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From atop Dante’s Peak, 5,000 feet above Death Valley, the landscape below — grim volcanic craters, bleak sand dunes and barren salt flats — looks a lot like Silicon Valley after the fall. Nasdaq stands at its lowest point in three years, and all indications are that it will go lower still. The public capital markets are virtually closed to new issues. Private equity markets appear to be operating in slow motion — deals are getting done, but valuations are low, rounds are down and the venture capitalists who were once giddy with enthusiasm are now preaching business fundamentals in Calvinist tones. The furious mergers and acquisitions activity that is often the hallmark of consolidating markets has not yet begun and may not happen soon; perhaps company executives and directors are still too shell-shocked by their devalued currencies to part with any just yet. It now looks like the past three years were an inflated bubble of enthusiasm for new technology and Internet companies that is quickly deflating back to normal levels. The practice of law, usually a follower of economic trends and not a leader, had been similarly distorted by the frantic demands of young companies and executives. The return to economic reality will mean changes for in-house attorneys in everything from their day-to-day duties, their compensation, and even their attitudes. The upshot: interesting but sometimes painful work, less money and less upside potential, and very mixed emotions. It promises to be a tough year for in-house counsel. The incipient recession will have two major consequences for in-house practice. First, the legal work will get more varied and, potentially, more interesting. Second, accuracy of advice will be valued over speed. It may sound counterintuitive, but for sheer fascinating legal work, there may never be a better time to be an in-house lawyer. A great deal of the nation’s attention is focused on high-profile cases like the Microsoft antitrust case, the Napster case, the various privacy battles and bankruptcy filings. Technology-oriented legal matters are now staples of the front page of most newspapers in the country, and in-house lawyers are in the middle of these challenging cases. The last few years have tended to feature less creative and more rote legal work. While many corporate deals are as exciting as the disputes that make headlines, it is hard to argue that marking up an S-1 template, closing a Series C round or reading material contracts as part of acquisition due diligence get the blood racing. Now, in-house attorneys are getting a chance to exercise new or atrophied skills: debt collection; SEC investigations; negotiating death-spiral preferred stock deals; Worker Adjustment and Retraining Notification Act issues; and debt workouts. And with a renewed focus on litigation, David Boies seems more in the center of Silicon Valley than Larry Sonsini. From the Recording Industry Association of America v. Napsterto U.S. v. Microsoftto eBay v. Bidder’s Edge, litigators who understand intellectual property and consumer protection laws are once again in high demand. The second way in-house practice will be different now is that the quality of advice will actually be important. The last five years have been about doing things quickly; the next five will be about doing things correctly. Past poor practices are now coming home to roost. Some of the accounting restatements and improper revenue recognition practices we have seen recently (at, among others, MicroStrategy, Covad, Critical Path and even Lucent) might have been prevented if in-house lawyers had been more vigilant about making sure the finance people knew what they were doing. It has also come as a nasty surprise to young corporate attorneys serving as in-house counsel that sometimes contracts are worth less than the paper they are printed on. As companies go out of business, many have told creditors that they won’t pay some or all of the money they owe, regardless of the agreements they’ve signed. No longer will lawyers be writing contracts with sloppy payment terms and inadequate security and collateral arrangements. Then there’s compensation: There won’t be as much. While a recent survey indicated that cash compensation to executives went up during the second half of 2000, anecdotal evidence tells me that there is little chance of a similar thing happening during 2001. Law firm associates and many young in-house lawyers were treated to huge raises in 2000 to keep them out of the clutches of companies, investment banks and consulting firms. These competitive pressures no longer exist. The major law firms are getting ready to downsize. The investment banks and consulting firms already have. With a glut of non-specialized corporate and securities lawyers coming on the market, there will be little reason to pay more. Stock options have become the contemporary equivalent of Confederate money. Friends at public companies used to ask when a good time to exercise and sell options might be; their principal fear was selling so early that they might miss out on the upside of the stock. Now I get calls from friends at private companies asking whether they should exercise their options at all, even at prices of one or two dollars. The fear now is that their employers will go bankrupt and leave nothing for common stockholders. Not all of the new work experiences for in-house lawyers will be fun. There is a world of difference between spending all night with underwriters, auditors and other pleasant people in the cozy confines of Bowne & Co. in Palo Alto, Calif., scrambling to get an S-1 on file by the Edgar deadline the next day and trying to cajole the beleaguered accounts payable clerk at a failing business into paying your bill. One reason I became a corporate lawyer is that corporate lawyers tend to have happy clients who are doing deals and making money. Litigators tend to have unhappy clients who are being hauled into court and paying money. In this worsening economy, executives will search for scapegoats for poor performance and will litigate their disputes. There is suddenly a bull market in insurance coverage disputes and mining contracts for indemnities and any other ways to share risk. When people scrape and squabble, the work for lawyers tends to become both important and interesting, but also difficult and unpleasant. Fighting with other lawyers for every last nickel can be miserable work. Still, for those less focused on money, the rewards of a deteriorating market climate are vast. The general counsel at a small technology firm drifting toward a stock price measured in pennies rather than dollars told me recently, “I can’t leave. This is far too exciting. I learn incredible things every day, not just about the law, but about human nature. How can I leave that behind?” David Schellhase, formerly general counsel of Linuxcare Inc., is writing a book about counseling emerging technology companies. He can be reached at [email protected].

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