ETHICS QUESTION OF THE MONTH
This content is generated by the Texas Center for Legal Ethics and is for informational purposes only. Look for the reasoning behind the answers at legalethicstexas.com.
Lawyer A represents a longtime client, Client B, in various real estate transactions. After several years, Lawyer A asks to invest in an upcoming real estate development project for which Client B needs investors. Lawyer A also perceives that her interests are aligned with the client’s interests because both want the project to succeed. Client B welcomes Lawyer A’s investment. They agree that Lawyer A will invest $50,000, and contribute her legal services, in exchange for a 10 percent equity share in the development. As part of her contribution of legal services, the lawyer prepares the paperwork documenting the investment agreement.
A few months later, Client B decides to start a company to create and sell real estate development software. Client B has enough investors and capital to start the company, but is concerned about managing the startup’s legal costs and other expenses. Client B offers the lawyer shares of stock in the new company in exchange for legal services. Client B proposes a formula that awards two shares of stock for every hour of services spent by Lawyer A. Lawyer A’s hourly rate is $250. There is a risk that the startup may fail and Lawyer A’s stock will be worthless; there is also the possibility that the startup could be successful and that Lawyer A’s shares could be worth significantly more than the value of her legal services at her usual hourly rate.
Which statement most accurately addresses whether these scenarios are acceptable?
A. Both Scenarios 1 and 2 are acceptable, and are commonplace.
B. Scenario 2 is acceptable, but Scenario 1 is not.
C. Scenario 1 is acceptable, but Scenario 2 is not.
D. Both scenarios are per se unacceptable.
E. We don’t have sufficient facts to know whether either scenario is acceptable.
The correct answer is E. For the reasoning behind the answer, go to legalethicstexas.com.TBJ
ABOUT THE CENTER
The Texas Center for Legal Ethics was created by three former chief justices of the Supreme Court of Texas to educate lawyers about ethics and professionalism. Lawyers can access the Texas Disciplinary Rules of Professional Conduct, the Texas Lawyer’s Creed, and a variety of other online ethics resources by computer or smart device at legalethicstexas.com.
The information contained in Ethics Question of the Month is intended to illustrate an ethics issue of general interest in the Texas legal community; it is not intended to provide ethics advice that applies regardless of particular facts. For specific legal ethics advice, readers are urged to consult the Texas Disciplinary Rules of Professional Conduct (including the official comments) and other authorities and/or a qualified legal ethics adviser.