VLG's 2003 Merger with Heller Ehrman Raises Doubts About the Viability of VLG's Unique Law Firm Model

In 1993, Craig Johnson and 13 other lawyers left Wilson Sonsini to begin a new type of law firm for start up companies.  This firm, Venture Law Group, would study hundreds of business plans and then decide to back the worthy few startups with legal work and liaisons to the VC world. (HBS Study)  In exchange for this legal and nonlegal work, VLG would receive equity ownership in the startup and from that point would turn the work over to another law firm (usually Orrick Herrington) to permit VLG to concentrate on management and financial issues directing the company to a path of success.  Over the years, VLG was responsible for working on many successful startup concepts including Yahoo, Hotmail, and WebTV. 

A decade later in the fall of 2003, Craig Johnson began talks of merging the 60 person firm (VLG) with Orrick Herrington, but they eventually merged with Heller Ehrman.  VLG was the quintessential multidisciplinary practice (MDP) firm for startups – a new way of delivering legal and nonlegal services to clients with dreams of placing their ideas and inventions into a public company.  This model compensated the VLG lawyers directly in line with the value delivered to the public shareholders of the startups.

This merger of VLG into the Heller firm raises two interesting sets of questions.  First, is the VLG business model for a startup law firm viable in the long run?  Some have claimed that this business model does not permit sufficient diversification for a law firm to survive.  Bob Peroni and I have argued that law firms that trade legal services for equity incur significant ethics and liability risks that are often overlooked.  Perhaps, VLG is only viable in a bull stock market.  Second, it would be fascinating to know how the Heller firm has handled the conflicts of interest (current and former conflicts) when it merged VLG as a separate and distinct department of their 600 person law firm.  One would surmise that VLG brought with it many financial, business, and legal positions and connections that present some fascinating conflicts of interest questions.

I raise these issues in light of the February 2005 news of 5 former VLG lawyers departing Heller for Orrick after a little more than a year at the new firm. 

Given that this blog has been in the works for a while before we actually put it online, we have a few belated postings that will be made in the first two months of our operation.

Comments

[John Steele]

I can say from firsthand experience that most of the players in Silicon Valley -- corporations and investors alike -- are very quick to waive non-litigation conflicts. Because VLG did not litigate, whatever conflicts they generated were likely to be waived.