Performance Based Fee Agreements, Explanation and Examples.
Milestone and Performance Based Fee Agreements
A milestone or performance based fee agreement is where our firm only gets paid when it completes a certain task or where it performs in a certain way. These agreements are particularly useful in managing the expense of long-term legal projects such as financing and licensing.
We like these arrangements because our clients like them. Our clients like them because they reduce the risk of paying for legal fees that do not return value. Under these arrangements our firm has "skin in the game" and only if you succeed are we paid. Our business savvy clients also prefer having a known quantity paid at a known time - which allows for planning with certainty.
In order to be effective these agreements require clear communication about expectations and the scope of the work. It should be noted that we rarely enter into such arrangements where the milestone is outside of our control - except in the licensing context. This means, for example, that we would not agree to the fee being paid on a seller of a building entering into contract since whether or not the seller signs is outside of our control.
Relevant Examples of Milestone/ Peformance Based Fee Agreements
You, the client, want to raise $1,000,000 through the sales of stock in a private placement in order to purchase and license a retail check-cashing business. This requires the formation of an entity, a drafted Private Placement Memorandum, the filing of a Form D with the SEC, and state notice filings. After hearing about your needs we estimate the total amount of the attorney fees would be approximately $7,000.
The milestone fees could be something like the following:
You, the client from the above example, have raised the money and purchased the building and now want to apply for a land use license at the local level. In the area you are working in you need a county use permit. Additionally, the city you are located in requires you to obtain a city use permit as well as clear the city planning department which requires a traffic use study and safety-effect study. We agree on a fee of $10,300 to be paid as follows:
The actual payment structure is agreed upon between us and a client and such agreements are usually structured in a manner that reduces risk of paying legal fees that do not provide a return.
On the other hand these agreements can, in some cases, be more expensive. These agreements shift multiple client risks on to our firm, such as the risk of not being paid, of expending time and effort that makes no return, and the risk that the total work will exceed our expecations. As a result the total fees are often greater than might be had under an hourly agreement. Ultimately, whether or not to use such agreements is a business decision that weighs the reduced risks and upfront costs against the possible higher cost.
1. Entity formation with associated documents.
2. Complete initial draft of Private Placement Memorandum.
3. Complete final draft of Private Placement Memorandum.
4. File Form D.
5. Complete identified state filings.
Total Fees = $7,000
1. Draft and file for county permit.
2. County issues use permit.
3. Completion of traffic study.
4. Completion of safety study.
5. Draft and file permit application for city.
6. County issues permit.
1. $0 (not billed)
3. $0 (note that generally the outside cost of third party services such as this would be passed through to you as it is not a legal fee)
4. $0 (again cost is generally passed through)