allows start-up companies to get highly talented legal services.  Availability of legal services helps to even out the socio-economic landscape by opening markets that were only available to large companies.
The forging attorney-client relationships are a win-win or lose-lose situation because the attorneys and their clients either win or lose together.  The start-up company loses if the initial public offering does not occur and the civil rights or personal injury plaintiff loses if the verdict is entered against him.
C. Attorneys Absorb the Risk
Instead of society bearing the risk of a company's failure, the corporate attorneys who take stock as compensation would bear the risk.  In the event that the start-up company client did not reach an initial public offering due to a failed business model, the attorney would not be compensated for his services.  As discussed below, private stock does not financially benefit the attorney like public stock.
Before attorneys accepted equity as compensation, the legal costs of an initial public offering were paid for by venture capitalists.  Venture capitalists are people who invest in start-up companies in order to see a future return on their investment.46  Venture capitalists do not always receive a favorable return on their investment.  When a venture capitalist invests in a start-up company that does not reach its initial public offering, then the investment is virtually worthless.
If these venture capitalists lose large sums of money, they may file bankruptcy.  The filing of bankruptcy can cause many creditors to be left unpaid or underpaid.  The costs of bankruptcy are shouldered onto creditors' customers to make-up for losses.  In short, the more that private risk-bearers like attorneys can absorb, the less that society has to absorb directly or indirectly.
Attorneys choose to assume the risk of no payment versus the amount of compensation the attorney receives if the outcome is successful.47  Attorneys at large law firms are in a good position to diversify their risk.  Attorneys can vary the amount of equity they will accept from each client.  The attorneys can choose the different clients in which the firm has equity.48
D. Encourage Public Market Activity
The fabric of a laissez-faire society is to let people contract without government interference.  When people cannot achieve their goals through traditional methods, they become innovative.  This innovation sparked the idea of attorneys taking equity in their clients.  There is no reason for parties outside the contract to interfere if the attorney follows all of the rules of professional conduct.49
E. Value is Added to Society
The field of law and economics focuses on value creation.50  The typical value creation scenario occurs when two parties are negotiating and they add value to the deal.  Value is added when both parties can get more of what they want without harm to the other party's interest.51 For example, if two people, a vegetarian and a carnivore, sit down to a dinner of mashed potatoes and steak, they can exchange part of their entrées.  The deal leaves the vegetarian with all the potatoes and the carnivore with all the meat.  This exchange will make both parties better off and neither party worse off.52
Value creation does not fit squarely with lawyers taking equity in their clients for compensation.  No new value is created between the client and the attorney.  If the transaction is successful, the attorney will gain what the client loses in equity.  In other words, the more stock that the client pays the attorney, the less stock the client will have at the initial public offering.  In terms of value creation, the bargaining of services for stock is always going to leave one party better off and one party worse off.
A less technical form of value creation occurs when equity is exchanged for legal services.  Start-up companies use private equity to compensate attorneys, but one should keep in mind that the private equity is virtually worthless because there is no liquid public market.  Prior to the initial public offering, it takes more of the low-value equity to equal the present value of a dollar.  Here the client is using low-value equity to obtain high-quality legal advice.  However, the high-quality legal services should increase the value of the equity at the initial public offering, which in turn should increase the value of the start-up company's products or services to society.  Due to the disparity in this exchange, value is added to society because something more valuable came out of less valuable equity.53
V. Ethical Approval by Professional Bar Associations
A. American Bar Association Model Rules
The American Bar Association (the "ABA") Committee on Ethics and Professional Responsibility released its Formal Opinion 00-418 on July 7, 2000.54  The American Bar Association Formal Opinion 00-418 elaborates on the need for attorneys to be allowed to accept equity in their clients in lieu of cash compensation.55  The ABA committee requires that each attorney who participates in the practice of taking equity in clients must comply with Model Rules Sections 1.8(a), 1.5, 1.7, and 2.1 when carrying on these transactions and legal services.56  The relevance of each Model Rule section will be discussed below.
The ABA committee recognized that start-up companies often do not have sufficient cash to pay for competent legal services, but the companies do have equity.57  The ABA did not find any reason that the transaction of accepting client equity as compensation on its face creates any ethical problems so long as attorneys comply with the other Model Rules.58
The American Bar Association's conclusion is well reasoned because the conclusion looks at the transaction for what it is, merely a business transaction with clients.59  There is no reason to hold this business transaction to any different standard than all other business transactions with clients.
The ABA trusts lawyers' professional judgment and ethical commitment to comply with all the ethical rules when conducting business transactions with clients.  The ABA has good reason to trust the professionals.  A California lawyer explained to an ethics panel, "It's dumb to invest when your investment is subject to rescission, so why not follow the rules?"60  The lawyers have a lot at stake in the transaction.  It is in the best interest of both attorneys and clients for attorneys to follow the professional rules of conduct.
 

B. New York Bar Association Applying the Model Code
The New York Bar Association has followed the American Bar Association's lead by issuing its Formal Opinion 2000-3.61  The New York Bar's Formal Opinion 2000-3 reaches a similar conclusion as the ABA committee, but through a different process.  The New York Bar uses the Model Code of Professional Responsibility rather than the ABA Model Rules.62  Even under the Model Code, the practice of attorneys taking equity in their clients as compensation is not a per se violation of any ethical rule.63
The New York Bar Committee cautions lawyers to comply with all of the other ethical rules when taking equity as compensation.  The subjects of these rules include: entering into a business transaction with a client, conflicts of interest, excessive fees, and lawyers maintaining their professional judgment.64
These areas of ethics that the New York Bar Association mentioned are similar areas that contingent fee lawyers are warned about as well.65  The New York Bar, just like the ABA committee, found that there is no major distinction between the conflicts inherent with contingent fee and those conflicts that come with taking client equity.
VI. Satisfying Sections of the American Bar Association Model Rules
A. No Conflict of Interest Under American Bar Association Model Rules Section 1.8(a)
 The ABA Model Rules Section 1.8(a) restricts attorneys from entering into business transactions with clients.  The rule allows business transactions as long as the transaction is fair and reasonable, the client is given a reasonable opportunity to seek independent counsel, and the client consents in writing to the transaction.66
The transaction and terms must be fair and reasonable at the time the lawyer enters into the agreement.67  Limiting the court's evaluation of the lawyer's fee to the time that the transaction is entered into results in a more just result.68  If attorneys were punished for receiving unreasonable fees after the transaction was over, then the attorneys would be punished for future events.
In determining value, the ABA committee suggests that the fact-finder can look to the price that independent venture capitalists paid for the same equity from the attorney's client.69  The ABA committee expresses deference to the investors because they may have more insight into the potential prosperity of the company.  Investors have knowledge and experience of the market for start-up companies' stock.70
The burden is on the attorneys to prove that the transactions were fair and reasonable.71  The attorneys are held to an objective standard.72  If attorneys do not meet their burden of persuasion, the equity transfers are invalid.73  Attorneys are left with no compensation if the transfer is invalid.74
Attorneys must fully disclose in writing to the client the risks associated with the transaction so that the client can understand the gravity of the situation.75  The writing protects both the attorney and the client.  The client benefits from the information in writing because any misunderstandings or unclear portions can be explained to him.  The attorney benefits because she has the security of knowing the document shows exactly what information was conveyed to the client.  Once the client is fully informed, the client must consent in writing to enter into the transaction with the lawyer.76
The client must be given a reasonable opportunity to seek independent counsel.77  This standard does not require that the clients actually seek independent counsel, but just that the opportunity was available.78
In a routine attorney-client relationship where cash is used to compensate the attorney, Model Rules Section 1.8 is not implicated.  Some attorneys consider the practice of exchanging equity in a start-up company for compensation as a routine transaction.79  Arguably, one finds it difficult to draw a distinction between these two routine practices.  It is a plain fact that attorneys are always in a business relationship with clients because attorneys are working for compensation from clients.
There are several instances when the attorney's interest of getting paid differs from the client's interest.  For example, if an attorney knows that a client will not be able to pay the entire bill, the attorney may cut costs by not spending as much time researching.  The attorney's less thorough research may be a disservice to the client, but a more efficient use of the attorney's time.  In this example, Model Rules Section 1.8(a) is not implicated, but disclosure of this situation to the client may substantially impact the attorney-client relationship.
B. Attorney Fees Received Are Reasonable Under American Bar Association Model Rules Section 1.5
The value of legal services is hard to determine.80  The Model Rules provide some guidance on the criteria a lawyer should use to determine a fee.  ABA Model Rules Section 1.5 includes such criteria as: 1) time and labor required, 2) the extent in which other employment is foregone, 3) customary fee, 4) amount of money at issue, 5) time limitations, 6) nature and length of relationship, and 7) experience of the attorney.81  These factors help attorneys to make distinctions between the type of work they do and how to appropriately charge clients a reasonable fee.
Many courts, scholars, and even some administrative agencies have developed factors for attorneys to use to determine their fees.82  The primary four categories of factor are 1) time, 2) labor, 3) importance, and 4) result.83  The "time" factor includes the time that the attorney spends on the matter and foregoes other matters.84  The "labor" factor relates to the intensity and complexity of the issues in the case.85  The "importance" hinges on who and what is at issue in the dispute.86  The "result" refers to the actual or anticipated outcome of the matter.87  There is no one good formula for practitioners to use to insure their clients are paying a reasonable price for legal services.  The real judge of whether a fee is reasonable is the client.88
Risk is a real factor that should be considered.89  A very small percentage of start-up companies reach an initial public offering.90  Some companies do not reach an initial public offering due to a lack of financial resources, a failed business model, or the company is acquired prior to the initial public offering.91  Failure to reach an initial public offering can render the attorney's stock worthless or of little value.  There is no reason to look just at the successes of certain clients and ignore the no-name start-ups that never reached a public offering.92
Equity as compensation is similar to a game of chance because the success of one client over-compensates the attorney, but the win makes-up for the loss sustained from previous or subsequent clients.93  Most law firms have a practice of accepting stock in all their start-up clients or not accepting any stock.  This practice allows the firm to diversify its risk.  On the other hand, some firms may try their role at the dice, but this is not customary.
The term "reasonable fee" is a very broad standard.  Courts and state legislatures have limited the amounts and situations in which contingent fee arrangements can be used.94  Increased risk of no compensation for the attorney is a factor considered when setting state law contingent fee maximum percentages.95  Courts have struck down some contingent fee agreements that awarded attorneys an "unconscionable" amount of the recovery.  Fees over fifty percent have been struck down on several occasions.96
Fortunately, the courts have not started to limit the compensation for attorneys who take equity as compensation.  There have been cases where the business transaction was done improperly and rendered invalid by the court.97
C. Attorney Exercises Independent Professional Judgment Under American Bar Association Model Rules Section 2.1
The ABA Model Rules Section 2.1 provides: "In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.  In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation."98  Lawyers have a duty to give candid legal advice to their clients.
Some commentators suggest that the lure of money will compromise lawyers' professional judgment.99  The commentators believe that attorneys' opinion letters will not honestly reflect the company's condition.  If attorneys do not write favorable opinion letters, then certain initial public offerings may not occur.  The tension between great financial gains at the initial public offering and no gain if the public offering fails, convinces some critics that the judgment of attorneys is no longer independent from the clients' desires.
This proposition shows distrust for lawyers.  One can see the unfounded nature of this accusation by looking at different professions.  For example, a police officer doing a search of a car discovers drugs and a large amount of cash.  The officer will benefit a lot from taking the cash with little chance of his misconduct being discovered in most cases.  Members of society should trust the police officer to bring the cash back to the station house and not put it in his pocket.  Lawyers should enjoy the same type of trust that police officers enjoy.  No example is perfect, but hopefully this illustration shows that money is not the sole motivator of many professionals and ethics are a matter of trust.
Attorneys who are in-house counsel have similar ethical concerns as attorneys who take equity in their clients.  In-house attorneys are paid by the corporation and often receive stock options.  In-house attorneys are not widely condemned for their ethical concerns, but private firms that receive equity as compensation are criticized and accused of compromising their professional judgment.  This different treatment is tough to distinguish.  In-house counsel has a duty to give legal advice to the corporation, even when the lawyer's opinion does not earn the most money for the corporation.  Likewise, a private firm preparing an initial public offering gives advise to a start-up company that is not congruent to its financial interest.
D. Addressing Other Criticisms of Ethical Concerns
Some scholars, who oppose attorneys taking equity in a client, point to a difference in litigation as opposed to sophisticated corporate transactions.  The response to this distinction is that litigators, just like corporate attorneys, can have a stake in the outcome of the client's situation without losing their professional judgment.  Litigators working on contingent fee have been trusted for decades to zealously represent their client.  One can reasonably ask, "Why not trust the corporate attorneys?"  There is no good response to this statement.  Contingent fee attorneys are just as capable of sacrificing their clients needs for their own, just as any attorney.  The issue is one of trusting professionals to follow ethical guidelines.
When attorneys accept client equity instead of money, the attorneys are taking a risk on the clients succeeding.  The risk the corporate attorneys take is similar to the risk that contingent fee plaintiff attorneys take. If no initial public offering is made, then the attorneys do not get paid.  As discussed above, non-public stock is low in value.  This risk causes attorneys who make it a common practice to take equity in their clients to diversify their risk.100  As seen by the recent economy, a lot of value is lost in the economy.  Accordingly, the risk is present for both attorneys who take equity in their clients and attorneys who work on contingent fee.
Some commentators believe that class action attorneys will bring suits against the deep pockets of corporate attorneys who accepted stock as compensation.101  The groups of people that could make up the class action include: 1) the corporations that agreed to give equity in return for legal services or 2) the stockholders who invested at the initial public offering to later find out the company was undercapitalized and should have never made it to the initial public offering.102  Commentators predict that these claims may be brought when the market is more volatile.  A volatile market causes tension to mount among management as well as investors' remorse on the part of outside stockholders.103
VII. Conclusion
A. Professional Bars Should Encourage Risks by Attorneys
The professional bar associations should encourage law firms to accept client equity as compensation for preparing initial public offerings.  The professional bars concluded that the practice of accepting client equity as compensation is not per se unethical, but they have not encouraged the activity.  Some law firms are providing a service to start-up companies who would not be able to afford such legal expertise, but for the attorneys' practice of accepting client equity as compensation.  The professional bar associations should encourage attorneys to help more people and groups to access quality legal services.
B. Uncertainty Should Not Breed Distrust of Attorneys' Professional Judgment
According to some professionals, one-third of all law firms that do initial public offerings own equity in their clients.104  The professional bars are correct to require all these lawyers to comply with the ethical rules; however, critics of lawyers who take equity as compensation should not be over-critical of this practice.  Not too long ago, similar risk-adverse people were critical of the idea of the contingent fee.  One great passage says, "And in time, this too shall pass."105  Hopefully, as time passes, the practice of accepting client equity as compensation will become as widely accepted as contingent fee arrangements. 

1 See Paul Gonson, Ethics for Securities Lawyers in ETHICS IN CONTEXT, ETHICS FOR: ECOMMERCE LAWYERS PERSONAL INJURY AND MASS TORT LAWYERS SECURITIES LAWYERS LITIGATORS ELDER LAW ATTORNEYS 2000, at 187, 205-06 (PLI Ethics Course, Handbook Series No. F0-0071, 2000).

2 See Susan Orenstien, Lawyers Need Equity, Too, The Standard, at http://www.coolavenues.com/netprenuers/lawyers_ equity.htm (April 3, 2000).

3 See id.

4 Robert C. Kahrl & Anthony T. Jacono, "Rush to Riches" The Rule of Ethics and Greed Control in the Dot.Com World, 2 MINN. INTELL. PROP. REV. 51 (2001) available at http://mipr.umn.edu/archive/articles/Jacono2001_02_01.htm.

5 Id.
 
6 Id.

7 Id. at 53.
 
8 See Mark Grossman, The ABCs of Raising "VC" (Venture Capital) (Feb. 2000), at http://www.gigalaw.com/articles/grossman-2000-02b-p4.html.

9 See Jay Hollander, Should Your Lawyer Own a Piece of Your Dot-Com?, (Oct. 2000), at http://www.gigalaw.com/articles/hollander-2000-10-p4.html.

10 See Jay Hollander, Should Your Lawyer Own a Piece of Your Dot-Com?, (Oct. 2000), at http://www.gigalaw.com/articles/hollander-2000-10-p1.html.

11 See Mark Grossman, The ABCs of Raising "VC" (Venture Capital) (February 2000), at http://www.gigalaw.com/articles/grossman-2000-02b-p4.html.

12 Silicon Valley has been setting trends from technology to its legal practice. See Susan Orenstien, Lawyers Need Equity, Too, The Standard, at http://www.coolavenues.com/netprenuers/lawyers_ equity.htm (April 3, 2000).  The Venture Law Group exemplifies the Silicon Valley dream. See id. Let by Craig Johnson, the group provides legal services and financial advice to start-up companies for a hefty fee.  See id. The Venture Law Group requires its start-up company clients to give founder stock or some other form of stock in order for the law firm to undertake representation.  See id.  Johnson helps the start-ups to secure venture capital funding.  See id.
Many start-up company entrepreneurs in Silicon Valley recognize the importance of retaining an attorney who will help the company to get more venture capital.  See id.  Sometimes, when venture capitalists will invest in a start-up company that they know has retained a big name law firm, they may trust the business judgment of the law firm.  See id.

13 See Jay Hollander, Should Your Lawyer Own a Piece of Your Dot-Com?, (Oct. 2000), at http://www.gigalaw.com/articles/hollander-2000-10-p1.html.

14  Ivo Welch, IPO - The Initial Public Offerings (IPO) Resource Page, (Oct. 1996) at http://www.iporesources.org/ipopage.html (last updated January 2000).

15 Stacy J. Kanter, Sample Timetable and Responsibility Schedule for an Initial Public Offering of Common Stock in HOW TO PREPARE AN INITIAL PUBLIC OFFERING 2001, at 81, 95 (PLI Corporate Law and Practice Course, Handbook Series No. B0-01BW 2001).

16 Id. at 93.
 
17 See id. at 83.

18 See id.

19 See Ivo Welch, IPO - The Initial Public Offerings (IPO) Resource Page, (Oct. 1996), at http://www.iporesources.org/ipopage.html (last updated January 2000).  This statement in the text is a generalization referring to a young start-up companies without any subsidiaries.  There are instances when a company can go public while privately owing subsidiaries.  The company may have a need later to make an initial public offering for its subsidiaries.

20 See Kanter, supra note 15, at 87-90.

21 See id. at 87.

22 See Ivo Welch, IPO - The Initial Public Offerings (IPO) Resource Page, (Oct. 1996) at http://www.iporesources.org/ipopage.html#11 (last updated January 2000).

23 See Debra Baker, Who Wants to Be a Millionaire?, 86-Feb A.B.A. J. 36, 36 (2000), available at http://www.bowne.com/newsletters/pdf/digest/apr00_2.pdf.

24 See Kahrl & Jacono, supra note 4, at 53, available at http://mipr.umn.edu/archive/articles/Jacono2001_02_01.htm.

25 It is fair to note that critics draw a distinction between a "reasonable" closing bonus and the large amounts of money that attorneys can get in a successful initial public offering.

26 Karl A. Schieneman & Valerie Horvath, Law Firms Address Compensation Issues, 2 NO. 22 LAW. J. 4, 4 (2000).

27 Id.

28 Id.

29 Linda Green Pierce, Dot .com or NOT.com?,  Northwest Legal Search, at http://www.nwlegalsearch.com/articles/dotcom.html (last visited October 5, 2001).

30 See Schieneman & Horvath, supra note 26, at 18.

31 See id.

32 Id.

33 See Ronald J. Gilson, The Devolution of the Legal Profession: A Demand Side Perspective, 49 Md. L. Rev. 869, 889 (1990).

34 See id. at 890.

35 Id.

36 See F. B. MAC KINNON, CONTINGENT FESS FOR LEGAL SERVICES (1964).
 
37 See LAW ASSOCIATION OF PHILADELPHIA, IN RE: CONTINGENT FEE ACCIDENT LITIGATION 25 (1929).

38 See City of Riverside v. Rivera, 477 U.S. 561, 579-80 (1986), available at http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=us&vol=477&page=561.

39 See id. (describing the courts decision that the contingent fee award was reasonable as set by Congress for Civil Rights litigation).

40 See id.

41 See id.

42 See Herbert M. Kritzer & J. Mitchell Pickerill, Contingent Fee: Lawyers as Gatekeepers in the American Civil Justice System 1 (Working Paper DPRP 12-3, 1997); HERBERT M. KRITZER, RHETORIC AND REALITY...USES AND ABUSES...CONTINGENCIES AND CERTAINTIES: THE AMERICAN CONTINGENT FEE IN OPERATION 2-3 (1996).

43 KRITZER, supra note 42, at 2; Kritzer & Pickerill, supra note 42, at 1.

44 This analogy is only comparing the economic position of the Civil Rights plaintiff and the start-up company, but in no way comparing the important moral difference between these two clients.

45 There is an economic difference between the Civil Rights plaintiff and the start-up company because the private sector is counting on the start-up company client to produce the revenue from its stock whereas the Civil Rights Plaintiff is depending on the defendant to pay the court awarded attorney fees.

46 See Mark Grossman, The ABCs of Raising "VC" (Venture Capital) (Feb. 2000), at http://www.gigalaw.com/articles/grossman-2000-02b-p4.html.

47 See HERBERT B. NEWBERG, ATTORNEY FEE AWARDS 13 (1986).

48 See Gail Diane Cox, Calif. Ethics Panel Gets an Earful on Stock, THE REPORTER, June 22, 2000, available at http://www.law.com/cgi-bin/gx.cgi/AppLogic+FTContentServer?pagename=law/View&c=Article&cid=ZZZTN47YS9C&live=true&cst=1&pc=0&pa=0.

49 The specific rules of professional conduct are discussed in detail below in this Article.

50 Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L. J. 239, 244-45 (1984).

51 Id.

52 Ronald J. Gilson & Robert H. Mnookin, Foreword: Business Lawyers and Value Creation for Clients, 74 OR. L. REV. 1, 9 (1995) (proving an example with similar underlying elements as the example in the text above).

53 This increase in value to the market place can be compared to the increase in value of a plaintiff whose lawyer works on contingent fee.  The money awarded in the suit would not have been earned, but for the contingent arrangement.  The money will increase the wages of the attorney that will result in more tax revenue for the government.  The money awarded to the plaintiff will be used to pay off debts such as medical bills and other goods or services in society.  The increased money in the stream of commerce promotes a healthy economy for society at large.

54 Nancy Cowger Slonim, ABA Ethics Committee: Model Rules Do Not Prohibit Lawyers From Accepting Client Stock in Lieu of Cash Fees, at http://abanet.org/media/ju100/clientstock.html  (July 7, 2000).
The ABA Formal Opinion 00-418 declared:
The Model Rules of Professional Conduct do not prohibit a lawyer from acquiring an ownership interest in a client, either in lieu of a cash fee for providing legal services or as an investment opportunity in connection with such services, as long as the lawyer complies with Rule 1.8(a) governing business transactions with clients, and, when applicable, with Rule 1.5 requiring that a fee for legal services be reasonable. To comply with Rule 1.8(a), the transaction by which the lawyer acquires the interest and its terms must be fair and reasonable to the client, and fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client. The client also must be given a reasonable opportunity to seek the advice of independent counsel in the transaction and must consent to the transaction in writing. In providing legal services to the client's business while owning its stock, the lawyer must take care to avoid conflicts between the client's interests and the lawyer's personal economic interests as an owner, as required by Rule 1.7(b), and must exercise independent professional judgment in advising the client concerning legal matters as required by Rule 2.1.  See ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418 (2000).

55 See ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418.

56 Id.

57 See id.

58 Id.

59 See id.

60 Cox, supra note 48, available at http://www.law.com/cgi-bin/gx.cgi/AppLogic+FTContentServer?pagename=law/View&c=Article&cid=ZZZTN47YS9C&live=true&cst=1&pc=0&pa=0.

61 N.Y. Comm. on Ethics and Prof'l Responsibility Formal Op. 2000-3 (2000), available at http://www.abeny.org/eth2000.htm.
 
62 See id.

63 Id.

64 See id.

65 Peculiarly, there is no distinction made between in-house and outside counsel throughout the Formal Opinions.  This omission does not come as a surprise because both in-house and outside counsel are held to the same ethical standard, however, the commentators primarily focus on the outside counsel.

66 MODEL RULES OF PROF'L CONDUCT R. 1.8(a) (1999). Model Rule Section 1.8(a) provides:
Model Rule 1.8 Conflict of Interest Prohibited Transactions

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given  a reasonable opportunity to seek the advice of independent counsel in the transaction; and the client consents in writing thereto.  See MODEL RULES OF PROF'L CONDUCT R. 1.8(a) (1999).

67 MODEL RULES OF PROF'L CONDUCT R. 1.8(a)(1); ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418; Richard Brust, Stocking up on Fees, 86-SEP ABA J. 69, 69 (2000).

68 Nancy Cowger Slonim, ABA Ethics Committee: Model Rules Do Not Prohibit Lawyers From Accepting Client Stock in Lieu of Cash Fees, at http://abanet.org/media/ju100/clientstock.html  (July 7, 2000).

69 See id.; ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418.
 
70 See ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418; Nancy Cowger Slonim, ABA Ethics Committee: Model Rules Do Not Prohibit Lawyers From Accepting Client Stock in Lieu of Cash Fees, at http://abanet.org/media/ju100/clientstock.html  (July 7, 2000).

71 Kahrl & Jacono, supra note 4, at 62, available at http://mipr.umn.edu/archive/articles/Jacono2001_02_01.htm.

72 Id.

73 See id.

74 See John A. Edginton, Admiralty Law Institute Symposium: Admiralty Law at the Millennium Managing Lawyers' Risks at the Millennium, 73 TUL. L. REV. 1987 (1999); Passante v. McWilliams, 62 Cal Rptr. 2d 298 (1997) (invalidating stock transfer of 33 million dollars for lack of consideration).

75 MODEL RULES OF PROF'L CONDUCT R. 1.8(a)(1).

76 MODEL RULES OF PROF'L CONDUCT R. 1.8(a)(3).

77 MODEL RULES OF PROF'L CONDUCT R. 1.8(a)(2).

78 See ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 00-418.

79 See Baker, supra note 23, at 39-40, available at http://www.bowne.com/newsletters/pdf/digest/apr00_2.pdf.

80 See ROBERT H. ARONSON, ATTORNEY-CLIENT FEE ARRANGEMENTS: REGULATION AND REVIEW 7 (1980).

81 MODEL RULES OF PROF'L CONDUCT R. 1.5.

82 See ARONSON, supra note 80, at 23-27.

83 Id. at 25-26.

84 Id. at 28-35.

85 Id. at 35-40.

86 Id. at 40-48.

87 Id. at 48-56.

88 Seldom are clients' views used to determine whether the fee was reasonable.  The courts do not defer to clients because they are not necessarily in a superior position.  The clients do not usually know what duties are necessary to solve a legal problem.

89 The risk to the attorney can been seen in certain states when they allow lodestar delay enhancement in order to increase court awarded attorney fees to represent the increased risk of non-payment to the attorney.  Further discussion of lodestar is beyond the scope of this Article.  See RUSSELL E. LOVELL, II, COURT AWARDED ATTORNEYS' FEES 226-30 (1999).

90 See Peter F. Kerman, Hot Issues in Executive Compensation - Stock Option Grants by Delisted Companies in HOT ISSUES IN EXECUTIVE COMPENSATION 2001, at 465, 467 (PLI Tax Law & Practice Course, Handbook Series No. J-503, 2001).

91 See id.

92 See Baker, supra note 23, at 36-39, available at http://www.bowne.com/newsletters/pdf/digest/apr00_2.pdf.  This article is full of large numbers and examples of firms that did very well on their clients' initial public offering, but it does note that many firms are not as fortunate when they take client equity instead of cash.  See id.
 
93 See ARONSON, supra note 80, at 82.

94 See id. at 117.

95 See LAW ASSOCIATION OF PHILADELPHIA, supra note 37, at 26-27.

96 ROBERT H. ARONSON, ATTORNEY-CLIENT FEE ARRANGEMENTS: REGULATION AND REVIEW 92-93 (1980); Gruskay v. Simenauskas, 140 A. 724, 727 (Conn. 1928)(refusing to enforce a sixty percent fee); Jackson v. Campbell, 8 P.2d 845, 846 (Cal. 1932)(refusing to enforce a seventy percent fee).

97 See Passante v. McWilliams, 62 Cal Rptr. 2d 298 (1997) (invalidating stock transfer of 33 million dollars for lack of consideration).

98 MODEL RULES OF PROF'L CONDUCT R. 2.1.

99 See DEBORAH L. RHODES & DAVID LUBAN, LEGAL ETHICS 557 (2001).
 

101 See Joel S. Miliband, A Wise Investment?, 42 ORANGE COUNTY LAW. 4, 4 (2000).

102 See id.

103 See id.

104 See id.; Cox, supra note 48, available at http://www.law.com/cgi-bin/gx.cgi/AppLogic+FTContentServer?pagename=law/View&c=Article&cid=ZZZTN47YS9C&live=true&cst=1&pc=0&pa=0.

105 H. A. Dobbs, Frequently Asked Questions, at http://www.bible-infonet.org/bin/faq/bible_quotes/and_this_too_shall_pass.htm (Jan. 2000).  This page explains the origins of this quote.