Every so often, a legal professional might encounter a startup client with a tight budget who offers equity instead of cash to cover legal fees. While there are tales of lawyers turning into millionaires from such deals, particularly if a company hits it big at the IPO stage, the reality is often less glamorous and fraught with potential pitfalls.

Unlike contingency work, where lawyers can estimate a case's value and likelihood of success, accepting equity involves a higher degree of uncertainty. This kind of arrangement isn’t just a gamble on the financial success of the company, but also on its leadership and business model.

Key considerations include the trustworthiness and competency of the client, as well as familiarity with the industry. Knowing the people involved and having confidence in the business can significantly reduce the risks associated with accepting equity.

However, there are substantial drawbacks to be wary of. For instance, issues can arise with malpractice insurance. Some insurers might refuse to cover claims, or extend the investigation period, if the lawyer and client co-own the business involved, due to potential conflicts of interest or fraud.

Tax implications also complicate equity arrangements. Equity received in place of payment is considered taxable income. This presents challenges in valuing the equity for tax purposes, potentially leading to double taxation: once upon receipt and again upon sale.

Ethically, lawyers must navigate these waters carefully. According to the ABA Model Rule 1.8, entering into a business transaction with a client — such as exchanging legal services for equity — requires that the terms be fair, reasonable, and transparently communicated, with the client advised to seek independent legal counsel.

Even with all precautions in place, differing perceptions of what's fair can lead to discontent among shareholders, especially if the company becomes highly valuable. A hypothetical scenario where a lawyer provides services for 20% of a company might not sit well with other stakeholders if the company is later sold for a significant sum.

For lawyers uncomfortable with the inherent risks of equity-for-services deals, alternatives like offering discounted rates or limited free consultations might be preferable. These options reduce risk while still allowing the lawyer to support emerging businesses.

Ultimately, accepting equity as payment should be approached with caution, thorough due diligence, and clear agreements to avoid misunderstandings and legal complications down the road. For those in the legal profession, striking the right balance between risk and reward requires careful thought and, often, a leap of faith.