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Ethical and Practical Considerations for Solo Practitioners and Small Firms Representing Early-Stage Companies

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8 Nevada Lawyer January 2013
ETHICAL AND PRACTICAL
CONSIDERATIONS FOR
SOLO PRACTITIONERS
AND SMALL FIRMS
REPRESENTING EARLY-
STAGE COMPANIES
this Great recession has inadvertently spawned default
entrepreneurs seeking job security by building their own
businesses, rather then depending upon an employer to
control their financial destinies. solo practitioners and small
firm partnerships identify with the self-employed mindset
by taking the initiative to build their own law practices.
accordingly, solo practitioners and start-up companies
would appear to be an ideal match. However, there are
varying issues that all solos or small firms must consider
before representing a start-up or early-stage company:
most notably client engagement and fee structuring.
As our current economic climate wanes, start-ups (Silicon
Valley favors of the week aside) are commonly insuffciently
fnanced and not in the position to hire in-house counsel or expen-
sive national frms. Conversely, solos can offer competitive rates,
personal attention and fexible services, with the ability to better
understand and accommodate the demands of start-ups, since
solos are essentially start-ups themselves. For these reasons, logic
would dictate that solos with experience in fnance, corporate and
business law market to start-ups and early-stage companies as
potential clients.
While this arrangement presents promise and opportunity,
there are several ethical and practical considerations to analyze in
order to legally and effciently build a practice with clients that are
essentially building an infant or adolescent business.
Client Engagement
The frst consideration is: who is your client? Since the
autonomy of the start-up company and its founder are at
times confusing, a solo must be certain it is engaging with
the appropriate entity, that being the organization, and not the
individual founder, as the client.
Nevada Rules
of Professional
Conduct (NRPC)
Rule 1.13(a) requires
that, “A lawyer retained by
an organization represents the organization
acting through its duly authorized constituents.” Further, NRPC
Rule 1.13(f) states, “In dealing with an organization’s directors,
offcers, employees, members, shareholders or other constituents,
a lawyer shall explain the identity of the client to the constituent
and reasonably attempt to ensure that the constituent realizes that
the lawyer’s client is the organization rather than the constituent.”
An equivalent standard governs under the ABA Model Rules for
almost all jurisdictions.
Attorneys may fnd themselves initially representing the
best interest of a single founder when structuring the company
or negotiating investor participation. This early alignment can
become problematic when the once-outside investor becomes a
partner, member or shareholder in the company from which they
are retained. It must be clear that upon additional shareholders,
directors, offcers or other members joining the company, the
BY RYAN STIBOR, ESq.
322234_A.indd 8 12/26/2012 10:13:56 AM
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322234_A.indd 10 12/26/2012 10:13:57 AM
January 2013 Nevada Lawyer 11
There’s a
better way
to build or
expand your
client base.
Join the Lawyer Referral and
Information Service (LRIS). A
public service of the State Bar of
Nevada, the LRIS provides free
referrals to those who can afford
an attorney but don’t know who
to call. When you enroll in the
program, you gain access to the
25,000 referrals LRIS makes
each year.
Benefts include:
º Low $50 a year dues
º £xceIIent return on investæent
º Frospective cIients are prescreened by LkI8 staff
º AII practice areas avaiIabIe
LAWY£k k£F£kkAL & IhF0kMATI0h 8£kVI0£
We advertise so you don’t have to. We advertise so you don’t have to.
To fll out an application, visit www.nvbar.org today!
For more information call 702.382.2200 or toll free 1.800.254.2797
ETHICAL AND PRACTICAL
CONSIDERATIONS continued from page 9
be spread over several months based upon their capitalization
or revenue. Also, this approach hopefully provides a safeguard
for the solo or small frm since the subscription fee is earned
upon receipt regardless of whether or not the services are
rendered during the term of engagement.
Equity Participation
The compensation model that could prove most
proftable to the solo or small frm but presents the most risk,
by far, is that of equity participation. Equity compensation
can come in varying forms, but typically it is a vested
interest of units or stock (or a derivative, such as options
or warrants) in the client company, in exchange for a fnite
amount of law-frm provided legal services. This is similar
to the subscription fee model in that the client’s current
and anticipated legal needs during the term of engagement
are defned, and the consideration for those services are an
agreed-upon equity interest in the client company.
However, solos and small frms interested in such
a compensation option should be aware of NRPC Rule
1.8(a) which states that, “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 in a manner that can be
reasonably understood by the client; (2) The client is
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
(3) The client gives informed consent, in a writing
signed by the client, to the essential terms of the
transaction and the lawyer’s role in the transaction,
including whether the lawyer is representing the client in
the transaction.”
The practical risk to the solo or small frm relies
upon the start-up or early stage clients’ likelihood of
success. The success rate of early stage companies
is very low, so the law frm assumes a very high risk
when contemplating such compensation for service.
Additionally, even successful companies’ shares are
many times illiquid due to their closely held nature,
which can hinder the law frm’s ability to turn their
equity interest into cash compensation.
Therefore, solos and small frms should assess the
risks and rewards before engaging with, and proposing,
any particular alternative fee structure to a potential start-
up or early stage client. The early stage company cannot
afford the massive hourly fees of national law frms,
which only highlights the natural synergy between small
frms and small client companies. Start-ups and early
stage companies can be promising client opportunities, as
long as solo and small frm expectations are managed and
the client base diversifed in order to mitigate the natural
risk that comes with representing such entrepreneurs.
RyAN STIBoR focuses on corporate
counseling, real estate, debt and equity
financing and intellectual property
licensing. He has negotiated the financing,
development and operation of approximately
a half a billion dollars in high-rise real estate
projects, technology companies and entertainment
and hospitality ventures. He is a licensed attorney in
California and Nevada. His firm, Stibor Group, LLC is
currently merging to form “Davis Stibor” in which he will
be managing attorney of the transactional division.
Michael F. Mackedon
Leonard E. Mackedon
Robert M. Erquiaga
MACKEDON ERQUIAGA, P.C.
179 S. Laverne St.
Fallon, Nevada 89406
775-423-2106
Continuing a tradition of excellence
in the practice of law
for the rural counties of Nevada
Michael F. Mackedon
Leonard E. Mackedon
Robert M. Erquiaga
are pleased to announce
the formation of
Continuing a tradition of excellence
in the practice of law
for the rural counties of Nevada
are pleased to announce
the formation of
MACKEDON ERQUIAGA, P.C.
179 S. Laverne St.
Fallon, Nevada 89406
775-423-2106
Continuing a tradition of excellence
in the practice of law
for the rural counties of Nevada
322234_A.indd 11 12/26/2012 10:13:57 AM

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