Law firms profit from tech IPOs

The flood of high-tech companies going public has raised more than a few boats, but among Silicon Valley law firms, none more than Wilson Sonsini Goodrich & Rosati.

Since the beginning of the year, the Palo Alto, California, law firm has taken at least eight high-tech companies public--including Inktomi, USWeb, and 3Dfx, all of whose IPOs were big news on Wall Street.

With more than 300 of the firm's 465 lawyers working in its corporate group, Wilson Sonsini is the proverbial 800-pound gorilla among its big-firm competitors, which typically devote less than half of their attorneys to securities work. And with strong ties to fledgling start-ups, particularly those with high growth projections, Wilson Sonsini takes more companies public than any other law firm in the country, said Alan Austin, the firm's managing partner.

"We have a lot of companies that come to us when they're ready to go public that say, 'We'd like you to do it because you're the most experienced,' " added Austin. "It's the combination of those two things that leads to the market share--the companies you've grown yourself and what comes to you because of your reputation."

Not that Wilson Sonsini doesn't face fierce competition. Other Silicon Valley firms--including Fenwick & West, Venture Law Group, and Gray Cary Ware & Freidenrich to name a few--also take their share of high-tech companies public.

Austin said that IPO work generally accounts for well under 10 percent of his firm's revenues, a figure that is typical for Wilson's big competitors as well. Still, the business can be lucrative because of all the other legal services that companies about to go public need.

"There's a bell-curve peak point around an IPO," said Mark Stevens, an attorney at Fenwick & West, which, in the last few months has taken Paul Allen's Asymetrix Learning Systems, Verisign, and Exodus Communications public. "It's the unusual company that's a really huge client significantly after the IPO."

For example, prior to going public, companies typically must apply for patents, draft employment policies, and take other steps to get their business in order. Following their IPOs, they must file documents with the Securities and Exchange Commission, and often need legal advice concerning offerings, mergers, and litigation.

The strategy for Wilson Sonsini and its competitors is to hook the client at the IPO stage or earlier, in order to cash in on all the different types of work the company eventually will need.

And they have been cashing in, as times have been good for Silicon Valley firms. According to The Recorder, a San Francisco daily newspaper that follows the legal profession, the average Wilson Sonsini partner earned $555,000 in salary and bonuses last year. Wilson Sonsini's corporate partners bill as high as $400 per hour for some services.

Adding to the cash bonanza is the practice among Silicon Valley firms of investing in the start-ups they represent. Typically, firms hold no larger than a 1 percent stake in any one client, but because the investments are made during early rounds of financing, returns can be significant.

"Historically, the funds have provided returns that exceed those of the S&P 500 so, at least based on historical precedents, they are very attractive," said Scott Dettmer, a name partner with Gunderson Dettmer Stough Villeneuve Franklin & Hachigian in Menlo Park, California. "It also makes the experience as well as the relationship with the client all the more interesting to have an interest in the company you represent," he added.

Dettmer and others are quick to point out, however, that there should be strict limits on when and how much a firm invests in a client.

Attorneys "make really hard decisions about what to talk about in the prospectus and whether the deal should even happen," said Fenwick & West's Stevens. "It's very important for the company doing the IPO to pay cash to their attorneys so they have somebody who doesn't have a vested interest in the deal going forward."