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Law firms turn venturesome — and invest in some clients

Companies make $$, are perceived as entrepreneurial

SHARE Law firms turn venturesome — and invest in some clients

NEW YORK — Some lawyers are looking to do more than just advise venture-capital clients — they are investing in some of the startups with which they do business.

Law firms that advise startups and venture capitalists have increasingly been getting into the investment game themselves, raising funds to back new companies, including some of those they advise.

In many ways, such a move is simple opportunism.

"We saw a lot of opportunities and potentially profitable investments as part of our role" of advising private companies, said Eliot Raffkind, a partner in the Dallas office of Akin Gump Strauss Hauer & Feld, LLP, which earlier this year raised $5 million from its partners to invest.

But such investments can be valuable competitive tools for the firms, as well. In attracting private companies as clients, the firms can hold out a sort of carrot to them, with the possibility that an investment might be in the offing.

For ethical reasons, law firms don't blatantly lure prospective clients with the promise of an investment, but law firms with their own funds have a bit of an edge because they "are perceived by entrepreneurs as being more entrepreneurial," said Stephen O. Meredith, a partner in the Boston office of Edwards & Angell, LP, which is in the process of putting together its own fund for its partners.

The whole purpose of the funds is to make their partners a little richer, a reflection of a trend under way in the overall industry, said John Taylor, director of research at the National Venture Capital Association in Arlington, Va.

"About five years ago, we saw a change in corporate venture-capital investment, which used to be just a way to keep an eye on what was going on out there, usually in your own industry," Taylor said. "Now, corporate investors are doing it more to make money."

Law firms across the country that are considering whether to raise their funds got the idea, along with so many others in venture capital, from Silicon Valley, where firms such as Wilson Sonsini Goodrich & Rosati and Venture Law Group began investing by agreeing to trade services for equity in startups.

The payoffs could be huge. Venture Law held 41,772 shares of eToys Inc. when it went public, with an average per-share price before the initial public offering of 54 cents apiece. That investment, valued at just over $22,500, ballooned to $3.2 million when eToys closed at 76.562 at the end of its first day of trading.

Given these returns, more law firms have jumped on the services-for-equity bandwagon nationwide. But while such arrangements benefit the partners in enriching the firm when the investment pays off, the partners don't really get a chance to put their own money in and reap personal rewards.

And attorneys see these opportunities daily. In deciding whether to take on a client, law firms perform much of the due diligence that many venture capital firms do before investing, so law firms have a bit of expertise is assessing whether or not a business plan is viable.

What's more, they get a chance to really get in on the ground floor. In many cases, they take on a client at the true startup phase, when a company has only recently gotten its initial angel funding, so valuations are at their lowest. A small investment of just a few hundred thousand dollars can easily turn to the multimillions if a company makes it to the public markets. Along the way, early investors can also cash out in subsequent funding rounds when new investors come in.

There are some potential ethical issues involved for the law firms, particularly with investing in a client. For its part, Akin Gump plans simply to latch on to deals that are already put together and be a small, minority investor, Raffkind said. When investing in a client, Akin Gump will simply live with whatever price terms are set on the deal. "Once the terms of the investment are set by someone else, we'll just tag along," he said.