Should My Startup Issue Shares to Lawyers or Accountants?

As a business owner, you have likely tied all your available capital and assets into your new business. Starting a business can be challenging, and the process involves seeking financial advice from accountants and legal services from lawyers. Their advice can often be expensive, and you may incur significant costs. You may be considering whether you can pay for the professional services of a lawyer or accountant by issuing shares as an alternative to forking out a cash sum to meet their fees. This article will explain the advantages and disadvantages of giving shares in your business to lawyers or accountants and whether this should be done. 

The Role of Lawyers and Accountants in Startups 

Legal and accountancy advice is essential for startups to navigate the business landscape. You may require professional advice for the following: 

• deciding and arranging the legal structure of a new business;
• drafting contracts and agreements; 
• protecting your business’s intellectual property;
• ensuring the company complies with the law;
• financial planning; 
• bookkeeping and recordkeeping;
• ensuring tax compliance; 
• identifying and mitigating financial risks; and
• audits. 

You may be facing a legally complex issue that results in mounting fees, or you may be grappling with a financially intricate issue that uses up your accounting budget. This can put your startup in a tricky financial situation, and you may consider giving your lawyer or accountant shares in your business in exchange for their services to avoid these mounting short-term costs. 

Issuing Shares as Compensation for Professional Services 

Businesses typically pay professionals for their services using cash. This is the traditional method of payment. Issuing new shares in your business is a less common payment method for professional assistance. Each share of your company represents a unit of ownership and holds a specific value. To be able to issue shares, you must register your business as a limited company with Companies House.

Advantages of Issuing Shares as Compensation 

1. Reduced Upfront Costs 

Startups have limited resources at the early stage. If you are considering issuing shares in your company, consider conserving your cash. Providing share capital rather than money can help you reduce upfront costs.

2. Access to Expertise

Issuing shares may help you access specialised expertise for your startup that you would not otherwise have access to if you paid with cash.

Disadvantages of Issuing Shares as Compensation 

1. Loss of Equity 

Accountancy and legal fees can be expensive. This can mean that a significant portion of equity in your startup would need to be handed to your lawyers and accountants to cover the cost of their fees.

Doing so would reduce your and any cofounders’ equity in your business, resulting in a far lower future return on investment. Diluting the founders too much can also harm your company’s long-term growth.

2. Ethical Concerns

Your employees may have shares in your business. If the accountant or lawyer works for you in-house and you offer company shares to employees through an employee share scheme, they can be issued shares. 

Otherwise, independently contracted lawyers or accountants may not be professionally ethical to accept shares in your business as compensation for their services. By accepting shares, they can create a conflict of interest because you are their client. Professional codes of conduct may preclude lawyers and accountants from accepting shares in their clients’ businesses. 

3. Variable Value

Unfortunately, there is no guarantee that your startup will thrive and grow. The financial value of the shares you issue is uncertain. Lawyers and accountants usually bill in more straightforward ways, for example, by the hour. Shares may expose professionals to unanticipated financial risks, which could mean they will be less likely to accept your offer. 

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Key Takeaways 

For business owners, issuing shares as compensation for professional services has advantages, including reducing upfront costs and gaining access to specialist expertise. Disadvantages include business equity loss, potential ethical concerns, and the variable value of shares. 

You should carefully consider whether to issue shares as compensation for fees for professional services incurred by your startup. If you struggle to pay your lawyers or accountants, you (and your finances) will likely benefit from discussing this with them. They may be able to offer an alternative payment structure. If you provide lawyers or accountants shares in exchange for their services, ensure the arrangement is fair, legally compliant, and aligned with your business’s goals. Ensure that you carefully consider share-based compensation agreements.

If you require advice about issuing shares of your business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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