Remember shares in lieu of fees? It’s alive and kicking
12 February 2014 | By Natalie Stanton
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What do Thomas Eggar and Californian giant Wilson Sonsini Goodrick & Rosati have in common? Not much, you might answer.
We’ll give you a clue: it’s not the climate. Rather, both firms have been known to tinker with unusual fee arrangements – notably accepting equity from clients in place of traditional fees, at least in part.
The practice has projected Wilson Sonsini into the stuff of legend on the legal landscape, having accumulated shares from today’s Silicon Valley super-brands as they took their first tentative steps into the market.
Wilson Sonsini’s associated fund – WS Investment – is thought to have had some massive windfalls over the years. Among the best-known is its supposed $72,000 investment in Google, which rocketed to a value of almost $28m a year after the company went public.
The Californian tech firm wasn’t alone in toying with the fee arrangement. It’s thought that a number of firms accepted shares as payment during the dotcom boom – including several that are more associated with St Paul’s than Silicon Valley.
Take Linklaters. It was thought to be the only magic circle firm to have accepted equity in lieu of fees for early stage companies back in the late-1990s and early 2000s. The scheme was spearheaded by former private equity head Rupert Pearce, who set up its internet and e-commerce group before exiting the firm at the peak of the dotcom boom in August 2000.
Suggest the idea of accepting equity in lieu of fees to any Linklaters partner nowadays and it’s likely to go sour pretty rapidly. Roger Baron, a corporate partner at the firm and former member of Pearce’s team said, “we’d be very cautious about doing it again, but we’re often innovative on fees and never say never”.
The practice has somewhat fallen from grace since the heady days of the late 1990s. After all, it often leads to questions of ethical practice and conflicts of interest. While advocates suggest that it’s no different to working for a conditional fee, detractors ask: can you truly draft a prospectus when you hold an ownership stake in the company?
A number of firms have an outright ban on the practice, slamming it as “risky” and “impractical”. In fact, many lawyers claim not to have come across any practical examples of the fee arrangement being used since the dotcom bubble burst. However, some are still willing to get involved – albeit a little more under the radar than in he past.
Which brings us full-circle and back to Thomas Eggar.
In December 2013, the firm accepted part payment in equity for its advice on the AIM admission of mining and exploration company Kodal Minerals. Despite being an otherwise unremarkable deal, the admission document notes that, “3,571,429 ordinary shares are to be issued at the placing price to Thomas Eggar LLP on admission in partial payment of their fees.”
Kodal Mineral’s 3.57 million shares had a placing price of 0.7p per share, which works out at £25,000. By the new year, the share price had rocketed to 2.08p boosting their value to about £74,200.
Sources close to the deal suggested that the fee payment was a “one-off used in particular circumstances,” but declined to comment on the exact scenario underlying the arrangement.
However, the transaction has certainly got the market talking. It’s thought that a number of mid-tier firms – particularly those with strong AIM practices – are willing to take a punt on part payment in equity. Stephenson Harwood has been known to engage with the practice over the past few years while Memery Crystal has utilised the arrangement within the last 18 months.
Nick Davis, a corporate partner at Memery Crystal noted, “we’d certainly look at taking shares as a piece of the fees from an early-stage start-up – possibly as much as 25 to 30 per cent – but it’s the exception rather than the rule.”
Rumour has it that there’s one firm in the market which recently accepted 70 per cent to 80 per cent of its payment for pre-IPO work in equity as opposed to cash.
Should we be surprised? Perhaps not. As one source suggested, “the general rule is that clients are becoming much more sophisticated in terms of fee arrangements. If you’re not a magic circle firm, there can be a level of creativity involved. A lot of work these days is done on a success/abort basis. Clients want protection from the down side, but they’re also willing to let advisers share in their successes”.
Another simply notes, “it happens more often than you’d think – you just don’t hear about it as much as you used to”.
So, Thomas Eggar is not alone. And as the practice continues to rumble on in the background of the legal profession, perhaps it’s time to stop considering it a slightly shadowy practice reserved for the margins and engage in a new debate about the merits of accepting shares in lieu of fees?