Remembering TCPaul, 2016-2019

Friend wants me to represent his Startup - How should I get paid?

Hey, I am more of a commercial transactional attorney wit jdtrash04/26/19
there's a conflict of interest if you get paid in equity. B dingbat04/26/19
how is it a conflict of interest? shouldalearnedmath04/30/19
What is a conflict of interest? Doesn't seem to be one in lionelhutz04/26/19
just because attorneys do it all the time, doesn't mean ther dingbat04/26/19
Negotiate for equity using a convertible note. He's not losi isthisit04/27/19
i'd rather take cash, and invest it myself. Most startups f dingbat04/27/19
No doubt. So it really comes down to your risk tolerance OP. isthisit04/27/19
rewrew dingbat04/27/19
Never work for a friend! Terrible idea. When my friend patenttrollnj04/27/19
I concur. Taking a friend as client or partner most likely m ternarydaemon04/29/19
As another poster pointed out, it's a conflict of interest a onehell04/29/19
...if it takes off. what was the value at the time you did shouldalearnedmath04/30/19
jdtrash (Apr 26, 2019 - 12:14 pm)

Hey,

I am more of a commercial transactional attorney with some startup experience early on in my career. My friend offered that I help him with basic incorporation work for 300 bucks an hour billed to the startup (he would prepay all fees) and later he may offer me a position or more permanent work. The fees would be deferred for a period of 12 months.

What would be a good counter to the offer that he made me? I don't really need a few extra thousand and I have a full time job right now. I would rather get equity but it sounds like he doesn't want to give me equity upfront. Maybe I can offer him some sort of option for legal fees to be converted to preferred shares?

What do you think?

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dingbat (Apr 26, 2019 - 12:43 pm)

there's a conflict of interest if you get paid in equity. But putting that aside, a convertible note is probably the way to go - if the startup fails (like most do), you have a valid claim along with all the other creditors, but if the startup succeeds, you can convert into equity.

You can explain it to your friend that your note will turn into equity alongside a future round of financing, so it's not like he's losing equity now or diluting his ownership interest. Quite simply, when he raises capital by selling equity, your note becomes part of that other investment.

The best part is the number of moveable parts - you can negotiate the nominal value of the note, the interest rate of the note, and the discount on the conversion rate, so you can make it look like you're giving him a good deal, while actually benefiting yourself tremendously. (hence the conflict)

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shouldalearnedmath (Apr 30, 2019 - 10:21 pm)

how is it a conflict of interest?

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lionelhutz (Apr 26, 2019 - 1:26 pm)

What is a conflict of interest? Doesn't seem to be one in the Google S-1 from the IPO in 2004:

LEGAL MATTERS


The validity of the shares of common stock that we are offering to repurchase hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati beneficially hold an aggregate of 197,132 shares of our common stock, which represents less than 0.1% of our outstanding shares of common stock.

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dingbat (Apr 26, 2019 - 2:08 pm)

just because attorneys do it all the time, doesn't mean there isn't a conflict (which may or may not be waivable)

Also, those shares may have been deferred fees for any number of other matters. it's the incorporation work that's most likely to be problematic

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isthisit (Apr 27, 2019 - 9:44 am)

Negotiate for equity using a convertible note. He's not losing ownership now but will once he seeks funding, which all start ups will do. It's the norm.

I'd rather take equity or a mixed payment over straight cash.

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dingbat (Apr 27, 2019 - 3:46 pm)

i'd rather take cash, and invest it myself. Most startups fail, and then your equity becomes worthless. Of the ones that don't fail, it could be years upon years before you get paid, and the payout might not be that big.

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isthisit (Apr 27, 2019 - 5:00 pm)

No doubt. So it really comes down to your risk tolerance OP. The sure thing now (cash) or the lottery ticket later (equity). I'd try to get a mix payout.

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dingbat (Apr 27, 2019 - 10:38 pm)

rewrew

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patenttrollnj (Apr 27, 2019 - 7:11 pm)

Never work for a friend! Terrible idea.

When my friends ask me to do some small things for them, I do it for free. Usually, I prepare the papers in their name, and just have them sign it (as if they prepared it themselves). Thus, I keep my name out of it.

If the work is really big, I send them off to another lawyer.

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ternarydaemon (Apr 29, 2019 - 12:42 pm)

I concur. Taking a friend as client or partner most likely means losing both in the long term.

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onehell (Apr 29, 2019 - 2:28 pm)

As another poster pointed out, it's a conflict of interest and more specifically, MR 1.8 for business transactions with clients. So among other things the client must be "advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction." And such independent counsel would probably advise against it, because on the off chance the thing takes off, you would have stock worth far in excess of the value of the service rendered.

That seems like a lot for a $300 task. It sounds like you're doing it because you don't need the cash and would rather have a lotto ticket. But even if the extremely unlikely happens and that lotto ticket pays off, there's always the risk it could be viewed later as an unreasonable legal fee. Kinda like how they always teach you in law school that you don't get to keep a third of a case that settles for $3m on a demand letter. No matter what your retainer says, the fee always must be reasonable in proportion to the actual amount of work performed.

The way I see it, either be his lawyer or be an investor in his company. But literally paying a legal fee in equity is problematic. In all likelihood the stock is worthless and stays that way, but if a miracle happens and you've bumbled across the next Facebook, then there's the additional risk that they'll just try and claw it back from you anyway.

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shouldalearnedmath (Apr 30, 2019 - 10:23 pm)

...if it takes off. what was the value at the time you did the job? $300 worth of equity at that time. If it takes off in 5 years it's not like you billed the guy for 3 million in value.

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