Consultants: How to make sure you get paid for your work

Consultant should get cash advance, an enforceable written contract and a lien on work to assure payment and seek equity, promissory notes or non-cash benefits from cash-strapped clients.

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IEEE Consultants’ Network, Waltham, Massachusetts , Date: October 22, 2008

  • Respecting Consultant needs & value of your services       

  • Innovative Billing approaches for cash-strapped clients

  • Protective Methods to enhance Chances for payment

  • Legal Strategies  for  collection

By Robert A. Adelson, Esq.

Why you, as Consultant, are worse off If work unpaid, than if never done…

1.    Business obligations of Independent Consultant  exceed company employee – tasks beyond work

  • Marketing & Sales – finding your consultant work
  • Maintaining currency in your field
  • Producing work once assignment given
  • Delegation of work and development of Subcontracting relations with other consultants
  • Keeping home or rented office facilty and equipment
  • Billing and collection – assuring your revenues & payment

2.    Time = $$$.  Unpaid work steals time from other business tasks also essential to consultant business 

3.   Respecting the Value consultants bring to the client – value that should be timely paid for

  • Just in Time management – to fill need
  • No lingering obligation, termination when use ended
  • Hired for expertise & experience – no training cost
  • No pension, medical, vacation or other benefits
  • No permanent office or support
  • Self-insured, liability insurance typically required 

4.    Exception to rule – When you are not worse off… When you, as Consultant, can afford not to be paid

  • When cash is not only currency for your payment…for example…
  • Assignments in new field, little prior experience – learn on client
  • Access to technology or markets, back license of technology
  • Face time with valued contacts; “free” exposure for your work
  • Work in desired location, other “perks” or benefits for doing work

5.         Though you benefit, client’s work shouldn’t be free 

 If your client is cash-strapped, and You want to do the work…

How to structure billing to get paid?

1.     Installment payments – fixed time-table

 2.     Debt obligations – promissory note

  • Unconditional promise to pay sums owed
  • Interest on outstanding debt
  • Warrants in client stock – Equity “kicker”
  • Collateral security for debt
  • Perfection of security interests
  • Defining “events of default” & consequences
  • Collection costs & Attorneys fees

 3.       Payment of your out-of-pocket costs –

  • Separate from your consultant fees – Not income to you
  •  Reimbursement /direct payment – so you’re not out of pocket

 4.      If cash pay unlikely…what else can you get?

 5.      Payment in Client’s Equity (a piece of the business)

  • Since you share risk… you deserve share of client’s upside
  • Get it now – if your work adds value… that shouldn’t penalize you
  • Types of Equity:  Stock, Options, Phantom Stock
  • Different tax treatments – seek tax favored equity
  • Valuation – balancing debtor’s current status & the prospects
  • Vesting of stock & options
  • Exercise period of options – termination issues
  • Anti-dilution protections; Cash-out, reporting, retention rights

 6.      Non-cash benefits to Consultant from Client work 

  • Be sure you’re timely obtaining these benefits in quality expected
  • When non-cash objectives achieved – be ready to terminate

What pro-active steps can you take? To improve chances of timely payment …

1.   Get cash advance – especially from 1st time clients

  • Eliminate “window shoppers” – establish payment expectation
  • Assure that client has “skin in the game” – stake in your work

2.   Valid and Good Contract – before starting work

  • Real parties to agreement, addresses, personal guarantees
  • Mutual assent – signed agreements
  • Clear mission – defined scope, performance obligations
  • Clear conditions, variables, contingencies on performance
  • Enforcement terms – governing law, consent to jurisdiction
  • Once again, right to collection costs, attorney’s fees (often done that prevailing party get attorneys fees – need this provision)

3.   Achieve value – meet your milestones

  • Show & evidence clear consideration – what you did for him
  • Potential case in equity – quantum meruit – value conferred
  • Defense to counterclaim – you didn’t perform and it cost client

4.   Establish lien on work accomplished / deliverables  

  • Contract should provide right to lien on unpaid amounts
  • Again, depends on value achieved
  • Fear rescission & action on lien potent weapon on bundled product

5.   Dunning clients within Bounds of law

  • Calling clients in arrears – law’s latitude on commercial debtors
  • Threatening pre-litigation letters
  • Collection costs (collection agency) & attorneys fees 

6.   Exception to Rule – When oral contract enforced

  • Party seeking enforcement acted in reliance on clear oral contract
  • Party denying enforcement received benefits from oral deal
  • Doctrines in equity: “Implied Contract” & “Unjust Enrichment”

If pre-litigation actions fail, what’s next? Legal strategies to achieve bill collection…

1.   What collection attorney needs before taking case?

  • Prerequisite #1:   Enforceable legal case
  • Prerequisite #2:   “Deep Pocket” to pay verdict for plaintiff
  • Different types of contingency fee cases
  • Size of case needed to merit contingency / or hourly legal work

 2.         What you need to do to have enforceable case

  • Evidence of contract – copy of signed contract or alternative
  • Evidence of work performed and debt owed
  • E-mails or conversations – reflecting defense to debt or its acknowledgement & collection efforts
  • Determine merits of client position vs. potential defense claims and defense counterclaims if any
  • Obtaining jurisdiction over debtor – address in state, ss# for skip-trace if needed

 3.         What you need to show a deep pocket to pay

  • Bona fide defendant – if early stage company, preferable to have personal guaranty, so person can be sued as well as company
  • Identify and quantify assets covered by lien or which may be reachable in pre-judgment attachment actions

 4.   Plan /Implementation: 1st (asset) stage of legal action

  • Preparation of complaint, plaintiff affidavit & proper service
  • Coordinated action against assets (“low lying fruit): reach & apply
  • With event of default occurred & realization on any collateral

5.   Plan /Implementation:  2nd (motion) stage of action

  • Motion for summary judgment if appropriate
  • Motion for expedited discovery – interrogatories / depositions
  • Defense against same, if any from debtor
  • Settlement or trial – at each stage, both parties weighing costs 

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Boston, MA 02110, (617) 951-9980.  Fax (617) 951-0048. E-mail: radelson@engelschultz.com  Website:  www.engelshultz.com   Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of  Law Review.  He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts and New York and US Tax Court Bars.

Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004. 

Mr. Adelson is specialized in corporate, taxation, finance, commercial and technology contracting law.  In those areas, he represents four main types of clients:

  • Startups, smaller companies and entrepreneurs in software, and other technology-based fields, including issues of building management team, IP protection, strategic and commercial contracts, shareholder issues, M&A and capital finance; 
  • Consultants ad service providers in issues of client contracting and contract enforcement; subcontracting work; trademarks and trade identification, copyrights and trade secret protection; liability, regulatory issues, entity choice incorporation;
  • Executives and key employees in negotiation of employment terms, compensation, stock, options and phantom stock, termination, severance and relocation;
  • Family businesses including those in transition with issues of succession planning, recruitment and retention of non-family members and other issues of business.   .

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in litigation, real estate, family and probate matters. 

Mr. Adelson is a frequent speaker at business forums and author of numerous articles published in Boston Business Journal, Mass High Tech and elsewhere. He is Vice Chair of the Boston Entrepreneurs Network and a board member of 128 Innovation Capital Group.  Further information is available at his law firm website  www.engelschultz.com .

The speaker thanks Nathan Sokal (who delivered a presentation from the consultant’s viewpoint), for the chance to join him speaking on the legal viewpoint, on topic:“Consultants: How to make sure you get paid”, for the IEEE Consultants’ Network at Waltham, Massachusetts, on October 22, 2008.   These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

(c) 2008 by Robert A. Adelson

Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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