Equity and Beyond

Equity and Beyond

Senior attorneys have further issues to consider when negotiating and evaluating offers of employment.  Achieving equity status is not necessarily the “be all and end all” of a partner-level offer.  Other, equally important issues involving your partnership rights and responsibilities and the financial health of the firm need to be addressed.  Because a lateral move at the senior level often means moving client base and staff, their needs must be considered, as well.  Expectations on both sides of the bargaining table must be fully discussed and settled before you sign on the dotted line.

Now that there are many classifications of attorneys in the typical law firm setting, not just partner and associate, it is important to define what your title will be and what benefits and duties accrue to that position in that particular firm.  You must understand the structure of the organization you may be joining:  is it a partnership, corporation, LLC, or LLP?  How many tiers of attorneys are there in the hierarchy, and what do the various titles really mean?  You need to determine how the various tiers are compensated, whether they have any voting rights, and how an attorney moves from one level to the next—and, possibly, back again—and who determines that movement.  Are there specific benchmarks?  What are the waiting periods at any given level?  What have been the experiences of others who have joined the firm as laterals previously?

There are almost as many compensation schemes for senior attorneys as there are law firms.  It is crucial for you to be clear about the process for setting compensation and what criteria are taken into account.  Most firms consider some combination of business generation/origination, personal production, hours billed, business development and cross-marketing activities, training and mentoring of associates, firm management, quality of work, pro bono or community work, and stature in the profession.  You should determine the firm’s priorities among these factors to make sure that they align with yours and that your personal business plan promotes the values that are important to your prospective firm.

Once equity partnership is offered, what exactly does that mean in this particular situation?  Since the American Lawyer Magazinebegan publishing financial data on the 100 top-grossing law firms in the U.S., law firms have been taking steps to push their profits-per-partner number higher.  Although many firms have learned to play with the statistics, it remains a useful method of comparing the financial health of law firms.  What are the average profits per equity partner your prospective firm, and what has its track record been over the past several years?  What are the projections?  How much of a spread is there between the highest and lowest paid equity partners in the firm?

In return for equity participation, of course, is the assumption of liability on the part of the partners.  Before you accept an equity position in a prospective firm, it is vital that you have an accurate understanding of the firm’s liabilities.  Ask about leases and debt load.  This is especially important with the larger, multi-office firm because, for example, although the office you may be joining might have a favorable lease, it may not be the case across the board.  Be aware firms that are not in the best financial health may be the most willing to offer equity status at the outset as they would like to spread the risk among a greater number of partners.  An “Of Counsel” or non-equity partner status at a healthier firm may well be a better deal in the long run than a full equity position at a weaker firm.

Equally important is to determine how the profits are divided and distributed.  You want to be able to estimate what you can expect given your level of production.  The timing of distribution also is a key issue when determining your cash-flow situation.  At one extreme are law firms that pay partners a low monthly draw plus one large profit distribution at the end of the fiscal year.  Others may have higher draws and smaller profit pools and/or distribute profits on a monthly or quarterly basis.  In any event,

For attorneys who are used to receiving their compensation on a more even basis throughout the year, there can be some hardship at least until your production levels are up and your collections start rolling in so that your profit distributions can be paid.  You may want to negotiate some sort of advance on profit distributions for the first quarter or two, to be balanced out over your first full year with the firm.  This especially comes into play where you previously may have been in a non-equity situation, and you are responsible for quarterly estimated tax payments for the first time.

If you are being offered an equity position, or expect to reach equity partnership in the foreseeable future at the prospective firm, you should ask about the capital contribution requirement and how it is to be paid.  Firms vary widely in the amount and funding of their buy-in, and it could be an important factor in your decision.  Some firms expect you to fund your capital contribution personally or through an individually obtained bank loan.  You may need to come up with the buy-in amount all at once, or there may be a pay-out period.  Some firms finance the partners’ capital contribution by deducting a set amount from each profit distribution over a period of time.  All of these factors need to be clearly understood and may be the subject of negotiation.

At the senior attorney level, some portion of your compensation package likely will be determined by your production; thus, it is vital that you and the prospective firm are clear on definitions when you set benchmarks.  You must understand, for example, how business origination credit is given at the firm.  In some cases, once an attorney has brought in a client to a firm, all matters are credited to that attorney, regardless of who actually brought in any particular matter.  This can pose a problem for a lateral attorney who is bringing in new matters but for a client currently being served by the prospective firm.  Other firms designate the originating attorney on a matter-by-matter basis.  Ask what policies the firm has established to handle such situations, or whether the attorneys are expected to work it out among themselves.  If there are no set policies, what has been the experience of previous laterals?

You should understand the firm’s terminology when setting out expectations for working attorney hours, billing attorney hours, responsible attorney hours, and so forth, as each firm has its own scheme for attribution, and it can directly affect your compensation and progress up the ladder.  Make sure that you understand what credit you will receive for the work you generate and perform yourself, the work you generate but is done by others, and the work that you perform but was generated by others.  Most firms credit each situation differently, and you may have certain thresholds you must meet before you are eligible for profit participation.

Billing rates are another key issue.  You want to make sure that your clients will be comfortable with the billing structure in the new firm or you are in danger of losing them.  While the prospective firm may want you to raise your rates somewhat, you want to negotiate the exact increments and time schedule by which you will be expected to increase your rates.

If you are a more senior partner, you should ask about the firm’s retirement policy.  Some firms require that partners retire at a set age, some as early as 62, but most are between the ages of 65 and 70.  Others automatically convert their equity partners to non-equity status at a certain age but allow the attorneys to work on an individually negotiated contractual basis as long as they wish to or able.  And some firms have no retirement policy at all.  You also want to examine the retirement plans and ask about the firm’s and your expected contributions.  Also, all senior attorneys should inquire whether the retirement plan is funded or unfunded.  You might want to think twice about signing on to support partners who retired before you joined the firm.

Most benefits are paid for by the employer law firm for associates, but may not be covered for senior level attorneys.  Partners often have to pay for their own benefits, in whole or in part.  Some firms go so far as to attribute to each partner a specific portion of the firm’s overhead before determining profit participation.  You should make sure you understand exactly what you are expected to pay for and what is covered by the firm.  Go over the benefits package in detail with the prospective employer’s benefits administrator.  Also make sure that you negotiate your marketing budget or clarify which expenses will be reimbursed by the firm.  This is especially important if your practice area involves much travel for business development purposes.

And last but not least, when negotiating your deal, you want to understand the firm’s processes for bringing in new clients and matters, handling conflicts, and for staffing specific matters.  Make sure that you can bring with you or hire the associates, paralegals, and staff you need to service your clients, or that the support is available among the prospective firm’s current staff.  Understand that it can be a deal killer, however, if you insist on bringing more people with you than are justified by your book of business.  If you plan to bring other attorneys and staff with you, negotiate the broad parameters of their deals such that they will be doing at least as well, if not better, than they were at your current firm.  You want your team to be happy and supportive of the move.

Valerie Fontaine
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