June 20, 2022 by Brian Scherer
Hiring a lawyer to advise your early-stage startup can feel like an overwhelming decision. Do I need an attorney? How much does a startup attorney cost? Can I pay a startup attorney with equity? As founders ourselves, we’ve been through this and put together this list of the top 5 things to consider when you pay your startup attorney with equity.
- Does this lawyer have relevant experience and expertise?
As a founder, you already have, or will soon have, advisors on a range of topics. Typically your advisors are experts in areas where you and your team lack expertise and/or experience. A startup lawyer is no different.
Your lawyer should have experience advising companies at your stage on the types of legal issues you’re facing. Whether you’re a hardware startup thinking about filing a patent, or a marketplace grappling with changing laws around worker classification, your lawyer should be able to understand the legal and business challenges you’re facing, and give you clear, actionable advice that helps you move forward. Your lawyer should also understand your risk tolerance and be able to advise you accordingly. Ideally, you want a lawyer who helps you draw a map to where you want to go, not a lawyer who holds up a stop sign.
- How much equity should I give my startup lawyer?
The decision about how much equity is fair compensation for your attorney depends on their time commitment. As with other advisors, it’s common to see equity compensation in the range of 0.1% - 1%. Depending on your needs and the amount of equity you are comfortable parting ways with, you might want to make the exchange for a commitment of anywhere from 4-20 hours per month (1-5 hours per week).
- Should we sign an agreement?
It’s always important to have a signed agreement with any advisor or employee working in exchange for equity. It’s especially important to formally document the scope and compensation arrangement for an attorney-client engagement.
In a traditional attorney-client relationship, the attorney prepares an engagement letter that the client signs, which details the specific matter the attorney will advise on, and the hourly or flat fee rate for the work. Even if they’re working for equity rather than an hourly rate, your attorney may want to have their standard engagement letter signed, especially if they are working at a law firm.
In the case of an attorney working in exchange for equity in your startup, you’ll also want to have an advisor agreement that specifies the percentage and type of equity granted, as well as the vesting schedule. The Founder/Advisor Standard Template, available via the Founder Institute’s website, is a form commonly used for startup advisor arrangements.
Be aware that all lawyers need to check for conflicts of interest before they engage with a client, in order to comply with legal ethics rules. Similarly, you will want to ask an attorney whether they represent or advise any of your competitors. Conflicts of interest is a topic we recommend discussing before you finalize and sign any agreements with your attorney.
- How does startup lawyer equity work?
The equity that you issue to the attorney advising your startup will work like any other startup advisor equity. You’ll need board consent to issue the equity, and you’ll need to execute the equity grant. Your advisor may choose to file an 83(b) election for tax purposes, and you should discuss this with them at the time the equity agreements are signed to confirm any information needed from you so they can timely file the 83(b) form with the IRS. Finally, as with all equity grants, you’ll need to track the equity grant to your attorney in your cap table management system.
- Where can I find a startup lawyer who will work for equity?
Fortunately for early-stage startups, more and more attorneys are interested in providing legal advice in exchange for equity rather than billing you at high hourly rates. You can tap into your network to get referrals to attorneys who may be interested in advising your startup in exchange for equity. Our friends at HeyCounsel work with a network of in-house attorneys who are willing to advise startups for equity, and they can match you with lawyers who fit your needs.
And there you have 5 quick tips when you are considering paying a startup lawyer with equity to make sure you are protecting yourself and getting the best advice possible.