Dot-com prosperity has transformed the practice of law. Lawyers are in such demand that hiring one is as difficult as finding venture funding – and almost as costly.

Venture Law Group
Sonsini, Goodrich & Rosati
Changing Business Model
Client Speak
Lawyer Speak

In the old days, lawyers got nervous before they pitched a client for work. But then again, in the old days, they actually needed to pitch for work.

Thanks to the wild and money-soaked growth of technology and Internet-related business, the legal world has been turned upside down: Big public companies are no longer desirable clients, associates are no longer peons, lawyers are no longer disinterested counselors, litigators are no longer stars and, the most striking reversal, in the lawyer-client relationship, clients no longer call the shots.

Consider these stories:

A senior partner at a major Silicon Valley firm walks into the board meeting of a biotechnology company he'd happily signed as a client a year earlier. One of his close friends sits on the board. Now, he's pained to admit, he doesn't have any associates to work with him on its current round of funding.
A client is lured from one firm to another by a partner he knows socially. His company shows great promise. But a year later, he's run into problems. His company is being acquired for a mere $15 million. The firm tells him to find other lawyers to handle it.
A first-year lawyer at a leading Valley firm turns in messy work for a big client. When the client complains, the rookie says OK, he won't work on the project anymore. The lawyer in charge tells the client he has no one else to assign it to. The client ends up taking the first-year lawyer to lunch to woo him back to the project.
It's all part of the new world of lawyering, where it's not fees that matter, it's not partnership that matters. It's your upside potential. And it had better be big.

Venture Law Group

No one personifies the new legal order more than Craig Johnson.
At 53, slightly disheveled, with thinning blond hair and wire-rim glasses, he doesn't look like a rebel. But Johnson has done something that few in the Valley do: He has created controversy. His law firm, Venture Law Group, has so stretched the boundaries of the profession that some say he should no longer call himself a lawyer. A businessman, maybe, or a venture capitalist. "[He's] a dealmaker," sniffs Alan Mendelson, a Valley veteran and senior partner at the law firm of Cooley Godward.
Johnson founded Venture Law Group in 1993. He says it was an idea he literally dreamed up, waking one morning with a radical new business plan in his head. At a time when bigger was better, Johnson proclaimed that Venture Law would never have more than 75 lawyers in one office. He aimed to make money not from the Hewlett-Packards or Sun Microsystems of the world, but from the companies that were still embryos being formed in a living room or garage somewhere. He opened his office on Sand Hill Road, close to the Valley's venture capitalists, a move that served both practical and symbolic purposes.

At VLG, he said, lawyers would make more money and have more fun.
Johnson says he's still very much a lawyer, though his definition is more expansive.
"We're becoming a hybrid of a startup law firm, a venture capital firm, a consulting firm and an investment bank," he says. "We're moving into a zone of entrepreneurism that other firms haven't considered."

A Russian-studies major who graduated from Yale, Johnson went from college to the Peace Corps in Ethiopia, to Stanford Law School, then, in 1974, to Wilson, Sonsini, Goodrich & Rosati in Palo Alto. He made partner in 1980, and became a top-earner with a spot on the firm's executive committee. When he announced he was leaving to start his own law firm, his partners were shocked. But Wilson had rejected his suggestion of a Sand Hill Road office, and Johnson was bothered by the departure of some of his prized associates. When he left, Johnson took most of his 15-member group, along with many of his clients, including Stratacom and Collagen. VLG's revenues have climbed from $3 million in 1993 to $53 million in 1999. It now has about 95 attorneys.

The partners at the top of most law firms make money on the backs of their associates – the more clients they bring in, the more bills they send out. Though much of the labor-intensive legal work is handled by lawyers who bill less than partners, their long hours quickly generate big profits for the higher-ups. But because it aimed to stay small, Venture Law Group could not rely on "leveraging" its associates this way. Instead, it took a heretical step. Where traditional firms value partners by their "book of business" – the amount of billings they bring in – VLG wanted to discourage people from simply generating as many fees as possible, so it de-emphasized its partners' "book" in setting compensation. (At VLG, associates aren't even called "associates." They are attorneys or senior attorneys. Partners are called "directors.")

The key to the firm's viability, given that it doesn't rack up billable hours, is to take equity in clients. As at other firms, exactly how it takes the equity and in what amounts have evolved over time. But today, giving equity is pretty much a requirement for new clients. Typically, VLG will demand some amount of founders stock at a cheap price, along with the chance to make cash investments during a company's funding rounds with venture capitalists. All this comes on top of the firm's regular legal fees.

Johnson boasts that his is the most profitable firm in the San Francisco Bay Area, with most of its 20 or so partners' compensation now coming from profits made on investments. Partners generally all contribute to VLG's investment pool; the firm makes investments on behalf of its younger associates, while the senior ones can invest directly in clients. A number of partners made several million dollars in 1999, Johnson says; in 2000 the firm's investment returns are expected to reach into the nine figures.

Hanging in the lobby is a list of VLG's "core values," which range from eschewing hierarchy to embracing innovation "as an end in itself." Johnson displays the zeal of an entrepreneur when talking about Venture Law, and although regarded as a formidable marketer, he shows no sign of cynicism. His bible is the book Built to Last: Successful Habits of Visionary Companies, which is a must-read for every new member of the firm.

Early on, Johnson says, he intended to use equity as a retention tool – that is, he included senior associates in the firm's investment pool but scheduled their shares to vest over four years. If they left, they lost out. Historically, Valley firms have made small cash investments in clients, commonly buying preferred stock alongside venture capitalists. When Venture Law started, it did the same. Then, two or three years ago, VLG got far more aggressive.

First of all, it started investing more at the venture capital stage. Whereas Wilson, Sonsini will put as much as $100,000 into a client, VLG will invest up to $250,000. These investments aren't barter for legal work; they're made in cash by the firm. "To be frank about it, we have more money to invest," says Venture Law partner Josh Green.

More significant, VLG began to demand founders stock – the inexpensive equity that traditionally had been reserved for a company's founders, not its lawyers. The initial response among VCs was "quite negative," says Green. But supply and demand was on the side of the lawyers, and VLG found its demands being met.

Word around town is that Venture Law takes as much as a 3 percent to 5 percent stake in the companies it represents. Johnson claims the firm's stake is usually much smaller – more like 1 percent of common stock after the seed round of financing. "If a company's worth $5 billion, you don't need to own much to do very well," he says, noting that some of the firm's biggest returns were on investments of less than a half-percent. "I'm wondering if we're even falling behind."
Competitors are as eager to know each others' percentages as kids are to know each others' grades. Other lawyers might be tempted to set up Johnson as taking more stock in his clients than others. Look, they can say, he'll take your whole company; we'll take much less.

But Venture Law owns a far larger share than 1 percent in some high-profile companies – companies, says Johnson, in which the firm moved beyond an advisory role to becoming a cofounder. Venture Law owns 7 percent of Garage.com, which connects startups with early stage seed investors and recently filed to go public. (Johnson came up with the idea for the company.) Its stake is so large that concerns over conflicts prevent VLG from handling Garage.com's legal work. VLG owns 15 percent of Grassroots.com, a political site, and Johnson is Grassroots' acting chief executive.

Venture Law also goes further than other law firms in allowing individual lawyers to invest personally. When bringing in a client to the firm, lawyers are allowed to take 30 percent of the opportunity to invest. Because Johnson wants to keep entrepreneurial-types onboard, firm rules let lawyers keep 70 percent of the ownership stake if they help found a company.

The earlier that lawyers get involved in a company, the greater the potential for a windfall. That's because they can ask for a greater equity stake before a company gets funded than afterward, when its valuation is higher and the risk is lower. In other words, two guys and a PC will probably have to cough up more equity than a prominent venture capitalist who brings in a deal.
"Craig takes the largest percentages, with the most raw entrepreneurs," notes Green, who plans to shift his own practice toward more advising and less legal work. His legal billings will drop, but he'll get larger equity stakes in his clients. The whole equation hinges on taking on clients before they go public.

The day of an IPO can make a law firm a lot of money. When Foundry Networks went public last September, for example, shares owned by VLG and Green were worth $8.4 million; today they're worth around $16 million.
But once a company is public, the potential for enormous gains decreases – even if the share price rises, it won't be the dramatic jump from pennies a share to, say, $15 or $20 in one day.
 

In youth-obsessed Silicon Valley, older companies also find their currency falling. In its early days VLG didn't exclusively represent startups. It was still proving itself, still trying to keep the lights on, and it took on big names such as Intel  and Goldman Sachs. Five years ago, though, Venture Law started turning down business – phasing out, for example, its representation of underwriters. "It was a gutsy move," says Green. "We made the decision to allocate human resources like a VC firm allocated capital resources. We were told by a lot of law firms that we were nuts to start doing that, that we'd burn bridges."

Recently the firm has gone a step further. The polite word for it is "outplacing." The blunt description is firing clients. The process is anything but pleasant: People who have known each other for years – have eaten business lunches, spent late nights closing deals together, attended wedding receptions – have to suffer through a call terminating the relationship. That a lawyer would fire a client – a client who pays his bills, a client who is nice, even – is a sign of how the Internet has shaken the most basic assumptions of the business world. Johnson's term of choice for this upheaval is "the Internet economic hurricane."

He says it hit Venture Law, hard, in 1999. His associates were billing brutal hours, unacceptable hours, as clients raised capital and made deals at breakneck speed. Those same associates were fielding irresistible offers from Net companies. Meanwhile, two key partners left, after a disagreement that was itself a sign of the times: They wanted to keep for themselves more of the equity in clients they brought to the firm. "It really was kind of a crisis time," Johnson says.
VLG responded to the crisis, and told a third of its clients in 1999 that it couldn't continue to represent them. The firm was moving closer to its original ambition: to focus on startups. That means VLG gives up some steady revenue to invest in companies that may or may not become stars. The trick is in the pick. "It's like looking at babies in a nursery and picking which one will be a Nobel Prize winner," says Johnson.

VLG dismissed around 140 clients; Intel was one. The company was a "wonderful client," Johnson says, but the work Venture Law did for Intel was relatively routine. And working for Intel came with no equity.
That's not to say VLG parted with all its public-company clients. Its biggest is Yahoo , which it has no intention of dropping. Yahoo is the kind of Internet celebrity client that, hurricane or not, a firm would be crazy to let go.

In order to more delicately extricate itself from the clients it stopped representing, VLG made a deal with a large San Francisco law firm looking to gain a foothold in the Valley to handle overflow. Orrick, Herrington & Sutcliffe serves VLG clients "when they grow up," as Johnson puts it. "Their perfect client was the large, fee-generating company with multinational operations. That's the opposite of what we want." Orrick is also working for VLG clients early on, in teams with VLG lawyers. Though Orrick is starting to take its own, smaller stakes in some of these companies, some in the Valley see the arrangement as unequal: Orrick picks up the grunt work, VLG gets big chunks of stock. But Orrick has no complaints; the firm would clearly have a hard time building up a Silicon Valley practice without VLG.

Some clients are surprisingly sanguine after getting dumped. "Of course we were unhappy about it, because they were doing good work for us, but that's kind of life in the big city," says Cary Klafter, director of corporate affairs in Intel's legal department. "We afford them stability and cash flow, which is not necessarily something they need in a boom time."

For others, the pill was tougher to swallow. One client who asked not to be named says he "thinks the world" of Johnson. But although Orrick has been "quite responsive," the switch cost the company money. "Our view is we have long-term relationships not just with our customers but with professional service firms," says the client, whose company went public with VLG. "This idea of being graduated and being moved to another law firm didn't sit well with us at all. The cynical me tells me there's more money to be made in stock options taken early on."

"Duh," says Johnson, who's candid about the life span of his firm's relationship with a client. Venture Law will generally stay with a company through its "liquidity event," whether that means going public or getting acquired. "In most cases, when a company becomes large, almost any firm can do the work," he says. "We are as sensitive to client loyalty as any other firm but, the truth is, we're not the best choice for a company as it gets larger."

Some of Johnson's peers at other law firms take issue with a calculus that leaves good clients out in the cold. Cooley Godward's Mendelson calls what VLG did in dropping clients "unconscionable." He says Venture Law is systematic in breaking off relationships with clients when there is no longer a potential payoff on the equity. "If it's a question of taking on five new startups or continuing to service a well-paying, friendly, productive client, you have a responsibility to the client you have." Of course, Mendelson, who has jokingly referred to himself as a "dinosaur," may find that some disagree with his view, even his own partners. Cooley, too, has put out the call to its lawyers to trim their client lists. Still, Mendelson maintains that Cooley's trims are less severe than those of Venture Law.

"There's a certain amount of hypocrisy with Alan," says Johnson. "I think what Alan is expressing is frustration with the success our model is having." He notes Venture Law could not keep going as it was without turning into a big law firm like Wilson, Sonsini. "It's not unconscionable that we chose not to do that."

Johnson is the first to admit that he intends for his lawyers to make more money and work less hard than at other shops. He calls big-company work "grinding" and less creative. VLG never intended to become a big firm. "Big companies need love, too," says Johnson. "Someone has to represent them. It's just not us."

By staying small, VLG can do for clients what it does best: Coach them through their earliest stages. Johnson says he himself now has just a dozen clients, far fewer than a top partner at a traditional firm. For two-thirds of them, he's strictly a business adviser – he bills nothing for his time but gets compensated in equity. Client Donna Jensen, founder and CEO of Startups.com, says she would ordinarily hesitate to give an attorney founders stock. (She gave Johnson only half of what he wanted; she wouldn't reveal the amount.) But she thinks he's worth it. |"I consider Craig to be an honorary cofounder, because he's had such a big impact on my business model."
Even other lawyers acknowledge Johnson's value. "He's probably worth the equity he takes, frankly," says a partner at a prominent Valley firm. "He's very well connected. He's a quick study and has good judgment about whether a company will succeed and its weak spots."
 
 

Larry Sonsini, of Wilson, Sonsini, Goodrich & Rosati, has been referred to as "the consigliere" or "the dean" of Silicon Valley. The Valley was a sleepy suburb when he joined what was then McCloskey, Wilson, Mosher & Martin, in 1966, in Palo Alto. He's the man who boldly pursued high-tech clients at a time when they weren't in vogue, who took Apple Computer (AAPL) public in 1980. Now 59, he oversees a 600-lawyer operation, the undisputed brand name for high-tech companies and entrepreneurs. It was Sonsini's law firm to which Craig Johnson was drawn as a young lawyer.

Sonsini has also reworked traditional definitions of the lawyering role. He learned from his mentor, John Wilson, to get close to clients, to visit their offices, sit on their boards. Today, Sonsini's firm is close to so many of the biggest names in the Valley that it has been sharply criticized for overlooking conflicts in its climb to prominence and riches.

"I was always considered a visionary in this industry," says Sonsini, who laughs that he now seems to have become a traditionalist. Though he doesn't criticize Johnson, he has directed his firm in clear opposition to Johnson's approach. Johnson is excited by the baby company, the idea scrawled on paper that will one day materialize into employees and publicly traded stock. Sonsini wants to build a world-class law firm that will compete with the top New York firms for the highest-end work.

More than 30 years into his practice, Sonsini is determined to build a legacy, a law firm that is something like a Skadden, Arps of the West. For Sonsini, disaster is not being able to service an HP or a Sun. His vision hinges on representing the biggest companies and handling the most complex transactions. That means scaling up, setting up diverse practice groups that can handle everything from a hostile takeover to a sexual harassment lawsuit to an environmental problem.
But environmental law is not sexy today. And environmental law is not as lucrative as a successful startup.

In order to attract young lawyers and keep the older ones happy – and, of course, in the interest of profit – Wilson, Sonsini must pursue its own share of equity plays. The firm invests five or six times more a year in clients than it did five years ago. The value of its shares in 1999 on a per-partner basis was more than the average profits per partner, which reached about $700,000, confirms Mario Rosati, who oversees the firm's investments. When Webvan went public last year, the shares owned by Wilson, Sonsini and members of the firm were worth more than $50 million after the first day of trading.

But the distribution of stock has caused some internal tensions. The firm's rules inadvertently allowed lawyers to almost literally barter their equity in the halls as a way to entice other lawyers to work on their deals.

Here's what happened: Under the firm's rules, when a partner brought a client to the firm with the opportunity to invest, he made 10 percent of the investment personally; the firm invested the rest. But say the opportunity was for $100,000, and the firm wanted to invest only $50,000. The originating lawyer had the option to invest the balance himself. Lawyers have been known to offer their stock to colleagues to try to ensure they will have staff on their deals. "We've seen equity used as a currency," Sonsini says with obvious distaste. "I am hell-bent to eliminate that. We're lawyers, we're not venture capitalists. ... The idea of using stock as a currency to get resources, to me, shreds the integrity of the law firm."

And that's not the only problem stock has presented. Equity works best when not many share it – that's one reason VLG wants to stay small. At Wilson, sharing equity among more than 100 partners is no small task. The fact that attorneys who originate deals can get a bigger personal stake is an obvious incentive to take on lucrative startups instead of big public companies. And it leaves litigators watching as their corporate colleagues get richer. "The more money you make, the more problems people seem to have," Sonsini says, sounding like a village elder. "A lot of partners feel business comes to the firm because of the brand name. Why should [some partners] benefit so disproportionately?"

So Larry Sonsini has been spending a lot of his time lately redesigning WS Investments. All the excess equity would now be put into a voluntary fund that everyone shares in. And Sonsini exhorts his lawyers to remember the importance of the big public client to the firm's mission and reputation. There is talk in the Valley that Wilson, too, is pruning significant numbers of clients, but Sonsini insists, "We're not saying, 'You're a public company ... go away.' That's not happening."
"There are speeches at Wilson about how we cannot as a firm be unable to staff our public clients," says one of its lawyers, who intends to stay, even though she could probably make more money elsewhere. "[Sonsini] is trying to figure out how to hold the firm together in a culture of individualism."

Sonsini admits that his is a"challenging business model." The question is whether some of Wilson's star corporate lawyers will decide to leave to go to a firm that doesn't share with litigators, or one with looser rules about how much a equity a lawyer can keep for himself.
 

Much of what VLG has done today is standard practice in the Valley. Many law firms now seek founders stock in their clients. They all take steps to give their associates bigger shares of the investment pool. It's common for Valley lawyers to turn down business these days and "outplace" clients.

They're all slightly bewildered by what's happened to a practice that, in many ways, is barely recognizable. Many partners now at the helm of Valley firms came of age at a time when they worked for the startup in the hope it would grow into a big company, offering a steady diet of work. Now those same partners find their associates are jumping ship and their own workloads are becoming unmanageable. They fantasize that somehow their big-company clients would simply disappear.

Most lawyers were forced to give up certain myths about their profession some time ago. One of the biggest was that theirs is a "profession" and not a business at all. Competition, the focus on comparing profits with the law firm down the street, did not dominate a lawyer's life 20 or 30 years ago. Venture Law's Green recalls how lawyers at Brobeck, Phleger & Harrison would meet on Thursdays with the president of Wells Fargo Bank, a major client, and talk about the state of the country. "Would I like times like that to happen again?" Green says. "Absolutely. That's just not the world we live in."

The profession underwent profound changes in the 1980s and '90s. It was the era of the leveraged buyout, and no cost went unexamined. Haunted by the bottom line, clients wanted bargains, not relationships. In the old days a client would rely on one outside law firm forever. But increasingly, general counsels of companies looked to farm out their work to different "suppliers," pitting firms against each other. The firms, says one Valley lawyer, "were taught by the clients that they could be replaced."

And it wasn't only between lawyer and client that loyalty thinned. Partners began to jump from firm to firm, eager to raise personal profits, which they were reading about in new lists of "profits per partner" published in American Lawyer magazine. While partnership in a law firm had been the equivalent of university tenure, now firms were even firing partners. Indeed, partnership went from guaranteed security to a high-pressure job. "Rainmakers" – lawyers who brought in clients – were more valuable than the lawyers who did the work.

Now, rainmaking doesn't mean what it used to. There's just too much rain. Scott Dettmer, a founding partner of Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian, says his firm is now turning down 80 percent to 90 percent of the opportunities coming in, "and some of them are pretty decent opportunities."

That lawyers invest in clients is not new, though never was investing the standard way of doing business that it is today. For decades, the Valley's leading firms have taken stakes of $15,000 to $50,000 in their clients. Some even took founders stock in exchange for deferring their fees or giving steep discounts. Today, many lawyers routinely seek founders stock; on top of that, they are making bigger cash investments alongside VCs during private funding rounds. Mark Tanoury, business chair at Cooley Godward, says his firm's stakes are now typically twice previous levels. And discounts are no longer part of the deal. Cooley seeks to hold a 1 percent stake in its clients, post-venture funding, Tanoury says. Such stakes are not uncommon. One venture capitalist says he heard recently of a lawyer asking 4 percent – not for coaching, just drafting the legal documents.
The firms say they need to offer equity to hold onto their people. Law firms, like other institutions, are hemorrhaging personnel to Internet startups. So many of Dettmer's associates and friends at other firms have gone to Net companies that he jokes: "I feel like an endangered species." Whereas 10 years ago associates scrambled to ingratiate themselves with higher-ups in the hope of making partner, today it's the partners who are trying to please the associates. Dettmer's firm kicked off a massive pay increase in January, raising new associates' salaries from about $100,000 to $150,000, including bonuses. Dettmer says that in 1999 his senior associates each took home an extra $80,000 to $100,000 from the firm's investment pool.

The opportunity to invest has become so intrinsic to signing a new client that lawyers act more like venture capitalists when prospective business walks through the door. "When we sit with a group of founders, we spend next to no time talking about legal issues," Dettmer says. "We spend pretty much the whole time going through their pitch, asking about the background of the founders, how scalable the technology is, how to grow the management team."

Even five or 10 years ago, lawyers in the East looked down on this kind of talk. Lawyers, the thinking went among the Sullivan & Cromwell crowd, did not invest in their clients because it could create a conflict of interest. That is still Sullivan's position. But in testimony to the persuasive power of the option, other East Coast firms are changing their policies as they look to set up shop in the Valley. Local lawyers tell of getting calls from prestigious firms in Boston or New York that want help setting up an investment fund. "Equity plays will fundamentally change the economics of law firms," predicts Tower Snow, chairman of Brobeck, Phleger & Harrison. Brobeck made three or four times more investments in clients in 1999 than 1998, says Snow.

While no one in the Valley seems concerned, taking stock in clients is still controversial among traditionalists. There are no ethics rules barring the practice, but the American Bar Association has at least a few task forces studying it. The major concern: A lawyer's financial stake in a client could cloud his judgment – leading him, say, to recommend a spinoff because it would quickly raise the value of the stock, even if it doesn't make long-term sense.

Lawyers like Johnson dismiss concerns over such conflicts. Taking stock, they say, really is no different from receiving huge fees or a big lump-sum payment if a merger goes through.
Conflict or not, a lot of lawyers will likely get sued if the market tanks. During downturns, clients often start suing their professional service firms, says Ron Mallen, a San Francisco lawyer who specializes in professional responsibility issues. Mallen predicts that lawyers could face a slew of claims, including fraud and self-dealing, over their clients' failures. "It's not what the allegations are," he says. "It's the charge that whatever the law firm did was colored by its own financial interest."

That interest is now considerable. One in three lawyers for the more than 500 companies that went public in 1999 held stock in the companies at the time of the offering, according to an analysis of Securities and Exchange Commission records by the ABA Journal. In more than 40 percent of the companies, each holding was worth more than $1 million. In two cases, Wilson, Sonsini's holdings after the first day of trading surpassed $20 million. That came on top of Wilson's normal hourly fees, which are easily several hundred dollars an hour per associate, more for partners. Wilson and the other firms like to point out that their stakes are small; it's just that Internet scales are huge. Indeed, founders of companies still make far more than their lawyers. Larry Augustin, the CEO of VA Linux, held 6.6 million shares of stock compared with Wilson's 102,584. Augustin became a billionaire overnight.
 

Client Speak

How do clients feel about all these changes at law firms? Some would happily turn over equity if it meant someone would return their calls. "You've got these lawyers who are just completely frantic," says one entrepreneur, who spoke on condition of anonymity. He says his incorporation papers from Wilson, Sonsini came back with other companies' names in them, as well as grammar and spelling mistakes.

One young entrepreneur says he'll talk about his lawyers only off the record, fearful that no one will represent him. Before he could even decide whether to give Wilson, Sonsini 1 percent of his company, the lawyer he'd met with called to say one of his partners had just quit and the firm was too busy to take on anyone else.

The rules of the market do not take long to learn. Clients are starting to cough up equity to their lawyers without being asked to, obviously afraid they'll be dropped if they don't. One venture capitalist reasons that "lawyers are demanding equity, but so is every other service provider in Silicon Valley. We'd rather share some equity than slow down time to market."

Others recognize the value that a top firm can give them in securing financing. Jad Duwaik, whose company, Optink, publishes a free weekly e-newsletter on privacy, says he was willing to give up a 2 percent stake of his company to have Mario Rosati of Wilson, Sonsini represent him. "We want to be seen as a player," he says. In exchange for founders stock, Rosati will defer payment until the company is funded. If Optink doesn't get funding, he'll eat the fees altogether.

One Wilson lawyer relates the story of a prospective client who said, "You don't have to be my lawyer. Just put your name on my business plan." For this, the hopeful entrepreneur offered 5 percent of his company.
Yet what an eager entrepreneur does today could come back to haunt him tomorrow. Josh Silverman, founder of Evite, an online invitation company, says that when he was shopping for lawyers, giving 1 percent of his company away didn't seem like a lot. Now that he's running a successful operation, he realizes that "there are employees who work hard for me for four years with the hope of vesting into a fifth of a percent."

One entrepreneur says he plans to try to get financing first, then let the VC pressure his lawyers into backing off on their equity demands. The trick, he says boldly, is presenting "a very hot company. ... It's all about the cute woman – she's got a lot of guys running after her. It's a challenging game."
The more mature company isn't perceived as so cute anymore. Like an overlooked middle child, the midsize public company might have the hardest time attracting a lawyer. Not a marquee name. Not a hot startup. Who's going to want them? "We all have clients, some of the larger ones, that use a lot of resources," says Tanoury of Cooley Godward. He seems visibly pained recollecting some of the calls he's had to make. "You don't have any equity upside. You have to say, 'This may not be a good deal for us now.'"

Though dropping clients is never easy, some suggest that lawyers may be enjoying "payback" for all the unpleasant clients to whom they couldn't afford to say no in the past. But even some accommodating clients are getting the ax. "It's almost like going to your doctor, your dentist, and they say, 'You know what? You're important but I don't have time for you,'" says one Net company lawyer. "It's this shift in mentality."
 

Lawyer Speak

Inside the law firms, the grab for equity, for the hot client, has caused its share of squabbles. At Cooley some of the senior partners have had a hard time making the call to fire clients. At other shops tensions have flared between corporate and litigation partners over the division of equity. Litigators – who share in a firm's investment pool but don't bring in investments – can feel like a tax on earnings to the corporate people. There's talk that some corporate lawyers don't want litigators around anymore because they dilute the value of the stock. And litigators can get snotty about their colleagues' hunger for the latest equity play. "Corporate people have a different approach," says one. "Litigators can't say, 'I'll take this case but you're got to give me some equity.' The environment has become cutthroat between clients and lawyers."

Lawyers can be prickly these days about their reputation. They know clients are complaining about their service, that venture capitalists aren't thrilled about giving them founders stock. When they're being honest, they'll admit that greed has permeated their business just like everyone else's in the Valley, that "loyalty" is a worn word. In fact, they'll argue, law is merely following broader trends – the chase after equity is making it as hard for public companies to hold onto their engineers as their lawyers.

"If the story is greedy lawyers going nuts in the Valley," says one Wilson partner, "to be fair to the legal community here, it's certainly not the lawyers who created the environment. We're just reacting to what's going on in the business community, including our people getting recruited in droves."

Different lawyers speak of this moment with varying degrees of drama. Some say law is undergoing a revolution, others say it's merely a blip. Some predict a law firm will soon go public, that equity will effectively replace cash compensation, that lawyers will do business like Hollywood agents, who get a cut for putting together deals. There's also endless speculation about what will happen if the market tanks. Who will survive?

"If there was no public offering for 10 years," Johnson says, "we'd just go back to doing what [everyone else] is doing. We still charge for our work. We can do just as well. We just wouldn't do so much better."
Since no one knows how long these times will last, lawyers are pretty much improvising as they go. "We all went through a huge pay increase," notes Sonsini. "At the end of the day, what has been accomplished? ... All we did was we changed the economics, but we didn't solve a goddamned thing."

Sonsini calls for calm. "We've got to realize that we're going through a phenomenon here that will correct itself," he says, perhaps as much wishful thinking as prediction. "Maybe the best thing we can do is not overreact."

Bill Simon, a Stanford Law professor who specializes in legal ethics, agrees. "There were economic forces driving the stability of the previous regime," he says. When this market dips, he adds, "lawyers will go back to being every bit as loyal to their clients as before."
 

Source: Susan Orenstein, The Standard, April 03, 2000