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Lawyers can barter services for stock options in client start-up corporations in lieu of fees, according to a formal ethics opinion released Friday in Chicago by the American Bar Association. The ABA’s Standing Committee on Ethics determined such arrangements are not barred by the organization’s Model Rules of Professional Conduct, particularly if the transaction is fair and reasonable to the client and the potential for future conflicts of interest is disclosed up front. The opinion comes after the ABA’s ETHICSearch research service fielded several inquiries about the arrangements, and, in part, after media reports of high-tech companies pirating talented young lawyers from large firms with promises of higher salaries and stock options. Committee Chair Donald B. Hilliker, of Chicago’s McDermott, Will & Emery, was at the ABA’s annual meeting in New York and unavailable for comment Friday. But the committee’s counsel, George A. Kuhlman explained the opinion marks a shift in attitudes within the legal profession. “Until very recently, the predominant feeling about this activity was that it was fraught with potential conflicts of interest, that it moved lawyers into a position where they feared they’d be perceived to be too business oriented, so it really was not at all pervasive,” Kuhlman said. But that culture has evolved, he said. Kuhlman related the shift in thinking to a strong market economy and the flourishing technology companies. With that combination, he said, “You’ve probably got a formula for changing the standards a bit.” Professional responsibility lawyer Warren Lupel, of Chicago’s Katz, Randall, Weinberg & Richmond, likened the legal services for start-up stock trade to lawyers accepting cases on a contingency basis. “That’s a gamble and therefore there is more justification for it,” said Lupel, who years ago, when he was first starting out, traded part or all of his legal fees for stock from a few cash-poor clients. Lupel’s gamble didn’t pay off. “None of it has any value,” he said about the stock. But it was a risk, as a new lawyer working with clients who couldn’t pay otherwise, that he was willing to take. And, as the ABA’s opinion notes, those arrangements are becoming increasingly common with the influx of high-tech start-ups and can be mutually beneficial if handled properly. There is a shared benefit, according to the ABA, in that lawyers have a way to provide cash-poor clients with needed legal services and at the same time lawyers can attract and retain partners and associates despite competition from higher paying venture capital and investment firms. From the client’s perspective, entrepreneurs view the lawyer’s willingness to invest as a “vote of confidence in the enterprise’s success,” the opinion notes. Formal Ethics Opinion 99-004. Ethics problems could surface, however, if boundaries aren’t established and once a law firm or an individual lawyer has a valuable stake in the company, Lupel said. The ethics opinion addresses those concerns and offers guidance for determining the value of the stock. The value of the stock is important because it can help determine whether an equity fee is fair and reasonable, according to the opinion, which is advisory and non-binding. The ethics committee suggested lawyers first set a reasonable cash fee, then accept stock that is of equivalent value at the time of the transaction. In instances where stock value is difficult to ascertain, lawyers may accept a percentage share, based on the perceived value that the legal services will contribute to the enterprise’s potential success. As for conflicts of interest, the committee detailed examples of information that lawyers should include in a written explanation of the fee, including the potential effects the transactions could have on the lawyer-client relationship and the prospect that the lawyer’s concern about protecting the value of the stock may eventually conflict with the lawyer’s independent professional judgment. According to the committee, lawyers are advised to warn clients they may be forced to withdraw as counsel at some point; and should recommend their clients seek independent legal counsel regarding the fee agreement. Visit Law.com’s ABA 2000 Convention Coverage

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