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Pity the poor Silicon Valley corporate lawyer: These days, it’s a lot harder to get rich. After several years of spectacular returns, the bottom fell out of their client equity portfolios last year. Just two years ago, Valley firms saw a 2,700 percent increase in the value of their investments in clients and were poised to pull down $417 million in stock at the end of 1999. But in 2001, the seven largest securities firms in the Valley saw the value of their combined holdings drop 93 percent. At the end of the year, they were looking to divvy up just $6.55 million in stock from newly public clients. The dismal performance of their stock portfolios is making even the most bullish Valley lawyers rethink their investment stances. Initial public offerings are in the tank and mergers and acquisition deals help the bottom line but not nearly enough. “We probably got a little ahead of ourselves in the excitement of 1998, ’99,” said Mario Rosati, the Wilson Sonsini Goodrich & Rosati partner who oversees the firm’s investment funds. Wilson Sonsini was one of the luckier law firms with its investments last year, based on documents filed with the Securities and Exchange Commission. The documents lump together the equity stakes held by the law firm and individuals at the firm who also own stock. Wilson Sonsini and individuals there held stock in all six of the clients the firm took public last year, and the stakes were worth $3.55 million on Dec. 31. At the same time, Venture Law Group’s stake in one client was worth $1.25 million. Fenwick & West owned stock worth $1.76 million. The four other tech firms that traditionally reap IPO profits — Cooley Godward; Brobeck, Phleger & Harrison; Gray Care Ware & Freidenrich; and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian — came up empty. Two other firms that more recently began taking equity in clients did a little better. Pillsbury Winthrop and some of its lawyers bagged a hefty $4.08 million stake off one client — Magma Design Automation Inc. Orrick, Herrington & Sutcliffe owned a stake in its one IPO valued at $314,900. The IPO stock holdings show just part of the picture, however. Firms typically get a big payoff from mergers and acquisitions of not-yet public companies, cashing out their stakes just as venture capitalists do. In the case of Wilson Sonsini, M&A deals comprised the bulk of the $8 million the firm’s investment fund distributed to partners and other investors, Rosati said. The same holds true for VLG, the most aggressive among the Valley firms in taking equity in clients. The firm’s investment fund distributed $7 million to its partners last year, mostly from M&A deals, said Donald Keller Jr., a VLG partner. “Our cash revenues were down, but our investment returns were reasonable in what was otherwise a difficult environment,” Keller said. “Some of the companies we invested in turned out well, even in a down year.” The firm’s investments took a tumble like the stock market, however. In 2000, the firm’s fund paid out $35 million to its partners, Keller said. In 1999, the fund paid out $15 million. Despite the 80 percent decline in the stock holdings for partners, VLG is sticking to its model. The firm takes stock in almost all of its startup clients, and partners — along with associates and staff — derive a significant portion of their salaries or bonuses from the firm’s investments. Last year, the firm’s associates and staff shared $1 million, Keller said. In 2000, they shared $2.5 million and in 1999, they divvied up $400,000. The partners at VLG see last year as a test of its business model, and they think the firm passed, Keller said. “If we can achieve those kinds of returns in ’01, we’re confident of our model,” Keller said. Firms put the brakes on making new investments last year. For one thing, venture capitalists made fewer investments for the firms to piggy-back on. “We took a more cautious approach,” Rosati said. Wilson Sonsini slowed down its investment pace last year, taking equity stakes in about 100 clients, roughly half the number of new investments in 2000. The pace matched that of years before the boom, Rosati said. “When I look at the level we traditionally invested at, we’re back to those levels,” Rosati said. “Back to what you would have expected in 1996, ’97.” Despite the dip in activity, recent arrivals to the practice say they haven’t soured on taking equity in clients. Jonathan Joseph, the Pillsbury partner who administers the firm’s 4-year-old investment program, said the deal flow had improved in the latter half of last year. “Valuations were much lower and oftentimes, we felt the business plans were better thought out,” Joseph said. The firm didn’t invest as much capital last year as partners had planned, but that hasn’t drawn the investment program into question. “It’s a trend that will continue in the foreseeable future,” Joseph said. “I think in the short term, it’s probably not as big a draw as it looked like it may be in 2000,” he added. “But long-term, it’s going to continue to be a valuable type of employee benefit.” Related Chart: Market Woes

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