Valley of the Kings
5 February 2001
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How his classmates must be reeling. When Larry Sonsini shunned their moves to New York and went straight from law school to a four-lawyer firm in a suburb of San Francisco, they all thought he was crazy. Now he is the unrivalled leading lawyer in Silicon Valley, at the helm of Wilson Sonsini Goodrich & Rosati - the law firm dominating US public offerings work. Sonsini keeps me waiting 45 minutes before inviting me into his sparse office and apologising profusely. Just like everyone always says, there appears to be no ego and no arrogance to him, he is just extremely professional.
He admits that he did well to spot the potential of the Valley back in 1966, when it was nothing but a backwater. "I thought I was heading for the East Coast to be with a large New York firm and practise securities law," he says. "I guess in a way I've always been an entrepreneur as well as being a lawyer, and I saw this opportunity to be the main securities lawyer in the firm and to build a firm."
And build it he did. McCloskey Wilson and Mosher was formed in 1961, Sonsini joined in 1966 and the firm acted on its first initial public offering (IPO) for Behaviour Research Laboratories in 1969. That year, it became the first law firm to set up an investment company to make investments in clients, and in 1970 it began representing clients such as LSI Logic and Cypress Semiconductor - still two of Sonsini's biggest fans.
In 1972, the firm did its second IPO, in 1973 it was renamed Wilson Mosher & Sonsini and then in 1978 it became Wilson Sonsini Goodrich & Rosati. A year later, Sonsini was selected to represent Apple Computer on its IPO, while the firm still boasted fewer than 30 lawyers.
Today, Sonsini's personal client list reads like a who's who of technology companies - Apple, Hewlett Packard, LSI Logic, 3Com, Agilent Technologies and Sun Microsystems are just a few. The firm has grown to more than 800 lawyers with offices in Washington, Texas, Virginia and San Francisco. The firm consistently tops the tables for both issuer's and underwriter's counsel for US IPOs and as issuer's counsel for US equities excluding IPOs. Oh, and it leads the field as IPO counsel to venture-backed companies as well.
In 1999, Sonsini personally handled one of the biggest flotations ever - that of Agilent Technologies when it was spun out of Hewlett Packard for $1.8bn (£1.2bn). New York firm Shearman & Sterling acted for the banks on that deal. And in 2000, Wilson Sonsini represented 55 issuers on their IPOs for proceeds topping $6bn (£4.1bn).
Larry Sonsini now leads one of the most profitable firms in the Bay Area. Last year, the firm pulled in fees of $450m (£300m), second only to Brobeck Phleger & Harrison, and it boasted profits of $134m (£92m) with average profits per partner of $925,000 (£620,000). Sources say that Sonsini could be bagging a personal pay packet of as much as $5m (£3.4m) a year.
But despite his success, Sonsini sits back in his chair, puts his feet up on his uncluttered desk and could not look more relaxed. Apparently he always takes a laid back view. Craig Nordlund, the senior vice president, general counsel and secretary at Agilent Technologies says: "Considering all he's done Larry is not arrogant. He's well thought of and well respected throughout the Valley. He can be aggressive in terms of taking an aggressive legal position if he has to, but if anything he helps to reconcile differences - he brings people together instead of trying to split them up."
But Sonsini gets what he wants - he is nothing if not ambitious. He takes great pride in setting out his plans for the firm, with international expansion at the forefront. "The firm is doing great," he says. "We have stayed focused on our strategy, which is to serve the technology industry on a global basis and at every stage.
"The first stage is to cover the venture capital industry and then the early public company. We are probably representing more early-stage publicly held companies than any other firm in the US. Then come the big companies, the Hewlett Packards and the Sun Microsystems. No one competes with us on a full-scale ability and that makes us very unique - we have a really premier client base."
International expansion is next on Sonsini's agenda. The firm is already handling offerings in France, Canada, The Netherlands, the UK, India and Israel to name just six, and that is where the firm wants to expand. But the first move will probably be into the UK. Sonsini says: "London is in the planning stage. I don't want to go to London to compete with the UK firms, I want to be a partner with them. I want to be able to serve the US technology company that wants to go there, and companies there that want to come here.
"We are currently evaluating the market and we are very interested in Cambridge, but [the first move] will probably be in London. I would like to be able to put a business plan together and have some serious thoughts in the next six months and hopefully do something in 12-24 months. I have spent time in England, and I think I like what I see there. Going international is a big step, I'm excited by it and I'm challenged by it. It's doing our thing - I think there's a need for our kind of service."
You get the impression that Sonsini would have liked to have moved faster on a global scale. Original name partner Roger Mosher left in 1978 because, Sonsini says, he didn't want to go global. "I guess I have been kind of the leader of the firm for about the past 20 years," says Sonsini. "I have had this vision almost all that time and it's obvious that in some aspects it has exceeded my expectations and in some places we are still not there yet."
Sonsini has a strong eight-member management team around him, of which he is the chair. General counsel is Don Bradley, and then there are managing directors of operations, professional services, WS Investments (the firm's fund for investing in clients), strategic planning and two for member compensation.
For clients, the firm has a reputation for working in small groups of partners who compete with each other and together make up the technology transactions group. Each group is capable of handling all aspects of deals, and is run by three or four partners who call in others from support groups such as intellectual property.
The compensation is merit-based, with Sonsini taking home the biggest cheque. Any income from equity investments is divided in proportion to compensation. Many of the Valley firms divide up profits from investments in clients according to who won the client, but Wilson Sonsini has tried to develop more of a team approach.
According to Sonsini, most partners bill around 2,200 hours a year, with associates nearer 2,000. Sonsini's billable hours reach nearer 2,500 each year. He says: "I like to work out every morning, so I get here around 8.30am. I'm trying to leave at about 7pm but I get calls at home."
Clients say that you can always get hold of Sonsini when you want him. Eric Benhamou, chair of 3Com, says: "You get the impression that Larry is the man to call in on things that are going to shape the industry, and he is basically on call all the time. When he takes time off, which is very rare, he enjoys going to Europe. I remember a few years ago he rented a sail boat with his wife and a couple of friends and sailed round the Mediterranean - that was one of the very few times I can remember when he was out of touch."
But Sonsini still finds time to get involved in community work. He regularly lectures at law schools including Stanford University, and he is actively involved in the National Conference for Community and Justice, an organisation promoting understanding and respect among different races, religions and cultures.
Sonsini is detaching himself from the day-to-day start-up work, and instead works with the serial entrepreneurs that drive the Valley. One of his closest contacts is Jim Clark, who founded Netscape and Silicon Graphics. Sonsini is a director of public companies including Commerce One, LSI Logic and Novell.
Benhamou says: "Typically he gets involved at the board level, whereas members of his team get involved in the implementation of the project. He's extremely knowledgeable - he has his fingers in many different companies and transactions."
As Sonsini approaches his 60s the issue of succession at the firm is a hot topic around the Valley, even though most people agree that there is little chance of him leaving the business for a while.
Tom Kellerman, now London managing partner at Brobeck Hale and Dorr, who spent most of his career working in the Valley, says: "He's a great lawyer to work with - he's done or been around more deals than anybody you can imagine. He is generally viewed as a person who can make a lot of important introductions, people feel like he is a person worth knowing."
And Sonsini is certainly happy where he is at the moment. "The Valley has got more sophisticated and got more competitive," he says. "It's maturing and it has become more powerful and influential, and more demanding. Technology changes rapidly and it's become more diverse. I think it'll become all of that and more. Obviously, we will continue to expand - we are blessed with being in a great location, with great weather and great companies."
Why would anyone want to give all that up?
When Craig Johnson walks into Silicon Valley's dealmaker restaurant Quadrus, heads immediately turn and knives and forks stop clattering. The chairman of Venture Law Group (VLG), one of the Valley's most high-profile law firms, seats his three companions and then approaches at least four other tables to say hello to contacts. It is rare that you see a networker so blatantly in action, and four hours later when I meet Johnson in his office it becomes clear how he has built up a little black book most corporate lawyers would give their eyeteeth for.
Eight years after setting up his own firm, he is still brimming with enthusiasm. He left Wilson Sonsini Goodrich & Rosati with 13 colleagues in 1993 to found a law firm focused entirely on start-up work. He is known as the lawyer that helped found Yahoo! but he has worked with hundreds of other start-ups. He helped launch Garage.com, Financial Engines and Grassroots.com, and his firm sparked off Hotmail, eToys and Phone.com to name but a few.
"Basically I had been the number two partner at Wilson Sonsini for 18 years," Johnson says. "The firm treated me very well and I was paid more money than I could imagine. I never had any thoughts about leaving until I had a dream one night with a business plan for VLG. I didn't necessarily believe it was right, and I wasn't going to throw away all my hard work, but the more I investigated it, it became clear that it was possible."
And that dream was what led him to jack it all in and start afresh. "It sounds crazy but it's true. I somehow came to the conclusion that I could never make these ideas fit with Wilson Sonsini and I had to start from the beginning," he says.
And so Venture Law Group was born. Johnson woke up and scribbled down notes on a piece of paper. (He still has that piece of paper.) The plan was to build a firm that would act more as a legal management consultancy, advising mainly private companies in exchange for equity stakes. Clients would either be taken over by larger groups such as Lucent or Cisco, or they would go public and graduate to other law firms.
Johnson says: "Part of the dream was it would a be a firm called either Technology Law Group or Venture Law Group, it would be located on Sandhill Road, the home of the venture capitalists, and it would be highly orientated to technology and would be small and have an acorn as a symbol. Now it is pretty much how I would have hoped it would be, it's very close to the vision I had."
No one could question his bravery when he made the move, but many questioned his sanity. And despite being hugely successful during the initial public offering (IPO) boom - the firm recorded revenues of $52m (£36m) in 1999 with only 90 lawyers, and made four times that much from equity investments - VLG is still a victim of the sceptics.
Johnson's former colleague Larry Sonsini, chairman of Wilson Sonsini, says: "It was difficult when Craig left because I was close to him and he was a wonderful venture capital lawyer. He had a vision which was very unique and that was philosophically different from what we believed. If you look at VLG you have got to ask what is the longevity, but Craig is a good friend and at the time it was difficult."
Powers adds: "Craig is really pursuing a different vision of a law firm. He's moving away from providing legal services to being someone who takes a piece of the business in exchange for arranging things. The theory originally was they were going to take equity stakes in very small companies and give away those clients once they got large - there was a lot of doubt in the Valley as to how that model would work."
It is hard to get a word in edgeways as Johnson fiddles with a paper clip and recounts the early days. He says the biggest surprise was the support he got from the other partners in his group at Wilson Sonsini, who had young families but were nevertheless willing to take a risk and join him.
"We were a weird looking law firm with a strange name at the beginning," he says. "And while that was great it was also kind of scary. We didn't pay ourselves for the first six or seven months, we wanted to wait until we actually had a cash flow.
"I was getting a little bit anxious there. It was like starting an aeroplane just a little bit off the ground. We didn't have much room for error - the room for error was my bank account and if we needed more money I had to get it. Then after about a year we could see the plane starting to take off. Then the phone started to ring - Intel, Goldman Sachs and Morgan Stanley.
"If VLG hadn't worked out I would have been bankrupt, but I figured that you only go around once. If I'd stayed at Wilson Sonsini just for the money it would have been a breach of personal integrity. I wouldn't have felt good about myself."
In the end, all the group's clients followed him to VLG, double what they had expected, and Johnson says he has made more money than he ever thought possible. And you can tell he's pleased to have got one over on the sceptics. "I think people actually thought I was somewhat mentally disturbed. No, I mean seriously," he says.
In the firm's literature Johnson has set out nine principles which set VLG apart, the first of which is having only the top lawyers specialising in working with deal-intensive companies. Then the principles start to get a bit more concrete, with a promise to be responsive and give clients home and mobile phone numbers and return calls as soon as possible. Each partner - the firm calls them directors - works on fewer than 15 companies at any time in order to keep service levels up.
Johnson says: "I'm pretty well known in Silicon Valley and not many start-ups can be told that someone of my experience will actually focus and work intensively with one client. Larry Sonsini splits Hewlett Packard in two with teams of 50."
Then come promises to write all agreements in plain English, and to offer lawyers with business backgrounds. Johnson spent two years in the peace corps in Ethiopia after graduating and then worked for four years as a systems computer programmer before going to Stanford law school.
VLG vows to choose its clients as carefully as they choose it - working only where they can add the greatest value and with those that will allow them to attend board meetings.
"We actually once had a group of Asian CEOs who were trying to start a new networking company literally stand in our lobby until somebody would come out and talk to them," says Johnson. "We are only taking on one out of every 20, 30, 40 even 50 companies that come to us. If a company wants to come and have us simply work for fees we won't do it even if the company is going to be the next Sun Microsystems.
"In 1995 we had kind of a mini crisis. We had way too much work and we had to figure out what to do, and that was when we learnt to say no. We set up a committee to review new work, and as we said no it didn't hurt our reputation, it helped us."
Since then the firm has turned away work from Cisco, Microsoft, Intel and Oracle.
Johnson wants the firm to be the most highly automated in the US, so that lawyers are freed up to use their talents elsewhere. Steve Poizner, the president of wireless device location company SnapTrack, which Johnson helped get off the ground, says: "Craig was quite innovative in terms of using technology to help make the legal process more efficient - he views his role as much more than just being a lawyer."
Although the firm aims to have zero voluntary attorney turnover in order to minimise client disruption, retention has nevertheless been an issue. Johnson says: "We do have a lot of competition for our key people from venture capitalists, and a lot of them have left. The economic incentives are in a way different league. Many of those people, at least on paper, are making $50m (£34.3m) a year."
Finally, the firm promises to be flexible and fair about its billing, and to remain small, because Johnson says that keeps it fun and higher morale means better service. Keeping associates happy is one of Johnson's top priorities, and was a driver for VLG to set up a referral relationship with San Francisco's Orrick Herrington & Sutcliffe.
"We called them in March 1999 and we said we have a problem in that even though we have limited clients, the clients we have are exploding so we are burning people out," says Johnson. "We didn't want to grow, and we don't want to tell clients you're fired, you have to go somewhere else. We don't want to give a poor service.
"Orrick Herrington is large, successful, profitable and headquartered in San Francisco. We called them up and said we have a proposal for you. You have a Menlo Park office but it has no corporate securities. If you are willing to have a corporate securities office here we will provide you with a steady stream of work and an introduction into the Silicon Valley network so that you can become a major player. They found that to be a very interesting proposition."
And who wouldn't? Johnson rejected another plan to start fining partners whose associates billed more than a certain number of hours in favour of referring work to Orrick.
He says he was heavily involved in Orrick's merger talks with City firm Bird & Bird. "If Orrick does merge, VLG will be an important part of that relationship. We had several meetings with the Bird & Bird people. Our name is actually as well known and that's partly what we were telling Bird and Bird.
"There were too many people that had to agree and too many complications that had to be worked out. I personally think that it's probably better for Orrick that didn't work out. All I can say is we are confident that we chose the right law firm to be a partner with."
Ralph Baxter, the chairman of Orrick, says: "It turns out that Craig Johnson and I think about the world in very similar ways - what we think is important about our law firms is very much alike." He says that the biggest client Orrick has so far gained from the relationship with VLG is Oracle.
Yahoo! is the only client the firm has made an exception for and carries on representing despite its spectacular growth. In 1999, the firm represented Yahoo! on its purchase of Broadcast.com and GeoCities, even though Johnson says that it is questionable whether they still add value.
"With Yahoo! we have had such a close relationship - we do M&A, corporate securities and IP (intellectual property). They work with many different firms, and we do it because the VLG lawyers who work with Yahoo! think it's fun to be able to say you work with Yahoo! They say all kinds of nice things about us, but other lawyers can do just as good a job."
Johnson knows all the entrepreneurs and venture capitalists in the Valley and has connections that could get him anywhere. But he insists that VLG is not a sweatshop, citing his own recent seven-week cycling trip round France as proof that the firm's lawyers do have a life. In true techy lawyer style he emailed back holiday snaps each day to his colleagues.
Poizner says: "Craig's a lot of fun and he's got such great stories of huge companies that he's helped start up in Silicon Valley. He has a great sense of humour and he's a great mentor. He takes company holidays and parties pretty seriously, and at Halloween he dresses up every year for the VLG party. He spends weeks preparing and has some very elaborate costumes - he's quite a character."
Guy Kawasaki, who founded Garage.com with Johnson, says: "Craig's greatest value is not his legal expertise, although he does have great legal skill, it's more his strategic expertise. He absolutely helped us with his contacts with getting early investments and early customers - and that's more than you can ask from most lawyers. I can't speak highly enough of him."
So far, Johnson's book of contacts has taken him to places he could never have dreamed of, and while others in the Valley might not think he's here to stay, he'll keep trying to convince them.
"To traditional lawyers it's been intriguing," he says. "Working with the highest overheads, the most expensive real estate and start-up companies, they would say it just can't work. They don't understand our model, but once they finally get inside of it they start to figure it out.
"It's just like Alice in Wonderland through the looking glass, everything in reverse."
Next week, in the final part of The Lawyer's series, Claire Smith assesses the progress of the UK's only firm with a presence in the Valley, Osborne Clarke Westphalen OWA, and meets one of Silicon Valley's biggest clients, Intel Capital.