The More Things Change … The More They Stay the Same: Despite a positive economic outlook, the way VCsand their legal reps work together hasn’t evolved much. –

When the investing climate crumbled four years ago, law firms that had been feeding off of the explosion of VC deals crumbled, too.

Big-name firms, such as Cooley Godward, Heller Ehrman White & McAuliffe, and Orrick Herrington & Sutcliffe, shuttered regional offices, and then laid off partners, associates and assistants by the dozens as their VC-related worked slowed to a trickle.

One marquee name, San Francisco-based Brobeck Phleger & Harrison, disbanded last winter after a series of layoffs and defections, leaving behind more than $90 million in unpaid bills.

But now that VCs are starting to invest again, the famine for legal service providers is again turning to a feast – of sorts.

The amount of work still hasn’t reached the banquet portions that were laid out for the taking a few years ago, but work is steadily increasing, especially for VCs, who are seeing a spike in IPOs, deals and fund-raising.

It’s the kind of work attorneys relish.

“Representation of VCs in their portfolio companies has returned to fundamentals,” says Audrey Roth, head of Boston-based Sullivan & Worcester’s private equity and emerging companies group. “Gone are the heady days of closings happening in two to three weeks, with no focus on a company’s baggage.”

In fact, Pascal Levensohn, founder and managing director at Levensohn Venture Partners in San Francisco, says that it was the flood of rushed deals in 1998, 1999 and 2000 that created reams of poorly executed documents that must be corrected before making new rounds of investments.

“There was lots of sloppy work done … mistakes made in the detail work,” says Levensohn. “When making investments in companies financed back in that period, we see lots of cleaning up to do.”

One result is that VCs have developed a greater appreciation in getting the documents right in new deals, as well as fixing old problems.

Matt Sonsini, a partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif., says the lack of focus from attorneys in the boom has returned to haunt the companies, their investors and legal counsel in the bust.

“Everyone has come to appreciate more the role of the attorney in deals, and so we’re spending a lot more time on documents,” Sonsini says. “Today all sides know the importance of getting things done right the first time.”

Thus, VCs are not only demanding more focus from their legal eagles in the post-recession eta, but also more experienced attorneys.

Jill Fishbein, a partner with the law firm of Tomlinson Zisko in Palo Alto, says that VCs today are demanding participation from senior partners, because they bring more business familiarity to meetings than younger, less-experienced lawyers.

“The VC partners today want thier lawyers to know what’s going on in the industry,” says Fishbein, whose clients include Morgenthaler Ventures, Sofinnova Ventures and U.S. Venture Partners. “It’s a must.”

Gerry Langeler, a general partner at OVP Venture Partners in Kirkland, Wash., is also seeing more gray hair.

“Law firms that were once turning away business are again eager for it, and because of this, we’re seeing the senior partners get involved with every aspect of our work, not just the junior associates,” he says.

His firm’s investments include such companies as Captivate Network,, Max-Viz, Portland Software, Preview Systems, Surplus Software, Unify and Vascular Solutions.

Dick Kramlich, co-founder and general partner at New Enterprise Associates – which recently completed fund-raising for NEA 11, an $1.1 billion fund that stands as the largest in the post-boom era – says the quality of legal and business advice has improved considerably now that more veteran attorneys are attending board meetings. He notes that an attorney is even present at one of the portfolio companies in which he serves on the board.

“The attorney has a wealth of experience,” says Kramlich. “He is fantastic in terms of advising us, and how to look at our next round of financing, how to structure the deal and what’s important from the standpoint of the new investors.”

Three years ago, Kramlich isn’t so sure the attorney would have been at the meeting, which may point to an increase in financial and legal accountability.

Include the Mundane

When working with VCs, lawyers are spending much more time these days on vertical issues important to deal making, such as matters of intellectual property.

“IP assets are now seen as much more valuable than a couple of years ago,” says Martin Tilson Jr., a partner in the technology practice at Kilpatrick Stockton in Atlanta. “VCs demand experienced legal guys who can look at the intellectual property held by a company and tell them what impact those assets might have in the marketplace.”

“We’re playing for much higher stakes now,” adds Tilson, who points to the increasing number of companies hit with patent infringement suits, including such high-profile cases as those faced recently by Microsoft and Research-in-Motion.

Meanwhile, some VCs are asking attorneys to look at every angle of a deal, no matter how mundane.

For example, Jon Callaghan, managing director at Globespan Capital Partners in Palo Alto, says that evaluating office leases have become big headaches for investors. He says companies discovered that they had leased far too much space when forced to wind down operations as business conditions have worsened the last few years.

“The lease literally became a life or death issue for many companies fighting to survive,” he says. Previously, portfolio companies would “go get a lot of space and grow into it,” said Callaghan, who serves on the boards of Copan Systems, Ingrian Networks, Nominum, Plaxo, Sigma Dynamics and Sorrent.

Fishbein notes that working with clients has been a little different recently, as VCs having expressed a greater appreciation for the “unglamorous” legal issues, such as board and stockholders’ books and records, the importance of D&O insurance and indemnification agreements.

There is a noticeably heightened awareness of fiduciary duties, she says, no doubt in response to the Sarbanes-Oxley Act (see story, page 47)

The More Things Change

To be sure, not every venture capital partner or legal service provider believes that the relationship between the investors and lawyers has seen much evolution lately.

Jeff Brown, who heads the venture group at Indianapolis-based Baker & Daniels, says the relationships between VCs and their counsel hasn’t altered all that much. The terms of the deals, Brown says, have changed – but not the process of how the client interacts with the firm.

“Clients always have wanted high levels of due diligence,” he says.

Tim Draper, managing partner at Draper Fisher Jurvetson in Redwood City, Calif., agrees with Brown.

“We’ve been consistent all the way through the past few years,” says Draper, who’s firm invested in 52 deals last year, second-most active in 2003 behind NEA.

“We try to keep the deal as clean as possible so that the entrepreneur is motivated and aligned as much as possible with the investors,” Jurvetson adds.

Still, despite the assurances from some VCs that things have remained the same, many attorneys contend their VC clients are asking for increased scrutiny of deals and more protections if deals go sour.

“The VCs are pushing hard on terms to move the ball in their favor,” says Ken Muller, a partner at Palo Alto-based Cooley Godward. “Each deal requires more work from legal counsel, as well as taking longer to close”

Cooley Godward’s clients want to make sure entrepreneurs “understand their deals,” says Muller. “They have to be precluded from coming back and filing a lawsuit.”

Brian Goldstein, a partner in business practice group at Testa, Hurwitz & Thibeault LLP, notes more and more West Coast VCs mirror the investing approach of East Coast VC firms, which traditionally have been more conservative.

“The West Coast firms are starting to look like the East Coast firms,” says Goldstein. He adds that he’s negotiating new deals that contain terms that allow “investors to protect themselves on the downside as well as the upside.” That approach has traditionally characterized deals offered in the East, he says.

Goldstein observes that the change in philosophy comes in response to three years of restructurings and down rounds – investments that imposed harsher terms and reduced valuations on struggling startups and their stakeholders, such as the founders.

Testa, which claims the world’s largest private equity legal practice with 300 clients, serves as legal counsel to New Enterprise Associates, among others.

Meanwhile, one of the big issues facing VCs in 2004 is that dozens of shareholders have filed court challenges to the terms and valuations imposed by VC investors.

Sullivan & Worcester’s Roth believes that those protections won’t be needed – at least in 2004 – now that the investing activities have turned positive.

“We will be seeing up rounds for the first time in several years,” predicts Roth. “This should be a major relief to the VCs from a fiduciary duty level, and will allow us lawyers to get a bit of sleep at night without waking up and worrying about the potential liability of clients who have board designees.”