When Is a Law Firm Not a Law Firm?

As an extension of that principle, VLG has elected to limit its lawyers to advising only 15 to 20 companies at a time (whereas at other law firms, individual partners may count 30 to 50 companies as clients). "We have far fewer companies per attorney than our competitors," Johnson acknowledges. "We prefer to concentrate on companies where we can provide business advice as well as legal advice. We like to be in the trenches."

It's not surprising, then, that VLG turns away as much work as it takes on. On a recent day, for example, Johnson rejected a video-postproduction business. "It didn't sound like it had enough new technology to have a lot of interest for us," he explains. "We want to brand VLG as the law firm you want to be with if you're the next Yahoo!"

Rather than taking on all of the work that comes through the door and growing to accommodate increased demand, VLG has instituted procedures for screening incoming assignments and is trying to resist expanding beyond 75 lawyers. The firm accepts only what it deems to be the most exciting, cutting-edge slice of the market. "We're like a cork floating along on top of a river of venture capital. Wherever the river goes, we go," Johnson explains. "When biotechnology companies are hot, we're biotech lawyers. Lately, telecommunications and software companies have been hot, so we're information-technology lawyers."

VLG partner Joshua Pickus jumped at the chance to represent WebTV Networks Inc.--which was acquired by Microsoft in 1997 for $425 million--even though WebTV was beyond the start-up stage when VLG came on board. When WebTV had approached VLG to handle the work, WebTV was already recognized as hot in Silicon Valley. The fact that WebTV had chosen to switch to VLG as new counsel said lots of good things to valley insiders. VLG's burgeoning reputation also played a role in developing the firm's ongoing relationships with Oracle and Intel.

Still, VLG has tailored its approach to appeal specifically to entrepreneurs who don't have a lot of cash to spend on fees. Fledgling ventures can count on VLG to devote substantial time--anywhere from a few weeks to a few months--to developing a business plan and a financing strategy, at no cost to the client until the client receives its financing. Yahoo! founder Jerry Yang points out that his company was not billed by VLG until after it had received its first round of venture funding. It was the same for Financial Engines. The upside for VLG comes as its lawyers help their clients through the ensuing barrage of deals and other transactions that typically accompany a vibrant start-up--work that VLG does charge up front for. The key, Johnson explains, is volume. Not volume of clients, but volume of work for a handful of clients who will come to rely heavily on VLG as their companies come to life.

"When we actually get down to doing substantive legal work as opposed to business counseling, then the meter goes on," Johnson explains. No matter how big or how small the company, VLG lawyers expect to be treated not as mere peripheral legal advisers but as true team players. "We want companies to treat us as real partners," Johnson says. "Real business partners in building up a business."

Reflecting that philosophy, VLG asks its start-up clients for the opportunity to buy into their businesses, purchasing common stock first and preferred stock after a company receives financing. All the firm's senior lawyers and partners contribute a pro rata share of their profits to VLG Investments, which in turn takes a small equity position in the firm's start-up clients. In addition, a partner responsible for bringing in a particular client also buys into the start-up personally. As a policy, VLG partners are required to take from 10% to 20% of the equity opportunity that VLG is offered in the client, with the remaining 80% to 90% reserved for the firm's fund.

"Because we're so involved early on in the business strategy as well as the legal strategy, we like to participate on a financial basis," explains Mark Silverman, one of three VLG partners in charge of running VLG's fund. "The ability to participate in the upside of the business for a client is very motivating."

From a pure investment perspective, Silverman concedes that the strategy is "very risky." Indeed, when compared with the most aggressive venture-capital firms--which typically back 10 to 20 new companies a year--VLG Investments seems downright wild. Since its inception, in 1993, Silverman says, the fund has invested in more than 200 companies.

The stakes typically are small--an average of just $11,000--for a current total investment of $3 million. As Silverman explains it, the investment goal of the fund is to produce a 20% to 30% yield compounded over a five-year period. Because the fund didn't really take off until 1995, Silverman says, he doesn't expect to see any measurable returns before the year 1999. "Although it's been hit-and-miss, it looks like it may bear fruit in the next few years," Johnson says of the investment strategy. "Our goal is to meet cash-compensation expectations for senior people while our equity investments mature."

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