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Silicon Valley corporate boutique Venture Law Group announced Tuesday it will merge with San Francisco’s Heller Ehrman White & McAuliffe. Partners at both firms are expected to vote to finalize the merger by Sept. 9. If that occurs as planned, the merger would take effect on Oct. 1. The decision — which has been expected for weeks — ends the solo run of one of the touchstones of Silicon Valley law. VLG was founded in 1993 specifically to take equity in startup technology clients and share in their stock market successes. But as the technology market morphed from boom to bust, VLG saw a sharp decline in its bread-and-butter work — incorporating startups, helping companies do deals and representing them in venture capital financings. Nonetheless, VLG partner Mark Medearis, speaking on behalf of his firm, portrayed the decision to pull the plug less as a Darwinian result of a tough economy and more as a logical phase in the evolution of the VLG model. “Our goal has been to be on the cutting edge of providing superior client service,” Medearis said. The deal with Heller gives VLG “an increasingly enhanced platform for providing higher levels of client service.” For his part, Barry Levin, the chairman of Heller Ehrman, said the merger would give Heller access to a team of experienced corporate lawyers to help the firm expand its reach among technology companies. The 660-lawyer Heller Ehrman, powered in large part by its 358-attorney litigation team, has thrived as tech players like VLG have been roasted by the economic downturn. Heller has increased revenue by 35 percent since 2000, grossing $354 million in 2002. Peter Zeughauser, a principal of law firm consultant Zeughauser Group, said a merger with VLG is seen as a shrewd move on Heller Ehrman’s part to swell its corporate group with a block of solid, tech-savvy talent. “Heller has been trying for a long time to build its corporate practice,” Zeughauser said. “VLG is a nice way to pick up venture capital work.” As for the VLG partners, Zeughauser said the merger signals the flaws of a business model that emphasized just one aspect of corporate law and shows just how slow emerging growth company practices have become in Silicon Valley. “The deal flow just got too light and you need a more diversified mix of practices or, at the very least, a diversified corporate practice,” Zeughauser said. VLG was one of two corporate boutiques in Silicon Valley founded in the last decade to cater to startups and venture capitalists. The disappearance of one has raised speculation about the fate of the other — Menlo Park’s Gunderson Dettmer Stough Villeneuve Franklin & Hachigian.Robert Gunderson Jr., who co-founded his firm in 1995 to cater to technology companies, said his firm is very different from VLG. He said his firm has focused primarily on giving legal advice instead of also trying to be a business adviser. “We’ve thought of ourselves as a law firm focused on emerging growth companies,” Gunderson said. “They [VLG] were trying to be a lot of different things in addition to being a law firm.” Gunderson said his firm has continued to service its long-standing venture capital, investment banking clients and publicly traded companies. During the boom, VLG shed many such clients. “It’s smaller than it was during the boom, but there is a lot of life left in the marketplace,” Gunderson said. “We’re ex-cited to be in a less crowded space.” VLG was founded 10 years ago by Craig Johnson, at the time the second-biggest rainmaker at Wilson Sonsini Goodrich & Rosati. Within months, more than a dozen Wilson lawyers had followed him.Though forming a new firm is risky, Johnson had made his name as go-to lawyer for Silicon Valley venture capitalists. At Wilson, only Larry Sonsini — the firm’s chairman and name partner — billed more. Johnson envisioned a lawyer-counselor role for VLG in which the partners had a hands-on relationship with just a few key clients and therefore acted almost like a member of a company’s management team. In exchange for the hand holding, VLG got in on the ground floor of the startups, taking common stock for virtually pennies that would turn into millions if the companies were acquired or went public. And as Silicon Valley experienced explosive growth in the 1990s, the formula appeared to be working beautifully. By the end of its first year, VLG had 14 lawyers and grossed $3 million, according to figures VLG provided for a Harvard Business School case study on the firm. By 2000, the firm had reached its peak, grossing $64 million and employing 110 lawyers. The take was so high that the small firm just missed landing among the 200 highest-grossing U.S. law firms of the year. In addition to the fee income, investment returns were said to generate millions more for partners during the boom. Some of the firm’s credits include representing familiar tech names like Yahoo Inc., WebTV Networks Inc. and Cerent Corp. After having to resort to salary cuts, demotions, layoffs and a capital call among partners, the firm today stands at 57 lawyers. VLG partners refuse to divulge current financial data, but lawyers with comparable practices in the Valley estimate the firm’s business must be half what it was at its peak. VLG lawyers will be able to keep their current investments. Future investments, however, will be in conjunction with partners at Heller. Johnson, who scored national attention for his firm during the boom, is currently on leave following a death in his family and was not available for comment about his firm’s merger. However, a comment from Johnson was included in the firm’s statement about the merger. “When we founded VLG 10 years ago, we embarked upon a novel business model, committed to serving technology companies and the venture capital funds and investment banks that support them,” Johnson said in the statement. “We will be the first to marry a dominant emerging company and corporate securities practice with a top-flight, global, full-service law firm.” Johnson — who in recent years has stepped back from day-to-day management at the firm — will be joining Heller Ehrman. But it’s not clear what his role will be. He will not carry the usual responsibilities of a partner, Heller’s Levin said. Instead, he may join as a consultant. Another senior VLG partner, Joshua Green, also will join in a role similar to Johnson’s, Levin said.Once at Heller Ehrman, the VLG lawyers will operate as part of the firm’s emerging growth group. Heller Ehrman will keep its name — but the emerging growth group will operate as the Venture Law Group of Heller Ehrman, Levin said. Heller Ehrman lawyers will be part of that group, but details about how they will be integrated are still under discussion, he said. Heller Ehrman plans to close VLG’s Reston, Va., and Kirkland, Wash., offices, relocating the small teams to nearby Heller Ehrman offices in those areas. Heller will maintain VLG’s Sand Hill Road space in Menlo Park. All of VLG’s lawyers have been invited to join Heller Ehrman, Levin said. In addition, Heller will add a VLG partner to its policy and compensation committees. Levin declined to discuss the status of the offers. Several of the firm’s senior partners, including Donald Keller Jr., are said to be considering other options, with Morrison & Foerster emerging as a lead contender. Keith Wetmore, MoFo’s chairman, declined to comment about recruiting efforts. Keller, who had been the firm’s chief spokesman, did not return several calls for comment. VLG’s decision to merge with Heller caps months of speculation about the firm’s fate. It had been in talks with MoFo as well as Orrick, Herrington & Sutcliffe and it appeared unlikely the firm would continue as an independent entity. VLG and Orrick have had a client-sharing relationship since 1999, and VLG passed on to Orrick clients or work that it couldn’t handle either because the lawyers were busy or they didn’t have the expertise. A merger deal between the two firms never materialized, however. Medearis said VLG will terminate its client-sharing relationship with Orrick once the merger with Heller is decided. The end of VLG was disappointing, but not surprising, for clients like Ron Bernal, co-founder of Growth Networks Inc., which was acquired by Cisco Systems Inc. in 2000. Bernal, now a managing director with Sutter Hill Ventures, said Johnson and Green were valuable to his company and a handful of others he helped launch during the Internet boom. However, he used lawyers from other firms in Silicon Valley, like Cooley Godward, who were just as at-tuned to the needs of entrepreneurs. “Let’s face it, what this shows is that they’re not immune to the market still being tough out there,” Bernal said. “It’s sad to see the change, but we all have to deal with the reality of it.”

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