It probably goes without saying that the demand for legal services in the Bay area, which includes Silicon Valley, has been extraordinarily high in recent times.
Quite how the current gyrations of the market will affect this flow of work remains to be seen, but I sense that we will not see much of a drop in demand, though work may shift from one practice area to another with the changing economic climate.
The busiest area is the venture capital market for start-ups, both in organising the deal and raising the capital, while for the more mature companies there is also a strong demand for services in the capital markets area and for merger and acquisitions work. In both sectors, there is a high demand for IP work.
As the over-excitement about the dotcom market calms down, the amount of IP work will remain steady and M&A work will also not drop, especially if the market continues to be difficult. If the public equity markets remain hostile to dotcoms then those companies whose next move would have been to float could instead find themselves looking for merger opportunities or a friendly buyer in order to survive. The knock-on effect of a depressed equity market could also result in a reduction in venture capital work.
But the main problem is that quality lawyers are in short supply. Nearly all firms are looking to expand and many have moved into the Bay area over the past few years. All are trying to recruit throughout US, Canada and Australia. But we have not seen many firms headquartered outside of the US setting up here, possibly due to the recruitment situation.
Simpson Thacher & Bartlett and Davis Polk & Wardwell have both opened offices in the Bay area and are expanding aggressively. Skadden Arps Slate Meagher & Flom has had a base in San Francisco for a while but has also recently opened in Palo Alto. We have also seen firms from outside New York try to open offices in the Bay area.
The indigenous firms here are split into those which have focused on start-up companies and those that try to offer a full-service firm. For example, Gunderson Dettmer, which was founded in Silicon Valley five years ago, has always been very focused on bringing a service to emerging technology companies and providing a relatively narrow scope of services. The firm is very strong in venture capital work and provides IP help and private capital markets advice. It has a smallish M&A group and it does not do litigation or anti-trust work. It does not seek to provide a broader range of services and has decided to focus on the things that it thinks it does well. But in the changing market these single focus firms may find that they have to pick up new skills. For example, the way that start-ups get their funding may move away from venture capitalists into more complicated set-ups.
However, there are indigenous firms, such as Brobeck Phleger & Harrison, which have a very strong presence but try to provide a broad range of services.
Taking equity in start-ups has ceased to be an issue. As a general principle, if you are representing start-ups then you are taking equity in them, but the equity is part of the overall compensation package and not in lieu of fees. The downturn in the technology market has not affected this stance. If you look at the investment portfolio of any firm then there are going to be some risks, but that is part of the very nature of start-up companies. So you just hope that after you have done all the right research you have the right mix of “home runs” as we call them here – the ones that will just take off, ones that will do okay, and flat-out losers. Entrepreneurs like the fact that as an investor, our interests are more closely aligned to their own.
It is important that any equity taken is by the firm rather than individuals otherwise the dangers of conflict become much more acute.
Peter Lyons is managing partner at Shearman & Sterling‘s Bay area office.