Forget the hourly fees. What lawyers really want in these high-technology boom times is to ride their clients' coattails to riches. And increasingly, that road leads to the stock market.
As salary wars rage in legal offices from Boston to Silicon Valley, U.S. lawyers are embracing a new way to profit from the success of their clients. Many are taking ownership stakes in customers -- sometimes instead of fees -- in hopes of reaping big returns on clients they usher from startups to initial public offerings (IPOs).
The practice is turning lawyers into venture capitalists, and it's forcing many to rethink the way they do business, as ethics and objectivity run headlong into greed and competitive pressures.
"Taking an equity position is another way of telling your client you believe in what they're doing," said William Zucker, a partner at Gadsby & Hannah and head of the Boston law firm's new technology group. Working for a young, cash-poor entrepreneur, he added, requires "recognizing that some of the reward will be down the road. There's no guarantee."
Most lawyers contend that entrepreneurs want them to invest in their venture. Young companies often need the money, they say, and it's a vote of confidence. Lawyers in California regularly invest in clients. Ad agencies and consultants are getting access to client IPOs, too; accounting firms such as Arthur Andersen have set up venture arms to get in on the action.
Even on the East Coast, individual lawyers have been investing informally in clients for years. An attorney working on a deal may be invited to invest $25,000 (U.S.) or $50,000 in a company that's going public. Venture capital firms will often invite their lawyers to invest small amounts along with them during, say, a $20-million infusion into an Internet company.
The controversy creeps up on lawyers when they invest directly in clients. At issue is their objectivity.
Can investors be sure all of a company's risks are divulged in a stock-offering document that was drafted by lawyers who own part of that company? If the business is ever sued, will the lawyers be named as defendants because of their ownership stake?
Many lawyers feel the conflict is no greater than it ever has been with other clients. In a contingency lawsuit, for example, lawyers earn a percentage of their client's winnings in a case. They are rewarded for representing the client well.
So, do lawyers deserve a piece of the action when clients go public?
John LeClaire, co-chairman of the private equity group at Goodwin Procter & Hoar, Boston's biggest law firm, says they do. Companies in the startup phase get very close to their lawyers, he said. Lawyers help make introductions for them, and they draw up documents from incorporating to taking on venture investors to filing with regulators to go public.
"You go on the road with these people. . . . You live with the ups and the downs of these people like your family," Mr. LeClaire said. As for the investment return, he added: "It's all 16-hour days and a lot of hope."
But at the same time, entrepreneurs need to be mindful of giving away chunks of their company to everybody who walks in the door.
Advertising executive Matt Devine is one of William Zucker's clients at Gadsby & Hannah. He and his brother are launching a business-to-business Web site ( Chefmarket.com). They're building a Web community where chefs can be in contact with peers, food sellers and other restaurant-service people around the world.
Mr. Zucker's law firm wants to invest in the company.
Mr. Devine said he's paying the firm's legal fees, and he's not looking for a free ride. He said Gadsby & Hannah is doing their legal paperwork and "helping us navigate our way through the financial area, sourcing investors."
Is Mr. Devine willing to sell stock to his lawyers? That's still up for negotiation, he said. "If they're successful in helping us land some of this financing, yes."
Mr. Zucker's firm has been taking equity stakes in clients for only about nine months. Many other firms are beginning to dive into the practice, too. But the phenomenon is quickly picking up speed.
Weary of watching clients in hot technology businesses amass fortunes while they earn only the fees of hired guns, some lawyers fret that they're being left behind. Others are jumping ship to become legal counsels to hot companies.
Law firms increasingly see taking small stakes in clients -- and running those investments as a venture fund -- as a way to offer bigger incentives to partners and to attract new associates.
At Goodwin Procter, partner David Henken runs a multimillion-dollar venture capital fund, the result of investments in clients.
"From the clients' perspective and ours, this is a complete alignment of interests, rather than a conflict," Mr. Henken said.
Other Boston firms, such as Nutter McClennen & Fish, are wading into client investments more slowly. Managing partner Michael Mooney said he's mulling the ethical issues related to the practice, as well as complications that need to be sorted out, such as taxes and how to spread the value of such investments among partners and others at the firm.