Sharing Financial Information with Junior Lawyers

When you’re ready to elevate a junior lawyer to the partnership level, you’ll likely have to handle the delicate process of sharing financial information that this employee was not previously aware of. This is happening more often as more small and mid-sized firms are going through the succession planning process. Equity partners will increasingly need to educate an associate or Of Counsel being promoted to partner, for instance, on the organization’s revenues and expenses. This can turn into a sticky situation partly because those expenses include details on payroll and other forms of compensation.

The legal issues are fairly straightforward. If partners are worried about compensation and related data getting out, they should reconsider why they are elevating this person to the partnership. In any event, they can require that the prospective partner sign a non-disclosure agreement.

Many associates have little experience reading financial documents and may need some assistance parsing out the numbers. Law firms therefore need to set aside more time than they initially estimate to get young partners up to speed. This too is largely an issue of planning.

The emotional factors involved in sharing financial information, however, can be trickier. This process often marks the first time the junior lawyer finds out just how little they’ve been paid relative to what the partners have taken in. It also may make clear to them that they’ve been receiving less than some of their peers.

Most of the time, since they’re in the process of moving up the ranks toward higher levels of compensation, the associate overcomes the surprise that may accompany financial disclosures. But this shock can also be avoided in a way that fosters more good will between that employee and the firm.

The best practice is to communicate this kind of information more gradually, starting the transition earlier to allow time for these details to be discussed bit by bit. Verbally letting an associate know roughly how much partners make can give them time to adjust before seeing it on paper. Sharing this kind of information, even in general terms, signals to the more junior lawyer that they are being treating as a future equal. This level of transparency can also prevent valued senior associates and Of Counsel from leaving the firm prematurely.

Sometimes, succession planning forces firms to address issues related to sharing financial information on short notice. This happens, for example, when a partner decides to leave suddenly, announces that they won’t sign the existing lease when it comes up for renewal, or encounters unexpected health issues. In this case, it’s key to remember the importance of educating the person looking to take on a leadership role or equity stake. Establishing an understanding that goes beyond the financial figures is critical if the firm wants to educate more junior lawyers about a shared future that includes transferring equity interests and putting into place new firm leaders.

Why Big Law Partners Struggle to Go Solo

Am Law 200 partners and other large firm attorneys are surrounded by helpers. When a computer glitch occurs, someone from IT visits your office. The billing department takes care of the collections process, so you rarely have to get involved. And some firms have an in-house kitchen with food delivered right to your desk. At some point, all these perks can become the ball and chain keeping you in the wrong job.

Time and again, we’ve seen attorneys sacrificing half their revenues and the control that comes with managing your own practice in exchange for the infrastructure offered by larger firms. Even when the draws paid out don’t match up to expectations, many large law firm partners overestimate the effort and funding required to create a new business.

As consultants to lawyers and law firms, we’ve seen that the reality of starting a firm is much less daunting than what you may imagine. Yes, you should expect a sharp decline in billable hours for your first year as you devote time to retaining clients, creating marketing materials, and hiring staff. But as you bring on new people and train them, you’ll be able to delegate these duties as you’re used to doing and focus on providing legal services. You don’t have to bill 2,000 hours or anything close to it to make a new firm financially viable.

To break out on your own, there’s no need to recreate the entire system you had at the big firm. Set up just the level of infrastructure you’ll require for the first year or so. Give yourself a few months to plan if you can, and don’t overspend on a more elaborate structure than you need to start practicing.

With the ability to outsource a huge number of functions, you can utilize the services of other entities for aspects of the business like accounting, payroll, IT, and branding. Beyond this, there are advisors who can speed up your learning curve dramatically. So, don’t give up a huge portion of your revenues by staying put or switching to another firm out of fear of the varied tasks involved in law firm management. It’s easier than ever to handle the logistical issues that arise when starting a new firm. And trust us when we say you won’t miss the lunch deliveries.

New ABA Ethics Opinion Further Strengthens Rainmakers

A new opinion from the ABA’s Standing Committee on Ethics and Professional Responsibility outlines recommended behaviors for firms and attorneys when lawyers decide to move on from their firms.  Published December fourth, the piece emphasizes the power of the client and encourages all parties to cooperate to serve the client’s best interests.

“Clients are not property,” the Committee writes. Thus, the best practices set forth in this opinion include the delivery of a joint letter from the firm and the departing lawyer to each client with whom that lawyer has had “significant contact” (a term further defined by the ABA). This notice would announce the change in affiliation and explain the client’s options in their future representation. Notably, the opinion disapproves of the practice of offering to replace a departing lawyer with another lawyer at the firm “unless the firm has the ability to retain other lawyers with similar expertise.”

The Committee also addresses the need for cooperation in sharing resources, insisting that firms not withhold access to systems or personnel once an attorney has given notice.  The opinion emphasizes every lawyer’s duty to provide all relevant records to the counsel who will be handling the case moving forward.

Overwhelmingly, the ABA’s opinion reinforces the notion that clients are and should be in control of their cases.  It is therefore the responsibility of the firm and the departing attorney to smoothly transfer the information and commitments involved. Detailed and timely communication allows the client opportunity to make informed decisions in regard to changes at the firm.

If the power ultimately lies in the hands of the client, it stands to reason that the most powerful lawyer is the one who has the strongest client relationship. Although the Committee’s opinion is advisory in nature, it could be cited with some frequency by lawyers who are leaving firms and taking clients with them.