Inside: Considerations before entering into an equity for professional services agreement (Part 2)

This second part of the series will focus on what other professionals should consider before entering into this type of agreement

In my first installment (Part 1), I raised the topic of how cash-strapped start ups can afford quality professional services. The method I highlighted was providing services to these start ups in exchange for equity. The article then focused specifically on ethical considerations law firms should be aware of before engaging in this practice. This new installment will focus on what other professionals should consider before entering into this type of agreement.

Attorneys are not the only professional group that have imposed safeguards preventing them from consciously or subconsciously being affected by personal conflicts of interest in rendering their professional services to clients. For instance, before an accounting firm enters into this type of agreement, it should be aware of the potential consequences of obtaining equity in a client. The Securities and Exchange Commission (SEC) has imposed stringent regulations on auditors to ensure and enhance the independence of accountants that audit and review financial statements of companies. Specifically, the SEC determined that an accounting firm is not considered independent with respect to an audit client if a former partner, principal, shareholder, or professional employee of an accounting firm has a continuing financial interest in an audit client. As a result, an accounting firm considering this arrangement may be losing potential future work as an external auditor or violating an SEC regulation if the firm is providing external audit services in exchange for equity in one of its clients.

Contributing Author

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Jefferey Ogden Katz

Jefferey Ogden Katz is a partner at The Patterson Law Firm, LLC. He is a leading litigation attorney and has handled numerous professional liability cases...

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