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Tips for Drafting Equity Partner Agreements

Non-equity partnership agreements, once a rarity in law firms, transformed the traditional partnership model.

Since the beginning, law firms have had single-tier partnerships where all have equity in firm growth. Only a handful of major firms, like Cravath Swain & Moore, hang on to that business model today.

While economics can change everything, non-equity partnership agreements are in vogue at most large law firms. For many firms, however, the traditional equity partnership is a standard. Here are some tips to consider in two key areas:

Partnership Debts

BigLaw attorneys really began rethinking the traditional partnership model when crushing firm debts took equity partners by surprise in the last recession.

Paul Jasper, a former partner at the failed Dewey & LeBoeuf, faced a clawback claim that would have required him to pay back $12.9 million for the firm's debts. He told the ABA Journal at the time that "partners need to think long and hard before accepting an equity partnership position in a large New York firm -- particularly if the firm's financial strength is in doubt."

When entering equity partner agreements, lawyers should be especially careful about taking on the firm's existing debts. It requires due diligence and open-eyed negotiations.

"Protect yourself from the partnership's debts," attorney Jennifer K. Halford wrote for FindLaw. "Additionally, make sure that the business has sufficient capital to cover its liabilities, and invest in a good insurance policy."

Partnership Contributions

Like any business partnership, law firms are built with contributions from the partners. In many equity partnerships, lawyers live by the "eat-what-you-kill" formula."

"A pro to this approach is it may lead to less friction over time between the partners who want to work 70 hours a week and those who want to spend more time with their families, traveling or on the golf course," writes Doug Bend for Forbes.

Bend, a managing partner at Bend Law Group, says such a partnership agreement should also divide up equity using a formula, such as 1.0-1.5 times the prior year's gross revenue, or a business valuation, when a partner leaves.

There is no "one-size-fits-all" for equity partnership agreements, Bend says. "The key is partners having a clear equity agreement in place that provides a roadmap when these and other issues inevitably occur."

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