Deferred fee agreement with a Lawyer


2

Please can someone advise whether the below terms is a good idea. I working on a start-up and engaged a Lawyer on a deferred fee agreement basis, then he sent the following terms. Before I enter any agreement with him, can someone please advise whether it is good because it sounds too good to be true:

I realize that, for now, you wish to work on a fee-paid basis (which is fine with me), but I also realize that cash can be an issue in a start-up situation, so the following information will - I hope - help you make an informed decision on how we might work together over the medium- to long-term. Nothing here is set in stone, and in any case, if you would prefer to continue working with me on a conventional fee-paid basis, that's great - the deferred fee scheme is really designed for situations where the start-up does not have the financing for legal advice initially, but that problem may not apply to you.

Obviously, what I propose here is tempered by the fact that I will be infusing a business perspective into my work with you and, over time, the arrangement may evolve into more of a business relationship than an adviser-client relationship.

Subject to that observation, I propose the following:-

  1. I would enter into a 'deferred fees agreement' with your new company. This agreement would also act as a 'contract for services' (not an employment contract), and would appoint myself as In-house Lawyer, Company Secretary and Data Controller.
  2. The agreement would defer payment of my professional legal fees indefinitely, and there would be no personal liability on yourself as an individual. To a considerable extent, the relationship would therefore be based around trust and the idea that I am adding value to the 'business partnership ' generally and not simply giving legal advice on one specific venture.
  3. I would take a shareholding of 5% of the fully-diluted capitalisation in the new company as security for the deferred fees. I would nominate my own vehicle, Law Rogers LLP, to take the shareholding.
  4. The shares would be transferred to me formally as soon as possible after we enter into the retainer agreement. In the event you decide not to confirm my appointment between signing of the retainer and actual formal transfer of shares, then we would agree on a cash value for my work to that point (based on a notional hourly rate of £26.00 per hour plus VAT) and you can then pay me this sum, either immediately or in instalments, depending on your circumstances.
  5. The 5% would be ordinary class 'B' shares. I would not have any voting rights, however I would have the option to elect to take a preferential dividend to settle some or all of any deferred fees on the happening of one of a number of 'trigger events'.
  6. The 'trigger events' would include (without limitation): (i). you obtain venture capital funding or external investment of a minimum 4x times the value of the deferred fees at Series A and 8x times the value of the deferred fees at Series B; (ii). you decide to liquidate the company and there is cash in the business bank account after payment of other legitimate creditors; (iii). you attain profitability of 8x times the outstanding legal fees; (iv). you sell the company; (v). I sell some or all of a class 'B' shareholding; (vi). we otherwise agree on a payment schedule.
  7. The deferred professional legal fees would be calculated at the notional 'in-house' rate of £26.00 per hour (exclusive of VAT - note my company is not registered for VAT at this time but may be in the future).
  8. I will provide you with monthly statements showing the number of hours worked and the deferred fees incurred.
  9. Yourself or the new company would have the right to buy-back the shareholding at any time for a sum reasonably agreed between us and which would, as an absolute minimum, reflect the value of my deferred fees up to that point.
  10. Conversely, I would have the right to convert my 'B' shares into class 'A' shares in the event that I make a further investment of my own by purchasing a minimum of 5% additional equity at whatever is the reasonably determined value at that point.
  11. I also have the right to review the arrangement at the 24-month point, then annually thereafter. In the event that the value of my work on an hourly rate exceeds the value of the shareholding by 100%, then I would expect to enter into further negotiations either to increase my equity or for you to help me liquidate some or all of the equity through a buy-back.
  12. The work of an in-house lawyer is strategic, and realistically, if this or any other venture takes-off, there will be time constraints on my ability to fulfil multiple roles for you. It is also probable that a conflict will develop between my 'business' role and my 'legal' role. However I accept and agree that - at least in the initial stages (first 24 months) - you will be looking for me to carry out the day-to-day legal work rather than source external law firms for you.
  13. I am not warranting to you that I can address, deal with or advise on absolutely every area of law - no responsible lawyer can. There will be the odd occasion when I will have to recommend we instruct an external specialist - for instance, a patent attorney. However, my broad knowledge and expertise enables me to deal with almost every issue, problem or situation you may encounter in the legal sense, and where I lack the specialist expertise to carry out the work, I will at least be able to identify the situations when it is necessary to source advice externally.

The above is for information purposes, but I hope it goes some way to explaining how a 'deferred fee' scheme might work as an alternative to a conventional lawyer-client fee-paid relationship.

Startup Costs

asked Feb 10 '12 at 02:27
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Tiger
11 points
  • You can use a question mark (?) to create a question. – Ross 8 years ago

4 Answers


2

I would never, ever sign something like that. 5% fully diluted? For some legal advice? No way.

He's a shark. He's done this before and you have no idea what you are getting yourself into. What are the requirements for his work? Is there a minimum number of hours he has to work? I could go on and on.

Walk away from this. Pay out of pocket or wait until you have the money. This is a bad deal for you.

answered Feb 10 '12 at 04:05
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Tim J
8,346 points

2

Personally, I would rather get a loan to pay for the legal fees. Also £26 per hour is not much at all, at least by United States standards. The work the lawyer does for you should generate business and revenue, and start paying for itself at some point. If you don't see that happening, then perhaps you don't need a lawyer.

answered Feb 10 '12 at 07:06
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Bneely
575 points

2

£26 per hour was the first alarm bell, his company not being registered for VAT the second. If it walks like a duck, sounds like a duck, it usually is a duck. Avoid like the plague.

answered Feb 10 '12 at 10:34
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Nick Stevens
4,436 points

1

5% for legal advice? Ridiculous! Walk away. Your lawyer is important, pick someone with great reputation. Barely known, but even some of the greatest lawyers are willing to guarantee a cap on your payments, so you pay the standard hourly rate, but there's a maximized amount you have to pay. If you involve somebody for stock, the typical - and fair - offering will be like 0,3-0,7 percent NQSO (Non Qualified Stock Option) plus a flat hourly fee. Stock amount depends on the exact work and the stage of the start-up. (The earlier the higher, of course.)

answered Feb 15 '12 at 21:47
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Dr. Peter Kadas
11 points

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