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 © NLP IP Company, Monday, August 30, 1999 This article first appeared on Cal Law on August 16.
A Break From Billables
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 B radley Handler was a second-year associate at Cooley Godward when he got a telephone call that changed his life. It was 1997, and Internet start-up eBay Inc. was looking for an in-house counsel. "As a second-year associate you get five to 10 headhunter calls a week," Handler says. "I had a policy never to call them back." But on that day, he happened to pick up the phone and was intrigued by what the recruiter said about eBay. "I thought it was a new and revolutionary company," he says. He joined eBay as corporate counsel that October. Eleven months later, the San Jose company went public, and Handler reaped a windfall in stock options. While he won't divulge his holdings, the company's stock price soared as high as $234 from its initial price of $18 per share and underwent a three-for-one stock split in March. As an insider, Handler's shares likely were obtained for less than $18 each. The stock was trading at about $130 last week. While several associates have had similar experiences moving in-house, the majority can't count on such huge luck: "For everyone that wins, there are probably a dozen or two that take a pay cut, and their stock options are never worth anything," Handler says. Nevertheless, young attorneys remain eager to join a new California gold rush to start-up technology companies. Associates' perception of a pre-public Internet company -- or a pre-public company generally -- is that "it's better than sex, better than food, better than eternal life," says recruiter Marty Africa. "Associates are turning down companies that have been public for six months for those without inside bathrooms." The associate flight is putting enormous pressure on firms already so stretched for resources that they routinely turn work away. And as their colleagues leave, those left behind endure an ever heavier workload. Ruing their lot, many of the remaining associates are looking for a company post of their own. Partners acknowledge that associate attrition is a huge problem and are boosting salaries and offering associates a stake in investment funds and other perks in an effort to keep them home. But associates say in-house positions offer the potential for overwhelming financial rewards that firms can't provide. "It's the No. 1 topic at lunches," says Don Oppenheim, a consultant at Altman Weil Inc. For some firms, "it's as close as they will get to a disaster." While the loss of associates to in-house positions is nothing new, the Internet stock boom of the past year has increased the pace of defections. Partners, as well as associates, have answered the call of technology companies. But the associate drain has been much bigger. Jason Bucha, who was a third-year associate at Wilson Sonsini Goodrich & Rosati when he jumped to Lucas Digital in February 1998, says start-up companies often work more closely with junior attorneys than partners and turn to associates when they are ready to hire in-house. Bucha is associate director of legal and business affairs for Lucas, a private company in San Rafael that provides visual effects and audio post-production for the entertainment industry. And such associates offer another virtue: affordability. Some companies "can't afford to pay a general counsel salary so they take fourth- or fifth-year associates," recruiter Avis Caravello says. For example, eBay hired Handler as its first corporate counsel and a year later brought in Cooley Godward partner Michael Jacobson as general counsel. Richard Climan, a partner at Cooley's Palo Alto office, says the success of Handler and Jacobson "helps explain why we've been hit particularly hard" by associate defections. Jacobson, who joined eBay just before the company went public, was given the option to buy 250,000 shares of stock at $15 per share. The stock soared to a high of $234. Even after a huge drop in value, Jacobson's initial batch of options is worth nearly $20 million, without taking into account the stock split. Climan says the experience of a few "distorts the risk-reward calculation and tends to give associates the impression that smashing success is more commonplace than it actually is." Yet big money through stock options isn't the only draw. Associates say they are attracted by the diversity of work, increased responsibility and closer involvement with one company. "You have a more diverse role and set of responsibilities in many of these companies," says Adam Wegner, general counsel at Exodus Communications Inc. Wegner was an associate at Fenwick & West when he moved to Exodus, which provides Internet systems and network management services, in July 1997. He too struck gold when the Santa Clara company went public eight months later at $15 per share. The stock was trading at about $85 a share last week. EBay's Handler added that the greatest advantage of working in-house "is being able to become completely integrated with a client." By contrast, as an associate "you come in at the late stage [of a project] and are a scribe, more than anything." Recruiters and attorneys say the explosion of new companies is allowing associates to avoid trudging down the seven-year path to a partnership. "Associates are taking [law firm] jobs in the Silicon Valley to hone their skills to be marketable in-house," Caravello says. Firms are "becoming a stepping stone." Some attorneys are bypassing firms altogether. EBay hired Scott Shipman as a part-time clerk between his second and third year at the University of Santa Clara School of Law. He had interviewed with Cooley, Fenwick and Wilson Sonsini but wasn't hired. One of his professors, Cooley associate Eric Goldman, suggested that a friend of his -- Handler -- had gone to a small Internet company and could probably use an intern. Shipman soon became something of a legend among students. Going in-house "was my dream come true," Shipman says. "I had thought it would take 10 years." Stories like Shipman's have helped spur the associate exodus to in-house positions. And their departures are creating anxiety among partners at the big technology firms. "It's a huge problem," Brobeck, Phleger & Harrison chairman Tower Snow Jr. says. He notes that Brobeck has lost at least two dozen associates to clients in the last 12 months. Each departure costs the firm on average $200,000 in recruiting and training costs, Snow says. Fenwick & West partner Greg Sueoka noted that Fenwick has lost several lawyers to its major clients, including Intuit Inc., Sun Microsystems Inc. and Excite@Home. Associates say "'Fenwick is the best firm on earth to work for, but I'm going in-house,'" Sueoka says, noting that he's heard "that speech a dozen times." Wilson Sonsini, Silicon Valley's biggest technology firm, also has been hard-hit by associate departures. Of 324 Wilson associates listed in the 1998 Martindale-Hubbell Law Directory , 96 have left the firm. Former Wilson Sonsini attorney Brandyn Criswell says that after a year and a half at Wilson she was the most senior associate in the new media practice group, which included one partner and six associates. "Everyone left to dream jobs," she says. "Associates get offers no sane person could refuse." Criswell, who had a finance background and an M.B.A., became director of strategy at CNet after a two-year stint at Wilson. Other Wilson Sonsini alums have landed jobs at LookSmart Ltd., Centraal Corp. and Buena Vista Internet Group, a subsidiary of the Walt Disney Co. Wilson Sonsini managing partner Alan Austin says he takes the defections in stride: "I wouldn't make too much of it. If you look over a period of time attrition goes up and down. Right now it's in an upward" mode. Partners also say there is a silver lining to associate movement in-house: It helps strengthen ties with clients. "You grin and bear" the loss, Brobeck's Snow says. "You hope you have cemented the relationship and they [the associates] feel a little guilt." While the number of associates moving in-house may subside, some attorneys and consultants say the issue reflects underlying problems with the structure of law firms. "The 19th century model doesn't work now," Snow says. "Why would a really intelligent person go into a firm if they can have just as challenging work and make a zillion dollars more at a company or venture capital firm?" Snow says firms have to narrow the economic disparity by offering investment funds. He also anticipates that firms eventually will go public. Firms "need capital to grow and to pay" their attorneys, Snow says. And they are appealing investments since they offer "predictable revenues and profit growth." The current economic model "requires a lot of leverage off associates," says John Place Jr., general counsel at Santa Clara's Yahoo Inc. "My sense is that associates don't want to be leveraged anymore." Place says firms need to address associates' desire for a balanced lifestyle as well as better equity and compensation. Cooley, Wilson, Brobeck, Fenwick, Venture Law Group and Gray Cary Ware & Freidenrich now offer associates a stake in their investment funds. However, associates point out that it takes a long time to see a return on such investments, whereas stock options often provide more immediate rewards. But Altman Weil's Oppenheim suggests that focusing solely on money may be shortsighted. He says compensation is just one element in a series of associate concerns. Oppenheim says firms "have to get into the heads of young people" who look at partners and say "'That's not going to be me.'" He says associates dislike tiered partnership and the attitude in many firms that partners are simply employees. But Oppenheim says a primary reason for the exodus in-house is burnout. Caravello agrees: "The No. 1 complaint" among associates going in-house is firm lifestyle. While "they work 24-7 at firms," she says, they generally are not expected to work weekends at in-house jobs. Most of the former associates interviewed for this article say their workload did not decrease when they went in-house, and in many instances it increased. However, they say they felt liberated from constantly watching the clock and having their lives measured by the billable hour. But moving in-house can have definite drawbacks. Attorneys can feel isolated and overwhelmed with a range of issues outside their expertise. Karyn Smith left Cooley as a fourth-year associate to become vice president and general counsel at juice maker Odwalla Inc. But after a couple of months she jumped back to Cooley: "I wasn't suited to being a general purpose lawyer," says Smith, who is now a first-year partner. She also says she missed working with other professionals. "I didn't have colleagues down the hall to bounce things off of." Caravello contends that many associates have a misguided notion about in-house practice. "So many attorneys come to me and think as a career path they can go far in-house. But it depends on the company." With a large company there is little upward mobility, and a start-up may not take off. And the in-house plunge can be a shock to the system after the generally ordered world of a firm: Some fourth- or fifth-year associates "are suddenly in charge of all the legal matters of the company," she says. "I see people take positions where I know they are in over their heads." Jamie Chung's experience was different. She had senior attorneys above her when she joined Pacific Telesis Group in 1994. She had been a fourth-year associate at Cooley, and after two years returned to the firm. She is now a partner in the San Francisco office. Though she values her time in-house, Chung says, "It's easier to move through the ranks at a firm and have a more diverse experience." While the position at Pacific Telesis initially provided a higher salary than Cooley, Chung says firms boosted pay substantially during her time away. So she actually experienced a pay hike when she returned. Part of the problem for associates who jump to high-tech start-ups is that employees generally can't exercise their stock options for six months after an initial public offering. So a stock that may start at a high price could tank before an attorney has a chance to sell it. Nevertheless, attorneys may see moving in-house as a no-lose situation. Regardless of whether they strike gold, they can build on their experience and return to firm life. While Yahoo's Place understands the appeal of in-house positions -- and regularly recruits from firms he does not work with -- he hopes firms hold fast through the current turbulence. "There is something noble and societally important to have talented professionals provide services to their clients," he says. "I would hate to see that diminished."
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| Brenda Sandburg is a staff writer at The Recorder , a California Law Week affiliate. |