Larry Sonsini Profiled in Fortune Nov-27-06

I have been catching up on my reading and came across a profile of Larry Sonsini in Fortune’s Nov-27-06 print edition. The article in the print edition is titled “The Man To See In The Valley” but “Scandals rock Silicon Valley’s top legal ace” in the on-line version. It’s part of their “Portraits of Power” profiles, which includes a collection of some of the grimmest black and white portraiture I’ve seen of people who are still alive.

There is an interesting history lesson on how Wilson Sonsini came to be sui generis among Silicon Valley law firms. We pick up the story as Sonsini joins McCloskey Wilson & Mosher as their first associate in 1966.

“So we started to develop the recipe for how to build companies,” Sonsini recalls. The recipe required entrepreneurialism, capital and infrastructure, and Wilson’s law firm was part of the infrastructure. “I was becoming a piece of the recipe,” Sonsini says.

“What I was learning very early on,” he continues, “was that I could build an enterprise too. In fact, I had to.” Wilson and Sonsini both wanted to continue to represent their clients as they grew, rather than handing them off to larger firms when they went public.

To do that, they’d need additional expertise, and Sonsini was put in charge of figuring out which new specialists the firm needed, and then recruiting them. “So I guess I was thrown early on into a leadership role,” he says. In 1973 his name went on the door, and in 1978 the firm, still with fewer than 15 lawyers, adopted its current name: Wilson Sonsini Goodrich & Rosati.

The realization that they could “grow clients” in the turbulent creative destruction of Silicon Valley capitalism followed.

Though the firm represented venture capitalists and investment bankers from time to time, its preference was to represent the startups themselves – a strategy not always understood by its younger lawyers.

Latta remembers when he was an associate in the 1980s being in Sonsini’s office one day when Sonsini took a call on the speakerphone from Bill Hambrecht and George Quist. Their firm was then the dominant high-technology underwriter in San Francisco, and they had called to inquire if Wilson Sonsini would agree to become their regular outside counsel.

“I think I literally got out of the chair and started jumping up and down,” Latta recalls. He was gleeful, he explains, because he thought that now he’d have a shot at making as much money as his classmates who’d gone to San Francisco firms.

“But Larry doesn’t hesitate for a second,” Latta continues. “Immediately he takes this apologetic tone and starts talking about why that’s not a good idea for them. That there are several law firms up in San Francisco that can do just a fine job of representing them, whereas there’s really only one firm down in Palo Alto that can do a good job of representing the companies they want to back. ‘Isn’t my highest and best use for you to continue to do what I’m doing? And if, by the way, that means you introduce these companies to me if you get to them before I do, that would be appreciated.’ It was just brilliant.”

Sonsini explains: “My view was that representing companies enables you to get involved at all stages of their growth. You develop a breadth and depth that makes you a better advisor and a better lawyer. It was also a fundamental part of the business plan. Many law firms at that point were focusing more on the capital markets side, representing investment banks, and to me that left a great opportunity to really develop the other side of the business.”

Investing Creates Conflict

There was also one fringe benefit to representing the companies. Senior corporate lawyers at Valley firms sometimes got opportunities to invest in clients at the venture capital stage. Most startups would fail, but those that went public could pay off handsomely.

Taking stakes in clients, however, created a potential for conflicts of interest. If a lawyer holds stock in a client company, for instance, and then has to decide whether the client needs to disclose information that will cause its stock price to plummet, the lawyer’s judgment might be clouded. Such investing might also trigger internal rifts at a law firm, since only the corporate lawyers were likely to get the opportunities, leaving their partners in other specialties out of a lucrative loop.

So in 1978 Wilson Sonsini set up WS Investments, a fund designed to manage both problems. Each partner’s pay would automatically be docked to create the fund – the deductions were mandatory – and each would, in turn, have a stake in the proceeds.

The article points out that this practice has spread to most of the other major firms that represent startups in their early years. It allows them to convert “billable hours” into sweat equity. There is a brief testimonial from T. J. Rogers as to Sonsini’s strength as an advisor (links added).

When you meet a few of [Sonsini’s] entrepreneur clients – intimidatingly smart, headstrong, combative, abrasive – it becomes apparent that these are not the easiest people to advise. Yet they all seemed willing to listen to Sonsini.

“I don’t take orders well,” says T.J. Rodgers, the founder, chairman and CEO of Cypress Semiconductor. “But taking advice from Larry Sonsini is easy. He’s professorial. He’s nonjudgmental.  ‘You can choose to do this, you can choose to do that, and these will be the consequences.’ So you realize you’re not being forced or pushed into anything. He explains to us why the sometimes frustrating, arcane and inefficient system we have makes sense, or at least made sense at one time, and therefore should be followed.”

The VC investment bubble of 1999-2000 bring WSGR attorneys enormous success but start to fundamentally distort the compensation structure and fee relationship with clients.

In 1999 and 2000, Sonsini says, it became “somewhat of a practice” in the Valley for lawyers to insist on being given investment opportunities in their startup clients as a condition of representing them. He admits that some Wilson Sonsini lawyers did this, and that they shouldn’t have.

It was widely reported that many Silicon Valley lawyers were making more off their investments in clients than from their legal work. According to The American Lawyer magazine, WS Investments distributed $175 million to the firm’s members in 2000. The figure plummeted to $8 million a year later.

WS Investments Bonus Plan is listed on WSGR’s Professional Benefits page, I can’t find a website or set of reports for the plan.

A Wilson Sonsini spokesperson says she doesn’t know where the $175 million figure came from, that it sounds wrong, and that it would be hard to compute a meaningful substitute.

I don’t know who is managing the fund but you would think someone would be accountable as to it’s disbursements. This may not be a question that they have to answer, much less want to answer to a Fortune reporter, but you would think someone would know the answer. Then again…

Sonsini maintains that only very junior partners at Wilson Sonsini – those with salaries then in the $400,000 range – would have ever made more from WS Investments than from their partnership draws. (Wilson Sonsini’s average profits per partner from legal work in 2000 were $835,000, according to The American Lawyer.)

So the implication in this perhaps technically accurate (perhaps since no one can figure out how much was disbursed) is that a bonus of 400K on top of a partner draw of 800K wouldn’t have an impact. I would seem that it was a significant component of all WSGR attorney compensation in 2000 (and probably 1999 and 2001).

OK, so what are some take-aways for entrepreneurs

1. The best attorneys present options and make you aware of the likely and potential consequences of different courses of action, but understand that the business decision still rests with the client.
2. If you allow an attorney to invest (and then re-capture his dollars in (possibly deferred) fees) you may find it difficult to fire or replace the attorney. Make sure it’s someone you want a long term relationship with: there is no such things as “free legal advice.”
3. Work with advisors who are willing to be transparent about their fees. If you were a prospective WSGR client, the answers that they gave here should be unacceptable. Understand why the code of ethics for accountants prohibit similar fee arrangements.