When making a lateral move, there are many factors to consider when evaluating an offer from a new firm. What should you do when the firm you are excited to join makes you the offer you have been waiting for, but the offer is for a nonequity partner position?
Candidates facing this decision often wonder if they should accept an offer as nonequity partner. Why did the firm not offer you a position as an equity partner, and how is this offer different? If you are currently an equity partner, is this a step back? How will this affect how you are perceived within the firm? How will this impact your compensation? Does this mean that you will not be able to achieve the goal of becoming an equity partner?
It has become increasingly common for firms to bring in laterals as nonequity, even those with strong practices and portable clients, who may even be equity partners at their current firms. As a seasoned legal recruiter, I regularly see very strong candidates who in the past would have expected an equity partnership offer receive nonequity offers.
Firms are shifting away from the single-tier partnership model. The rest have moved to a two-tiered partnership plan, and are leveraging this model as a means to recruit and retain the best talent in a competitive market. While firms with two-tier partnership models could still make equity partner offers, they often prefer to reserve those offers to use in very limited circumstances.
Firms make offers as nonequity for a variety of reasons:
- It allows the firm to bring in partners they are excited about but who may not meet the higher criteria for equity partnership at this time.
- Firms are thoughtful about how external hires are perceived internally, and do not want to bring in new equity partners who may not outperform those already at the firm who are working to achieve that goal.
- Firms can be more creative with compensation and include items like incentive bonuses that would not be available for someone whose compensation rests on the performance of the firm.
- Laterals often want to know what they are going to make. Equity partners are paid based in part on firm performance, and it is harder to rely on what that compensation will be at year end.
- Avoiding the equity buy-in means that partners do not need to subtract that from their day-one compensation. Nonequity partners do not need to give a portion of their compensation to pay into the loan for the equity buy-in, something that many laterals see as a decrease in the compensation from the new firm.
- It allows firms and new partners to evaluate one another before making the bigger commitment to the equity partner commitment. So, if you are in the market to make a move, it helps to be aware of this trend.
- Given that nonequity offers for laterals are becoming the norm, you should be prepared for this possibility and consider other aspects of the offer (e.g., platform, compensation) when determining if it is the right opportunity to take.
To properly evaluate an offer as a nonequity partner, it is therefore helpful to get the answers to a number of questions.
Understand the Firm Structure
No matter if you are joining as an associate or a partner, it is crucial to grasp the organizational structure of the law firm prior to becoming part of it. Understanding the structure of the firm and the support it provides to its lawyers will assist you in determining whether it is an environment where you could thrive and make a significant impact on its success. Find out:
- What is the structure of the partnership?
- What is the current makeup of equity and nonequity partners in the firm and in your practice group? Are there plans to change this balance in the future?
- Are equity and nonequity partners treated differently internally? Do they attend the same meetings and have the same voting rights?
- Does the firm have permanent income partners or fixed-share partners?
- Are income partners treated as employees of the firm and offered employee benefits (health insurance, 401(k), etc.)?
- Is there any capital contribution for income partners? What is the current capital contribution for equity partners? Most firms range from 18% to 40% of compensation for equity buy-in.
- What is the breakdown of women and minorities at the firm? How are they represented in the nonequity and equity partnership ranks? If these numbers are not good, what is the firm doing to make improvement?
Find Out How Compensation Is Determined
Most law firms look to the same data to determine compensation, but each has a unique way of weighing those criteria, including book of business, billings, cross-selling, mentorship, and leadership. Depending on who you are and your particular strengths, different systems might have different results for you. Before making any move, gather as much information as you can about the system at the firm and how it changes if/when you become an equity partner. Ask these questions:
- How is compensation determined for income partners and how often is it reviewed? Are there particular metrics that are used (e.g., billable hour thresholds/requirements, originations, shared credit on matters)?
- As a general matter, do income partners receive bonuses and, if so, how is this determined?
- Is there an upper limit or cap for income partner compensation and, if so, is that before or after any potential bonus eligibility?
- Do nonequity partners see any bonus based on firm performance?
- Do partners share credit on matters? If so, how does this work? Can income partners be billing partners on matters?
- How are the compensation metrics different, if at all, for equity partners?
- How fast does the firm adjust compensation up and down during a good and bad year? Is this the same for both equity and nonequity partners?
Ask What Needs to Happen to Make Equity Partner
Firms often have guidelines that can be described as a mix of objective and subjective criteria when it comes to becoming an equity partner. You will want to gain a strong understanding of how these factors are interpreted in your office, in your practice area, and in the firm overall. Uncover the following:
- Is there a general expectation with respect to income partners and the path to equity partnership (e.g., length of time before eligible for promotion to equity)?
- Is there a hard rule regarding book of business before someone can be evaluated for equity partnership? Is a profitability evaluation performed on this calculation?
- Is there a maximum amount of time someone can spend as income partner before "up or out" kicks in (e.g., metrics regarding originated revenue, etc.)?
- Is there a cultural expectation to becoming an equity partner? Does the firm have nonequity partners who meet objective measurements but who are not equity partners because of other reasons? If so, what are those reasons?
When receiving an offer from a new firm, focus on whether the firm is a place where you will thrive and progress versus having a higher-grade title that you feel you deserve when you walk in the door. By doing your own due diligence and finding out everything you can about the structure and the culture of the new firm, you will be able to make a better decision for your career path and end up making a move that will benefit you in the long run.
