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Equity Partnership Isn’t What It Used To Be

Recently, I spoke to a relatively young nonequity partner looking to make a career move. Despite everything that he could have listed as must-haves in a new firm, he would only consider moving to a firm that would admit him as an equity partner. To him — and many others — becoming equity partner shows a firm’s long-term commitment to him, with the attendant job security and voice in important matters within the firm. While I understood his concern, in reality, the industry has changed and being an equity partner is not what it used to be. In fact, it may not be better to enter a new firm as an equity partner.

Here’s why:

Capital Contributions

Historically, firms have collected capital contributions from equity partners only. Although this policy is changing and a handful of firms require contributions from nonequity partners, the majority of firms do not collect capital from nonequities. This is a big deal! While the norm is for equity partners to pay in capital equaling between 25 and 35 percent of the current year’s compensation, some firms require as much as 65 percent, and most partnership agreements contain provisions that give the firm up to several years to repay the partner should she or he leave. For new partners, it’s much more sensible to have an interim period with guaranteed compensation, eligibility for bonuses and no requirement of a major investment of capital — particularly for a lateral in the process of integrating into a new platform and culture. This interim period gives the lateral the best possible opportunity to decide if he or she wants to make a long term investment of a significant amount of capital in the firm.

At-Will Employment

Equity partnerships used to be like tenured professorships: Once you crossed that line, your job security was hard to lose. These days — as law firms increasingly adopt a more corporate model, including with nonlawyers brought into management positions and heightened scrutiny of individual metrics — everyone at a firm, regardless of title or past performance, is an employee at-will. Some firms are more compassionate or patient than others, but even the firms that have historically relied on strong, long-term institutional relationships are looking for partners at all levels to generate new matters and business relationships.

Breathing Room

Most firms have significantly greater business generation expectations from equity partners. Even for the most historically successful rainmakers, it is common for there to be a ramp-up or transitional period, during which fees generated at a new firm trickle in and first year results generally suffer as a consequence. This is also usually the case with less experienced partners who are bringing business and prospects with them and hope to increase their book of business as a result of the move. A well-defined path to equity partnership, including an interim period, during which the pressure to produce is lightened, can be of great value in ensuring the long-term success of the lateral at the new firm. Many firms have a policy that includes a minimum one- or two-year period during which a lateral can really get to know his or her new partners, understand how to navigate the processes and operational aspects of the new firm and introduce and integrate her or his clients into the firm. If the lateral and the firm are a good fit, equity is the logical next step.

Compensation Structure

Very few firms are strictly lockstep or have rigid retirement policies that include mandatory de-equitization. Compensation structures are more fluid, giving management greater discretion to regularly adjust points or other indices of interest throughout a partner’s career. Bonus pools for all types of partners are more prevalent and appear to be growing larger, and there is a concurrent trend toward lowering draws and back-ending compensation for equity partners to give management more power and discretion. Nonequity, nonshare or income partners generally receive the lion’s share of their compensation as a fixed monthly draw or base and are handsomely rewarded through bonuses for outstanding results.

Hybrid Partnerships

There is a trend toward partnership structures where income or nonequity partners are now “hybrid partners.” That means a portion of their compensation, typically around 10 to 30 percent, is based on the performance of the firm. In the case of a 20/80 arrangement, 80 percent of the partner’s compensation is guaranteed and the remainder is determined by budgeted or targeted estimates of annual firm revenue. The good news is that these partners reap some of the benefits of the upside when the firm exceeds its budget or target. The bad news is that this comes with a concurrent requirement of a (often reduced) capital contribution. Some firms that have adopted this model have gone so far as to market themselves to prospective laterals and new lawyers as “one-tier” partnerships. But are they really? Those same firms do not include them in the annually reported statistic of PPP (profits per equity partner). AmLaw and NLJ define equity partners as lawyers who receive 50 percent or more of their compensation as equity, i.e., a share in firm profits. Everyone who receives less of a share of profits is nonequity; which basically means that, according to the standard in the industry, he or she is primarily a salaried employee of the firm. The inherent contradiction is obvious.

The simple truth is that partnership, regardless of the shape it takes, is all about performance. The long-term importance of economics and title pale in comparison to the need for a lateral to be satisfied that the firm’s management and partnership have the right vision and resources to enable success for the partner and his or her clients. Many law firms have policies that require partners to spend some period of time at the firm prior to becoming an equity partner, except in cases involving high-profile or senior partners with a demonstrable track record of significant business. I am unaware of any firm that differentiates between equity and nonequity partner on its website, business cards, signature blocks or other marketing materials. A smart, hardworking lawyer who has the tools to be a law firm partner in 2018 and truly understands the expectations of the destination firm will succeed with or without the title. Those who don’t do what it takes to make a valuable contribution to the new firm will find that the title is irrelevant.


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