PUT YOUR MONEY WHERE YOUR MOUTH IS: ETHICAL GUIDELINES FOR LAWYERS INVESTING IN CLIENTS

Written by Merri A. Baldwin^*

Whether and how lawyers may invest in their clients is a perennial topic of interest for business lawyers, ebbing and flowing with the economy. In the dotcom boom of the 1990s Silicon Valley firms touted the huge profits they made from taking equity in their clients, riding the IPO wave to (hoped-for) mutual success. Two decades on, lawyers and law firms continue to invest in clients, often through venture funds or other investment vehicles. It is not uncommon for lawyers to invest in their clients, particularly for lawyers or law firms that represent emerging companies. It is also accepted by this point that doing so is not per se unethical, although depending on the facts, there could be ethical risk involved. It is important that lawyers who wish to invest (or take some form of stake) in their clients understand the ethical and other rules that govern their actions, and minimize the risks as much as possible for both them and their clients.

TYPES OF "INVESTMENTS" LAWYERS MAKE IN THEIR CLIENTS

Lawyers invest in their clients in a number of ways. Lawyers who represent emerging company clients sometimes take a stake in the venture in lieu of their fees, since the client may be cash-strapped but in need of legal services.⁰¹ This practice is sometimes referred to as "equity billing." Similarly, lawyers may take a stake in a patent or other intellectual property in lieu of fees. Larger law firms may invest in their clients as part of an early round of financing, on the same terms as certain other classes of investors; this may be done through an investment entity or fund that is separate from the law firm itself (and may include as members all or some of the firm’s partners.) Tax consequences of these alternatives differ.