Making the grade

One of the greatest misconceptions out there is that being an equity partner at a law firm puts you in the nest with the golden goose. The reality is that the move in to equity can be a bumpy ride at the best of times with earning liable to go both up and down, and over the last three years it has become increasingly fraught. Like the transition to partner status from associate, however, it can be a driving factor to move, that irresistible itch that needs to be scratched. To ensure it isn't a move you regret there are a number of factors you should take in to account.

Partnership structures

Equity partnership is not the same between firms. Holding equity as part of a small number of partners in a small to mid-size firm will be a vastly different experience than an equity position as one of hundreds of partners in a large international firm with an all equity structure. As part of your day to day life equity can mean one of two things: you are effectively a share holder or you are a stake holder; with the life of a business owner to go along side your day job in law.

Capital Contributions

The capital contribution you make will almost invariably be significantly higher than any you have made before and may not be your last. Though provisions are often made, from preferential loan rates and deductions from your distribution to interest bearing structures that nullify the cost of the loan rate, make no mistake it is there even if it costs you nothing today. Don't forget that if you leave, you'll be trying to get your money back too, it is not unknown for partners to stay put simply because their current firm could not afford to recompense their capital contribution. Treat it as any other investment, you need to believe in the strategy and ethos you are buying in to and expect a return on your investment. As a general rule a contribution equal to roughly a third of your remuneration is fine, equalling close to your remuneration and alarm bells should be ringing. It is worth noting that changes in banking regulation may well see an end to interest payment only structures and necessitate payment of the principal as well, a tough pill to swallow depending on the contribution you have been asked to make.

So where exactly does that money go you may wonder, beyond the obvious of enriching your life as a partner it can be there for a number of more nefarious purposes too; such as propping up debt or providing a nice tidy uplift to the top end of equity, bringing us nicely on to...

PEP (Profits Per Equity Partner)

PEP figures often hold a complex relationship with firms. Just because a firm has a generous looking average PEP that does not mean it is the figure you'll be achieving any time soon. The critical part here is the PEP spread, the wider the spread the harder it will be to hit the magical figures your heart desires and the more likely your capital contribution is bolstering that top end, particularly if there is a regular flow of new partners joining the firm. It's also likely indicative of virtual tiers of equity and those making the real decisions will be sitting comfortably at the top.

Drawings & Distribution

The first year of equity can be difficult financially. Coupled with the sizeable capital contribution is the drawings and distribution structure, with firms taking very different approaches. A fact to be aware of is that at some of the leading-name firms the drawing schedule in the first year can mean you will be earning significantly less than you were and even less than some associates in the same firm and it may not end there. There may be caveats on distribution linked to the firm’s performance and it is often scheduled over a number of months, during difficult times it may not be seen at all for a significantly longer duration than anticipated. The initial 12 to 24 months can be a stressful period because of this and it is essential to have funds behind you to ease the strain.

Final Thoughts

There are numerous firms that have suffered over recent years and many still have skeletons hidden in their closets; as an equity partner you are expected to share in both the pain and the gain. Moving into equity can be a fantastic experience but taking the time to recognise what equity means to you personally, understanding the firm, its values, financial state and invariable politics, and having realistic expectations will help ensure the move goes smoothly. Then again some itches just have to be scratched…