More Firms Are Willing to Work for Stock Options

For some cash and stock options, the headhunting powerhouse Heidrick & Struggles will help recruit a chief executive and other top officials to run your company.

For the same deal, law firms will line up to do your company’s legal work. And no need to fork over millions of dollars to promote your start-up. Some advertising and marketing firms will swap ad space for equity in your firm.

Seeking to cash in on highflying technology stocks and the booming stock market, professional firms are making new offers to some clients: Will work for stock.

Trading services for stock has been taking place on a small scale for decades, but now professional firms are increasingly employing the practice--especially since clients are vigorously competing for their services in this super-heated economy. Indeed, some headhunters, consulting firms and investment bankers will work for clients, mostly “dot-coms,� only on the condition that they get the opportunity to purchase stock at an agreed upon price.

Other professionals will discount or trade their services for stock, gambling that they would hit the stock jackpot when their clients become publicly traded companies.

“It has become clear that the way to riches is not through collecting fees but through acquiring successful equity stakes,� said Michael Hall, a partner in the Silicon Valley office of law firm Latham & Watkins. “Many professionals will not take on new engagements without getting the opportunity to acquire meaningful equity stakes.�

Take, for example, Heidrick & Struggles, which is often retained to find top executives for some of the nation’s largest companies. The executive search firm now boasts its own “equity billing program,� receiving 33% of the first year’s cash compensation of a placed executive, plus a third of the executive’s first year vested shares. Last year, the firm took cash and stock options in 234 clients compared with 18 in 1998.

Heidrick executives say their equity billing program is a common-sense reaction to recent trends in the job market where more executives are leaving well-established firms to accept lower salaries--but stock options--in start-ups and smaller companies.

“It no longer made any sense for us to accept only cash compensation because that was artificially low,� said Stephen Unger, managing partner of Heidrick’s media, entertainment and interactive content practice. “Now, if a prospective client doesn’t want to make up the shortfall with stock options, our preference is to avoid doing work for these kinds of companies in favor of others who are aligned with our interests.�

Lucia Steinhilber, who runs Heidrick’s equity billing program in Palo Alto, said most of the arrangements have so far been successful. Heidrick raked in profits when it cashed in its stock warrants for placing executives in Covad Communications, ConvergeNet Technologies and NetGravity.

“Not all arrangements are going to work out,� Steinhilber said. “But over the portfolio, we’re hoping to come out better than if we had accepted only cash as payment.�

Professional firms like Heidrick can require stock options because their services are in high demand, said Jon Goodman, executive director of EC2, a high-tech business incubator at USC.

“Some of these professional firms are getting like country clubs where you have to apply for membership,� Goodman said. “They’re being very picky about who they choose as clients because they only have so much bandwidth people to do the work.�

Goodman said the arrangement is also beneficial to entrepreneurs who don’t have to spend their limited cash to buy services.

Take, for example, Legalopinion.com, which for $39.95 provides consumers with a written legal opinion from a licensed attorney. The Seattle start-up recently bought $40 million of advertising without shelling out a dime. For 12% of Legalopinion’s shares, a Newton, Mass., advertising firm agreed to run an advertising blitz and placed ads on Internet banners, television, 200 magazines and 2,000 radio stations.

Legalopinion’s president, Don Crompton, said the arrangement was similar to raising financing for a company--except that it didn’t carry all the costs. “This is an inexpensive way to get national exposure,� Crompton said. “We have to give up good stock, but we’re getting full value for it.�

Just ask Joseph Raymond, who needed national exposure for his cash-poor MedLawPlus.com, Inc., a commercial Web site where lawyers, doctors and accountants bid against one another for consumers’ legal, medical and financial work. Only last week, Raymond struck a deal under which it would pay online bookstore Alphacraze.com in stock based on the number of referrals Alphacraze sends to MedLawPlus’ Web site.

“It’s a great benefit to use stock,� Raymond said. “It makes my cash go farther. Plus, there is another benefit: You’re establishing a partnership with your stockholders.�

Indeed, officials with many law firms say their clients prefer arrangements in which lawyers hold equity stakes in their companies.

John T. Frankenheimer, co-chairman of Loeb & Loeb in Los Angeles, said the incentive keeps lawyers focused on helping to make their clients successful.

But Frankenheimer insists that his firm is “very discriminating� when it accepts stock in lieu of fees.

“This is not something that we can do across the board,� he said. “It would bespeak a great belief that the client has started to be successful or we believe strongly in their prospects.�

Frankenheimer and other law firm leaders say they prefer to be paid cash for their service and to make small investments in their clients.

“Equity is fine, but you may not be able to liquidate the equity two or three years down the road,� said Tower Snow, chairman of Brobeck, Phleger & Harrison, which has 635 lawyers servicing 3,200 technology clients alone. “But you need money to pay the bills. Our preferred course is to invest.�

Indeed, Snow’s law firm recorded handsome profits from investing in clients and technology stock rockets Broadcom, NetZero and Rhythm Connections, among others. Snow wouldn’t specify but acknowledged that Brobeck has a stock portfolio worth tens of millions of dollars.

Another Silicon Valley law firm, Wilson Sonsini Goodrich & Rosati, did better, holding stock in several dozen clients worth more than $200 million, by some estimates.

Many experts say some companies are becoming more stingy with their stock and would rather pay for services.

“Equity has become the mother’s milk of some companies,� said Hall of Latham & Watkins. “Some clients don’t want to trade it unless they really have to.�