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Vanderbilt University Law School




This article poses the question: How should parties to litigation finance agreements – third party funding or contingency fees – deal with the inherent difficulty in pricing legal claims? It answers that a practical solution would be to use staged funding. Staged funding side-step the impossibility of accurately pricing litigation ex ante by allowing re-pricing and exit that are pegged to information disclosure. Done right, staging allows all parties to minimize the effects of uncertainty, better price their bargain, optimize the distribution of the proceeds of litigation between its different investors – far beyond practices common today. Staged funding also facilitates increases in the value of the option to settle – described here as a compound call option – by accounting for real options i.e., lawyers’ and funders’ option of adjusting their investments in response to new information. The article concludes with practical suggestions on how to adept staged funding, common in venture capital, to third party litigation funding.

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