Famous Silicon Valley Attorney Back with Virtual Law Firm

Anyone who has lived in Silicon Valley for some time knows entrepreneurial attorney Craig Johnson. Once a partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, Johnson left in 1993 with 13 of the firm’s attorneys to found Venture Law Group, a firm that successfully catered to high-tech companies like Hotmail, Yahoo, and Red Envelope but skidded during the downturn and by 2003 was forced to merge with the national firm Heller Ehrman.

Johnson, now 61, stuck around Heller Ehrman for a couple of years, then bailed, telling a reporter in 2005 that “I was always a business person in lawyer’s clothing.” Indeed, he has spent the last couple of years making seed investments in tech companies. But now Johnson is back as co-founder and chief executive of a brand-new, Web-based law firm that aims to change the way that law is practiced — and the way that lawyers live.

The concept couldn’t be simpler. Called Virtual Law Partners, the firm’s attorneys — 18 and counting — work wherever they want, whenever they want, using a customized platform that lets them share documents and checklists and billing information. Because there’s little overhead beyond administrative staff (who also work where they please), the firm’s attorneys, who set their own fees, keep 85 percent of what they bill clients. It’s a far cry from the roughly 33 percent of fees that attorneys at traditional firms keep, thanks to their overhead and the profits that get paid to partners.

Late yesterday, I caught up with Johnson at his home in Portola Valley, a woodsy town of 4,500 residents just west of Stanford University.

Seems like you can add as many attorneys as your platform will support. How big will this firm will be in another year or two?

We’re very selectively adding about four attorneys per month. They’re mostly in the Bay Area right now, because Northern California is where most of the people who initially came to do this were located. But this is going to be a national, even a global firm. We just want to be sure it grows at a measured pace.

Presumably, establishing a culture is going to be key to your firm’s success. How can you pull that off?

We strongly believe that face-to-face meetings still matter, so we’re getting people together for parties every other week to blend the real and virtual worlds and make it a happy place for people to work both professionally and personally. We’re spending time on integration and orientation issues. I also talk with each of our partners at least once every two weeks. Still, it’s a new area. Creating a scaled virtual service business, whether recruiting, accounting or law, you face unique challenges. You don’t see people in the hall.

Attorneys set their own fees. Might that confuse or irk clients who work with more than one attorney from your firm?

The prices are market driven. People have different areas of expertise. We provide informal guidance about what others are charging but we pretty much let them make their own decisions. They’re the most vested in terms of what they charge.

You’re spending money on a technology platform and IT staff and administrative staff and marketing, but this organization seems to run light. When will you be profitable?

We expect to be profitable in next six to 12 months. We consciously set the balance of revenue split way over on the side of our attorneys, though we figure that when we reach 50 to 60 attorneys, we’ll be making enough from management fees [meaning the 15 percent that the firm keeps of its attorneys’ fees] to be profitable.

If you really scale this thing, you’ll be wildly profitable, won’t you? Your costs won’t scale along with your staff.

If we truly become a large law firm, with 250 to 500 attorneys, 15 percent of every billable hour will be more than we need to run the business, so we’ll take a substantial part of that and put it into a bonus plan for our attorneys to promote good citizenship within the firm — like awarding those who help in interviewing candidates. Then, at the end of the year, we’ll figure out how much money we don’t need and that will be divided up among everybody depending on the points they’ve earned.

Sounds like a fair model.

We copied it from the virtual CFO firm B2B CFO, to which our CFO belongs. Virtual firms in all kinds of services businesses are popping up everywhere. We just happened to be one of the first to do this to scale in the legal field.

How many resumes are you seeing?

We’ve only been public with this firm about a week and we’ve been getting hundreds of resumes, many of which are extremely high quality. When we started planning the firm a year ago, the idea was to take people who were transitioning to their own practices and were at a dead end and provide them with a platform. It was kind of a roll-up strategy. What I’m coming to realize is this model is as attractive to people with big books of business. I’m having two meetings in the next two days with partners with large books of business from large firms who are intrigued by this model.

A few years ago, you said you didn’t want to practice law anymore. Is that still true?

I reactivated my bar membership but I’m not doing any client work. Work-life balance has to start at the top and I’m absolutely committed to it. I get my bike rides and parties and movies in. This is all about improving quality of life for everyone, including me. My motives here aren’t financial, though I do think Virtual Law Partners will be successful financially. My motives are doing something different in an industry that’s been remarkably resistant to innovation.

What did you learn from Venture Law Group that you’re applying to Virtual Law Partners?

A lot of the DNA comes from Venture Law Group, which had a very strong culture, very high morale, and was very non-hierarchical. But the two firms do have different values to an extent. At Venture Law Group, work-life balance wasn’t a core concern. Also, we had some great success but also rough times during the Internet bust. We think in this model, with very low overhead, the firm could survive any economic event because we’re keeping expenses so low and attorneys are being compensated on their own. We don’t have any large real estate commitments that we’ll suddenly be unable to carry, for example.

What happens if you happen to hire a bad seed? What’s your liability?

First, the partners pay for their own malpractice insurance, and health insurance, though we negotiate centrally for the best possible rates. But if we have a rogue partner, we can terminate them in 30 days without giving any reason. Everyone agrees that they have no tenure. We have to be able to act quickly to expel someone from the organization if necessary.

Regarding the idea of cross-liability, it isn’t something we worry about. When California adopted its LLC structure in 1996, one of the express reasons it did so was to eliminate cross liability, so that one partner isn’t liable for another.

Like lots of service providers in the ’90s, Venture Law Group sometimes took equity in exchange for its services. Can you imagine that happening again with this firm?

I don’t anticipate that happening. Also, though we’ll be representing tech companies and startups and venture capital firms, we’re also perfectly happy helping the in-house department of General Electric. I think frankly, over time, a relatively small percentage of our attorneys will be doing startup work.

Really? Yikes. Does that speak to your view on the economy in the Valley?

I think people coming into this model are doing it to support their families, so in most cases, they need cash compensation since we’re not paying salaries.

My main observation about what’s happening today is that you can’t have a situation forever where something goes in goes in and nothing comes out. It’s been six or seven years now and except for a few aberrations like Google, there’s been no meaningful liquidity. I wouldn’t go so far as call it a crisis in the venture industry, but…

If, theoretically, you were focusing again primarily on startups, what companies or sectors would you be targeting?

Clean tech. That’s for real. There’s no question in my mind that that’s going to be huge.