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Venture Law Group’s 25 partners were forced to dig into their own pockets last month for a capital call to buy out the firm’s costly San Francisco lease. The firm sold stock in its equity pool to cover each partner’s contribution. Partners, speaking on condition of anonymity, said the contribution on average was less than $100,000 per partner. That’s far less than the $250,000 to $400,000 figure that lawyers at rival firms say they’ve heard was involved. Since a capital call is widely considered a symptom of ill health for a firm, VLG’s recent financial move touched off renewed speculation in Silicon Valley that the Menlo Park, Calif., boutique is crumbling in the downturn. And VLG partners acknowledge this is the first time their income — whether from the equity pool or from their share of profits — has been tapped to cover expenses. Yet the firm is downplaying the decision, with partners saying the lease was a drag on the bottom line and the buyout plan was a sound fiscal decision for the firm. “Removing that lease obligation improves our profitability considerably,” said Donald Keller Jr., a VLG partner who handles the firm’s daily management. No doubt VLG has suffered a painful hit to the bottom line since the economy started to slide. In 2000, the firm’s partners pulled down $905,000 each in profit off of $64 million in revenue, according to the firm’s managers. The firm is mum on how much those numbers have dropped in the last two years, but lawyers with comparable practices at other firms report that revenues are off by as much as 40 percent. “We’re not starving, and revenues have stabilized,” Keller said. The firm has survived, he said, by hustling for business and slashing costs. And VLG brought in revenue by subleasing office space it held on Sand Hill Road in Menlo Park to a venture capital firm. In San Francisco, the firm was locked into a lease for more than 10 years for high-end Pier 1 waterfront space on the Embarcadero. The firm opened up its new satellite in July 2001 by moving in 16 of its lawyers. The space could house twice that. But with layoffs, performance-related firings and attrition, the firm has since shrunk to 72 lawyers — down from a peak 110 — and it no longer needed the space, Keller said. VLG was able to head off a direct order to partners to write checks for the capital call by selling stock on each partner’s behalf from the firm’s equity pool. The firm was founded to take aggressive equity stakes in start-up clients, and those funds have contributed the bulk of partner income. Associates and staff also own points in the equity pool, and lawyers draw less in base salary than other firms because of their share in the pool. Most firms siphon a portion of each partner’s profits to an ongoing capital fund, which is then used for large expenditures or expansion. Partners get back what they put in when they leave their firms. But at VLG, capital costs have traditionally been funded with gross revenues instead of partner profits or investments. Except for a one-time capital contribution new partners make to the firm, partners don’t contribute to the firm’s capital fund, Keller said. “We’ve financed ourselves with revenues and a small amount of bank debt,” Keller said, “so either it’s funded out of revenue, or you give it to the partners and tell them to give it back.” Individual partners said they weren’t fazed by the capital call, because times are tough and they aren’t on the hook regularly for capital contributions. Given the relatively unique nature of VLG’s business model, law firm consultants said they did not view the capital call as a sign of impending doom for the firm. It would have been more troubling if partners at a firm where they consistently contributed to capital accounts had been forced to make the same decision, said Stephen Barrett, a law firm consultant in Los Angeles. “It signals that if all of your eggs are in the technology basket and that basket goes sour, you need to turn to more conventional capital sources,” Barrett said. “It’s an interesting development for a firm that was created on that different business model.”

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