|
The technology boom has created an explosion of legal work that large Silicon Valley firms are unable to handle. That's left the door open for outsiders and boutiques, like White & Lee.
The new economy has flooded Silicon Valley with legal work. With big Valley firms barely keeping their heads above water, out-of-towners and boutiques are soaking up the technology overflow.
An executive from a Silicon Valley start-up was shocked when he talked to Wilson, Sonsini, Goodrich & Rosati - the region's leading law firm - about the possibility of hiring the firm. If the firm were to represent his company, a Wilson partner said, only 20 percent of the work would be done by a partner, recalled the executive. The rest would go to associates. And the firm wanted 3 percent equity in the company. Finally, the Wilson lawyer said, the firm's turnaround time on contracts could be up to 30 days. In Internet time, a new business could easily die in a month. The executive, who asked that his name be withheld, appreciated the candor of Wilson Sonsini's attorneys. When it came time to hire his lawyers, however, he chose a firm outside the Valley.
Another Internet client, George Northup, chief financial officer of San Mateo's LiveCapital.com, decided to use small firms for some of his company's work. "You get the best minds at work and the principals of the firm," he explained, as opposed to "a first-year associate who is learning at our expense."
Legal work has become so abundant at Silicon Valley's large firms that they are turning clients away - opening the door to the region's feisty start-ups of the legal persuasion. They are happy to accommodate with more reasonable prices and a culture more akin to that of start-up companies. Small firms easily handle the most basic corporate work, like drawing up incorporation papers. As businesses grow, more complicated work in securities, intellectual property and employment issues crop up. While big-firm lawyers send increasing amounts of all those types of assignments their way, they tend to draw the line at labor-intensive projects like initial public offerings or multistate lawsuits.
For start-ups, going to a big firm can be a mixed bag. While big Silicon Valley firms have the reputation of being more than just law firms - their connections to venture capital and investment bankers often lure start-up companies as much as their legal talent - some clients complain that they can't get the level of attention they want. "There comes a point where you just can't give them the service they deserve," says Laurie S. Hane, a partner in the business department at Morrison & Foerster in San Francisco. "The demand has exploded, and we just can't keep up with it."
So the big-firm lawyers are calling in their small firm colleagues for help. Under special circumstances, the big-firm lawyers are even able to retain clients while small-firm lawyers take on extra work.
Terry Kelly of Palo Alto's Ritchey, Fisher, Whitman & Klein, a 20-lawyer half-litigation and half-transactional firm, recalled how a partner in his firm agreed to handle a "follow-on public offering" for a large firm's client. The large firm's partner just didn't have time to do it, they said. The original firm - which Kelly declined to name - kept the client, but lost out on helping with the relatively small deals by big-firm standards. According to Kelly, the deal was valued "at least several million dollars."
This splitting of a client is "an extreme example," says Kelly, of how busy big firms are.
However, it may be on the rise. Some corporate and intellectual property attorneys at small firms and non-Silicon Valley-based firms say that lately they've heard clients griping about the lack of responsiveness from attorneys in the Silicon Valley's big firms. "People aren't getting their phone calls returned from Peninsula firms," says Caroline Mead, co-chair of the intellectual property practice at Graham & James in San Francisco. Although her firm is hardly a small one, its base outside the Silicon Valley fray creates a sense of distance from Peninsula-based firms.
Part of the problem is that clients find that large-firm partners are swimming in work and that associates end up handling many tasks. Mead says that clients represented by firms in Palo Alto and Menlo Park "are getting second-year associates thrown at them for a big-issue question." Some of these clients, who feel as if they "have fallen off the radar screens of lawyers" at large Silicon Valley firms, come to Mead, practically begging to be represented. She takes a lot of intellectual property work from such clients.
Event clients who stick by large Silicon Valley firms for their corporate work may not be thrilled with the firms' other departments, some lawyers say. "Corporate and securities lawyers in big firms are unable to command a lot of responsiveness from other groups in the firm," says Charlotte Salomon, an intellectual property attorney who has her own practice in Pleasanton, called LawTech. She believes that part of this problem may stem from a lack of loyalty to firms on the part of both clients and lawyers - who sometimes hop from firm to firm without developing relationships with other partners.
"Clients have said, "I love my securities guy but every IP lawyer they sent me was a bozo or never called me," she explains.
Small firms and sole practitioners offer an antidote: returned phone calls. Clients who go to Palo Alto's Jotham S. Stein, a business and employment counselor and litigator with a solo practice, "know they'll get somebody who's going to call them back and give good advice," he says.
An additional source of dissatisfaction with large firms is their high price tag. Big firms charge high hourly rates as well as requiring equity from most start-ups. Smaller firms generally have lower hourly rates. Kelly, for example, noted that his hourly rates are much lower than those of a similarly experienced partner at a large Silicon Valley firm, closer to those of a junior partner. Greg Beattie of the 20-attorney Bay Venture Counsel in Oakland points out, too, that "billing rates are not as high" at small firms like his. Exact numbers were not available.
The issue of expense may hit particularly hard with intellectual property work. Salomon says that the price tag issue may not be as apparent with securities work, because clients pay fees when they close their financing deals, "so it is a lot easier to bear." When clients have a wad of cash from their financing, they don't mind giving a piece away. It's entirely different when they have to write out a check every month.
But clients see big firms as "perhaps too expensive" for projects outside securities. Salomon's work is more cost-effective, she says, because of her low overhead and lower billing rates.
Another selling point of small firms is that they do not necessarily require chunks of equity as large as those aggressively pursued by big Silicon Valley firms.
Many large firms ask for the option to buy 3 percent or more equity in the companies they represent at reduced rates. Brobeck Phleger & Harrison, for example, may require up to 5 percent equity in its start-up clients, according to partner G. Larry Engel, who works in the San Francisco office. The amount depends on many factors. "It's a complex calculation based on lots of different circumstances. It's negotiated in each situation, in part depending on what they really want from us," Engel says. "The greater the expected time commitment, the greater the risk situation on collecting fees, the greater the equity" requested.
There are small firms that require nearly as much equity as large ones do. David Lee of the 10-attorney Menlo Park firm White & Lee, which specializes in the corporate representation of start-ups, confirmed that his firm's policies are similar to those of the big Silicon Valley firms.
But most firms limit the amount they ask for, which helps make them more attractive to some clients. The smaller firms or sole practitioners don't necessarily have the clout to demand high levels of equity. While Beattie of Bay Venture Counsel says that his firm does take equity in its clients, it doesn't require as much as large firms do. His firm doesn't have a fixed policy. "Different partners can cut different deals with companies," Beattie says, but the amount adds up to less than the standard 2 percent or 3 percent at larger firms. Salomon explains that she doesn't normally require equity from her clients, although she has started asking for it more often because she sees her colleagues at large firms insisting on it. Stein says he only sometimes takes equity.
Some clients may also feel more comfortable in the setting of a smaller firm. While small firms certainly don't have a lock on entrepreneurialism, the feel of a 10-attorney office is noticeably different from that of a 500-attorney office. The offices are more intimate. The contact is more personal. And lawyers who have split off from large firms to join small practices or form their own have a sense of what it means to start a company.
Also small firms can be more welcoming of infant companies -sometimes even those with just the germ of an idea. Big firms often "require that the company is already funded and has management in place," says Lee of White & Lee. They pass the clients who don't match that "profile" along to him.
"The big firms have found it increasingly difficult to grow small start-ups," Lee says. When big-firm lawyers have to choose between focusing on huge IPOs or answering an entrepreneur's question, the smaller matters can fall by the wayside, he explains.
Kelly of Ritchey Fisher just took on a client with little more than a two-page business plan. "It's very raw," he says, chuckling, but it's the embryo of a new company.
Kelly makes a practice of helping clients who start small, and who sometimes have to struggle to get their businesses started. He says he's not in it for the money, and can take a risk on clients living on the edge. He recalls one set of entrepreneur clients five years ago who were "up to their 16th version of a business plan before they got financing." Kelly continued to work for them - while the company's founders "were living on credit cards" - accepting the risk that fees might never be collected. The company eventually went public and they're "living happily ever after."
In a sense, small firms offer the best of several worlds: they're not only less expensive and often less time-constrained, they also boast lawyers who've had big firm experience. Salomon, for example, left the Los Angeles office of a large firm, Mayer Brown & Platt, in 1990.
Both Lee and Beattie, corporate attorneys who pick up a lot of work from big firms' overflow, started their careers at Cooley Godward, where they were partners. Stein, in turn, was a securities litigator at Wilson Sonsini for nearly two years.
These lawyers are often the first people to hear about overflow clients and matters. Salomon gets some referrals from a law school classmate who's a partner at Morrison & Foerster - and even more from other big-firm alumni who've gone in-house at technology companies. Lee and Beattie get frequent calls from Cooley attorneys as well as those at Wilson Sonsini, Gunderson Dettmer and Fenwick & West. Stein gets clients referred from Wilson Sonsini, Morrison & Foerster and Gray Cary Ware & Freidenrich.
The number of calls seems staggering. Lee says he gets around 300 referrals from big firms per month. It's been like this for at least three months, he adds. Lee also hears "directly from entrepreneurs who've talked to big firms," but who either have been turned away or didn't like what they heard.
According to Kelly, Palo Alto's Ritchey Fisher regularly receives referrals from Cooley, Wilson, Fenwick, Gray Cary, Gunderson, Venture Law Group and others.
Even a sole practitioner like Stein is getting up to 15 referrals per month.
With all these hand-me-downs floating around, attorneys don't seem overly concerned they're only being referred second-rate clients. Lawyers point out that clients being referred out from big firms have already met certain standards. In the past, there typically was "a little bit of stigma attached to a client that gets kicked out of another law firm," says Beattie. But not so in today's booming legal market. "There's nothing damaged about the goods that are being passed along among lawyers these days," says Beattie. "Typically those people pass through screens at other firms" which assure that "they are good clients," he adds.
Clients that Bay Venture Counsel has gained this way include some household names: Mitsubishi was referred, Casio needed some "strategic" work done and Z DNet was also referred for "a sizable chunk" of legal work, Beattie says. Beattie's firm, like many small firms and sole practitioners, isn't always the client's sole legal representative. But it has been able to serve many of his client's legal needs.
At times client attitudes pose more of a problem than their quality. Clients who wanted Cooley, Fenwick or Wilson might feel slighted when they get a small firm. "I don't want to be somebody's second-string lawyer," Beattie says, and if clients remain disappointed that they can't have the big-name firm, he doesn't represent them.
Not every type of work is handed off to smaller firms. Some small firms and sole practitioners acknowledge that they don't have the capacity to handle all a company's legal work. They lack the standing armies of associates large firms maintain.
Small firms seem to be aware of their limits. Stein says he may not be able to take on "a multistate patent case" but can handle "90 percent of what small high-tech clients need." His practice spans employment law, business and securities law and even some intellectual property law. He adds, "I have enough experience to know when I'm not the right lawyer they need" and sends them to larger firms.
Although Bay Venture Counsel handles mergers and acquisitions in the range of $10 million to $50 million and a few IPOs, other practitioners say they don't do that type of work. They don't always have the necessary hands, and in addition, big firms are more reluctant to give IPOs away.
Lee of White & Lee explains that "we send them back to Cooley" for public offerings or merges and acquisitions. Instead, White & Lee concentrates on securing financing and supporting the growth of its clients.
"I think it's fair to say big firms have a lock on a lot of the IPOs," says Salomon.
Certain big firms do have something that small firms lack. In addition to the plethora of associates at large firms capable of handling IPOs and the experience of firm partners, a key reason why the big firms still attract so many entrepreneurs has to do with their networks of connections. As one client explained, at the premier, large Silicon Valley high-tech firms, "partners just have a tremendous network of contacts within the venture-capital community, as well as the investment bank community and incredibly wealthy private investors-the angel investors." This feeling of getting more than just the resources of a law firm keeps clients coming back to the large Silicon Valley firms.
Those clients who have taken work to small firms don't always paint a rosy picture. Clients have found that lawyers at some small firms don't have the background to work through complex deals. Simple contracts young companies make may be fairly straightforward, but more sophisticated types of alliances or agreements can pose more problems.
"For day-in and day-out things like vendor contracts, it's a perfect fit - it's not rocket science," says one client who worked with a small firm. "But "a more complicated co-branding agreement was beyond their capability," continues this client. This company, who requested anonymity, used a firm without a mergers and acquisitions practice. The business eventually found a larger firm.
That's why certain clients have stuck with big firms for large deals and major matters, while going to small firms for work that doesn't require as many bodies or that demands a particular expertise.
You could hardly find a more desirable Internet start-up client than LiveCapital.com, which provides an online marketplace where small businesses can obtain financing. It's backed by gold-ribbon venture capitalists Kleiner Perkins Caufield & Byers and plans to go public in the next year.
The company is represented by six law firms, according to chief financial officer Northup. While it has hired two large Valley firms, Cooley and Fenwick, to do its securities, contracts and intellectual property work and has been satisfied, it has looked farther afield for other matters. A small firm, Buell & Berner of Larkspur, has picked up some of the company's labor work. So has Stein of Palo Alto, a sole practitioner who was consulted on issues of executive compensation and equity, Northup says.
"They had the bandwidth and the eagerness to do the work for us," explains Northup. He says he's glad to farm out "specialized and discrete work" to small firms "hungry" for it.
"The major firms have the horsepower to do a big deal or a big financing," Northup points out. "A smaller firm just doesn't have the horsepower. But on smaller, discrete issues you can get help" from small firms and sole practitioners, he says.
Some small firms say even they are filled up with work. To gain more capacity, some are turning outside their own offices for help with tech work. Clients would even consider "going out of the area to do tech work," Lee says.
Lee, who was not taking on new clients when he was interviewed, alluded to a possible alliance with a firm in Oregon. "We've been developing a relationship with a firm in Portland, and old established firm that does tech work" and has around 60 attorneys, but that has not specialized in that field. Lee points out that "given how busy people are in the [Silicon] Valley, we're having to look outside the [Silicon] Valley... for some additional bandwidth."
Some Bay area technology attorneys are banking on companies seeking out cheaper representation that also is backed by big-firm body counts from large, non-Silicon Valley firms. Tom Armstrong, a one-time Cooley Godward attorney who worked with Bay Venture Counsel for 10 years, moved to Duane Morris & Heckscher's San Francisco office this March. Duane Morris' home office is in Philadelphia, where it has hundred of attorneys. The firm also has offices on the East Coast and in Chicago and Houston. Armstrong says the lawyers in Philadelphia and other cities will provide vital support for the work he'll do for tech clients based in San Francisco.
"With the technology, you don't have to be right next to the client to get work done," he says. "A lawyer working in Philadelphia doesn't cost as much as lawyer working in Palo Alto - the overhead is less. And clients aren't totally immune to price," Armstrong says.
One client agrees that quality representation for local Internet and technology companies can be found far afield from the Bay area. After talking to local firms, Mucho.com, a Lafayette-based Interned company, eventually turned to a large Chicago firm, Jenner & Block, which doesn't even have a California office and lacked experience working for Internet companies.
The company's executives were encouraged by the firm's desire to work with them and their undemanding attitude. "They didn't say you can't talk to us without giving up a piece of your firm," chairman and chief executive officer S. Cash Nickerson -who is a former Jenner partner - recalls.
"We're kind of a novelty for them," says Brad Triebsch, managing director of wholesale strategy for Mucho.com. But Triebsch thinks that Jenner's attorneys rival those in the Silicon Valley, despite their newness to the Internet field. "They're certainly as talented as a Wilson or a Cooley, but they're just not inundated," he says. "We get all the partner time we need."
The firm flies out its attorneys from Chicago to meet with Mucho.com's management. One week last month two partners came out, the next week two associates, Triebsch says.
"Jenner's hourly rates are significantly less, and when you're paying less, you can afford higher levels of expertise," says Nickerson. "Travel and hotel expenses are still significantly less" than the price of a major Silicon Valley firm, and "the accessibility" is much greater.
Although at first some were skeptical about hiring a Midwest firm without much Internet background, the company's been happy with its decision. Nickerson thinks working with Chicago attorneys means his lawyers' vocabulary hasn't been drowned in "Internet-speak."
"The reality is it's been very refreshing," Nickerson says.
|
