Business Week Magazine said, "Larry Sonsini is unquestionably the most sought after lawyer in Silicon Valley." As chairman of law firm Wilson, Sonsini, Goodrich and Rosati, he has overseen hundreds of stock offerings. With the legal team of over five hundred lawyers, a third of the Silicon Valley public companies are his clients. In this 2003 interview Larry shares his view on technology and public offerings.
RW: So tell me about your younger days.
LS: Well, I was born in New York. I was born in upstate New York and my parents
left a very small town in upstate New York in 1949 to come west. Literally,
my dad did not have a job. We got into an old Studebaker and drove across country,
I was about eight years old at the time, and settled in Los Angeles. But my
dad was a bit of an entrepreneur and he went to work for Howard Hughes, initially
with Hughes Aircraft Company, and later with the tool company that ended up
building the helicopters and some of the Gatling guns that were used in the
Vietnam War and, and, and the following. Dad's principal background really was
in quality control, and he was pretty much uh, a major administrator in, in
I went to school at Berkley and came up here in 1959. At the time I thought I was going to go to med school. But about the time of my senior year I finally decided that, oh, I don't know about that, I had an interest in the law, particularly the business aspects of law. So I went to a very fine law school in, in this country right at Berkley, Boalt Hall School of Law, and I immediately started to have an emphasis upon the business side of the law, particularly corporate law, securities law, finance, merger and acquisitions, and, and that type of, that type of program.
When I graduated I thought I was heading back East to go work with one of the major Wall Street law firms but a security law professor of mine said he'd heard of a very small group of lawyers in Palo Alto that were starting a firm. And one of them was John Wilson. And I met with John and he started to talk to me about a new type of business model, and that was called venture capital. And he was involved with some of the very earliest venture capitalists. One of which was Tommy Davis, who was the co-partner with Arthur Rock, that started Davis and Rock in the late '50s and, and early '60s.
Prior to my joining them they were a, a rather informal partnership. There were only four of them and they wanted to build a firm to represent these young entrepreneurs and these venture-backed start-up companies. So I, I must have had some entrepreneurialism in me because lo and behold I abandoned the idea of going to a large firm and drove down here in an old Volkswagen Beetle and started the practice of law in 1966 on Welsh Road in Palo Alto and immediately got involved in representing some of the real pioneers in technology, and also got involved in building the business plan for the law firm because I had a dream, and the dream was to build a full-scale law firm that can service a technology company from infancy to as large as it can become. And that was the vision. And that's what we started on.
And in the early days, we primarily concentrated upon semiconductor companies because in the late '60s and early '70s that was the major driver of, of the businesses that we were doing then. Software came much later. Peripheral equipment, whether it be disc drives or, or even computers came, came later. And one of my very earliest clients in, in the business was Electronic Arrays, a company that was located in Mountain View making some CMOS circuits, and that was my first real baptism to that industry. And I represented them very early on from a private stage to when they went public and when we later sold it.
Along the way I got to know a lot of people in the industry. One of my favorite clients was Bob Noyce. Bob and I became good friends, and I represented him a lot personally on a lot of his investments and a lot of the things that, that he was doing. And of course one of the long-standing relationships was with LSI Logic. I represented Wilf Corrigan when he was at Fairchild, and particularly the takeover of Fairchild by Schlumberger, and the battle that was had with another company called Gould, and I advised Wilf on some of his personal situations. And after the sale to Schlumberger he came to see me and said I, I want to start a semiconductor company, and I want you to be a part of it, and I want you to be my lawyer in building the company.
So, I remember we were in my office, which at that time was across the street here on Pageman Road at Palo Alto Square, and we outlined the beginnings of LSI Logic. And one of the first things we did was to really put together the, the capital to form the company, and I made a call to Don Valentine who was at Sequoia Capital. We also called up Tom Perkins at Kliner-Perkins and we, we put the financing together for LSI Logic. And that was the beginning of it. And I've been involved with LSI Logic ever since.
I was on the Board for a number of years, went off for a few years. I'm back on the Board of Directors. They are a, a principal client of, of the firm. The, the genesis and the maturity of LSI Logic really reflects the growth of technology enterprises in the valley and now in the country. You know, the, first of all the concept of an idea, and then putting together the entrepreneurial team: the engineers, the marketing people, all coming together to really build an enterprise, and you put all the components together and you bring in the venture capitalists, you bring other service providers, accountants, lawyers, and you really start to form the model for the enterprise and grow with it. And we went through a lot of periods where we did financings, or we did strategic partnership and alliances, set up wafer plants, took the company public, did acquisitions, and my law firm basically grew with those enterprises. You know, at the time that I was involved with LSI Logic we were probably twenty lawyers. Well, you know, today we're five hundred and seventy-five lawyers. And today we represent not only start-up companies but some of the largest companies in the country, people like Hewlett-Packard, Sun Microsystems, Apple Computer, and that has been pretty much known in the story of the technology industry in Silicon Valley. But we are like those enterprises, we built a service firm that grew with them.
RW: Well, what I remember back in 1980 when we started LSI that you already had the procedures down to a photocopied to-do list to make sure that we were clean if we ever could go public: so no internal loans, no funny business, make out a will. And I remember in 1980 going over that and thinking, "These guys really, they really have this thing worked out. Shrink-wrapped. This is how you, how you start a company."
LS: Well, that's right. You know, the questions don't change, it's the answers that do. And we developed early on the template for being able to commercialize technology in a business context. We, we understood how to put the incentives together for the founding team, how to build the incentives for future employees. We understood the structure you needed to put together to attract venture capital and how that should be put together. Very important of a lot of what we do deals with understanding the technology. I'm not a technologist but understanding how to protect an intellectual property, how to put in place the processes and procedures in the enterprise to commercialize this technology. And those were all things that became the core of this law firm and that was providing those services to build enterprises from an early stage.
RW: So how many public offerings have you been through?
LS: Well, you know, I, I, I lost count. I, I'm sure I've been through, personally, probably over two hundred, maybe even three hundred public offerings. We had continually led the nation as the leading law firm doing initial public offerings. You know, we did in, in 1999 during the Great Bull Market for technology, we did over a hundred public offerings in that year alone. So, I have done very many. The firm has done a large number. And I think that's one of the, the expertise of the firm and one of the, one of the attractions for many clients to come to us is our ability to not only do private financings, but also to take companies to the market in those initial public offerings. And it's more about having in place the structure that you need to have to make the transition from being a private enterprise to a public enterprise, where factors such as corporate governance become into play, independence of board directors come into play, greater responsibility of fiduciary duties to shareholders comes into play. And that transition is an expertise in which we, we have.
RW: Well, how do you, how do you perceive, how do you see going public? That reached epidemic proportions and a lot of companies that went out that , that shouldn't have. So are you positive on, on public offerings?
LS: Oh, very much so. Public offerings are nothing more than a tool in building an enterprise. A public offering should be viewed as not an end goal, but a part of the process of maturity in an enterprise, because you're doing more than raising capital in a public offering. You're creating a market. That market accomplishes several things. First of all, it gives you a currency to do other things with, such as acquisitions. You can now buy companies by using your stock and you are more attractive to be, to those companies because your stock has liquidity. It's an alternative to cash and it gives you greater flexibility. Secondly, by going public you do create a market that gives you a vehicle for your employees to realize upon the equity incentives that they have in the company. A lot of the hard work that they put into the company, sometimes for lower salaries, and rely it upon growth and equity. They now have a market to, to go to. It gives you an opportunity to increase the profile of the company. Credibility in the market place, because being public carries with it disciplines about maturity, corporate governance and those kinds of things. So the public offering process is always going to be with us as long as we have vibrant capital markets and we have the will to build enterprises. But it's a vehicle. It's not an end game.
RW: But there have been excesses. And in stock options which is one of the hot areas right now of discussion.
LS: Well, I don't know whether I'd use the word excesses. There have been public offerings by companies that may have not been ready to go to the market. There have been public offerings by companies that may have been overvalued at the time. But those are just the dynamics of the market place. You're going to have those swings, and I say let the marketplace correct and deal with those. Let us not interrupt the system. The stock options are a very important tool to incentives entrepreneurs. They're a very important tool for building enterprises. There may have been periods of time when people have criticized the use of options, but I think again, that's part of the process of us building companies and building our, our systems and our attitudes and our best practices in managing our companies. I think we've got to be careful. We've got to be sure that we don't try to correct excesses by destroying the system itself. You can over-correct. And I, I think that that's a balance that we strive, got to strive to keep in place.
RW: So what, what services does the firm provide?
LS: Well, we provide a variety of services obviously, but to break them down, I, I, I always like to articulate it this way: we try to provide the services that the top management team and the Board of Directors need at least eighty percent of the time. So we provide, for example, a corporate finance practice that really runs the gambit of financing from private to public financing, from equity to debt financing, and those kinds of securities and derivatives. We provide a corporate law practice that ranges from not only compliance with security laws but also corporate governance. We have a large technology practice where we do intellectual property transactions, such as licensing and technologies. We have an anti-trust practice, trademark, trade name, copyright practice as part of our technology group. We have a lot of support practices that are important to enterprises: tax, real estate, debt practice, for example, employee benefits dealing with stock options and equity incentives. We have a significant litigation practice dealing with intellectual property litigation, employment law litigation, securities and SEC enforcement litigation. So as you can see we, we provide clusters of boutiques of expertise inside the firm, and when we represent an enterprise, we'd bring together these specialized fields and work with management of those various disciplines. And that way our business plan mirrors the business plan of the growth enterprise.
RW: How do you compensate these boutiques? Do? Are mergers, mergers and acquisitions, are they better paid than somebody worrying about intellectual property?
LS: No. Not necessarily. We, we are a partnership. We, we share in the profits. We're a merit-based system. So, we take a look at everybody's performance and we value a number of quantitative and qualitative factors that really transcends one's particular discipline, whether you're a technology transactions lawyer, a security litigator, or a corporate securities lawyer.
RW: So what happens when some young people show up here with an idea?
LS: Well, what happens is, is we, we'll sit down with them, typically a corporate lawyer, and talk to them about their idea. We'll do not a lot a great due diligence on that idea. We're not here to say the technology will work or not work. That's not our job. We're here to help them fulfill their dream of building an enterprise to accomplish some objective, to realize on their technology innovation. And so we will, you know, coach them, and at the same time advise them on the pitfalls, the issues that they have to address in trying to commercialize this concept of theirs. Sometimes we will introduce to them venture capitalists to help them get their funding. And we will basically start to grow with them if they do get funded and represent them.
RW: So how much do you charge for this service?
LS: Well, you know, sometimes when someone walks in the door with an idea they don't charge anything at all. Sometimes we have to wait until they get funded. And if they don't get funded we probably charge them very little if anything at all. So there is a risk profile here, but that's part of our business. I mean, I think that we have enough volume given our reputation and given the success that we have that we can afford to do that. We really make our money by building great enterprises, and as they grow and become big and successful, that is where we become successful. And if we have to put in our time at no charge for a young entrepreneur that has a wonderful idea but maybe can't get funded, that's okay.
RW: So how, how does that relate to the Silicon Valley culture and perhaps the difference between an East Coast or a European-based culture?
LS: Well, I think that there is a great difference. And we see it very much in our law firm because we're a unique law firm. We're unique because we represent growth companies from infancy, the entrepreneur, to very big, global, multi-billion dollar enterprises. Consequently, when it comes to representing large, global, multi-billion dollar enterprises such as Hewlett-Packard, we compete with the New York law firms on that playing field. We have here the disciplines, the scalability if you will, the talent, and the skills to provide those kinds of services. What makes us unique is we also have the same kind of skills that allow us to represent a, a, an entrepreneur. We have lawyers that are focused on the venture capital practice. We have the venture capital practice being a very core part of who we are. And when it comes to that practice, we compete with other law firms, small boutique technology law firms. So we have developed a business plan and a business model that allows us to be very focused on the entrepreneur and the start-up company, and what I would say in vertical groups, that is to say corporate partners running corporate practices servicing young companies, but we have this capability at the same time to scale our practice into what I call horizontal groups of key disciplines, mergers and acquisitions, corporate finance, litigation, to take those enterprises to the next level. That's what dynamic and unique about this law firm.
RW: And so is this indicative of a Silicon Valley kind of culture?
LS: It's indicative of a Silicon Valley kind of culture, I don't think there are a lot of law firms like us. We aspire to be, you know, a firm that has a national foot, footprint and a global reputation, but the model certainly follows the growth of technology in Silicon Valley. It is unique, but we have transported that: we have offices in other technology communities, such as Kirkland in Washington, Austin, Virginia, Utah. We're looking very seriously at Southern California. So, we want to be where technology is. We want to be a part of technology communities because technology enterprises at the early stage don't really do well if, if they don't have their advisers located where they are. But as a company becomes bigger, geography becomes less important. It's expertise, and that's talent.
RW: You ever invest in these small companies?
LS: Well, we do but we pioneered the concept of investing in companies that
are clients a different way. Very early on we adopted a policy that basically
prohibits individual lawyers investing in clients. Secondly, we have a policy
that says that when we invest, we're going to invest predominantly in young
startup companies basically on the same terms that either the founders or the
venture capitalists invest. Thirdly, when we do invest, we usually invest a
relatively small amount of money. It is not our policy to take large positions
in companies. Rarely do we ever have anything that approaches one percent of
an enterprise, or two percent of an enterprise. We hang on to those investments
until they become liquid, and then only once they're liquid, such as through
a public offering or a sale of the company, do we distribute out the securities
to our partners. And we don't invest in public enterprises.
Our policy was designed to do several things. One, to maintain a level of independence and integrity that a law firm needs in advising enterprises. Two, to make sure that everybody in the organization has an opportunity to share in the equity investment: because corporate lawyers see the investments because they're on the spot, but your litigators, your tax lawyers, they may not. But we want to build one firm, one firm thinking, one major enterprise, and so these policies facilitate that team making. We don't take stock for fees. We invest our own money when we do. And it's a policy that has, I think, been followed by a lot of other organizations.
RW: Well, you've been associated with a lot of semiconductor companies. Do you have any stories about some of those characters?
LS: Oh, I have lots of memories, you know. I, I remember one company that I helped get started was Monolithic Memories run by an Israeli, Zeff Drori. And I remember working with that company and building that company and had some wonderful experiences. Irwin Federman became its Chief Financial Officer and ultimately became the successor CEO. We sold the company to AMD and I remember so much talking to Jerry Sanders about how to put those companies together, and one of the directors went on to be a director of, of AMD, Charlie Blalack. I remember one Saturday morning sitting down with a young technologist: T. J. Rodgers. It was a Saturday morning and, and T.J. and I had a meeting with a venture capitalist called LJ7 of Sevin Rosen out of Texas. And T.J. was a very energetic, enthusiastic entrepreneur, a fine technologist, and had this vision of building his own thing. And I remember putting Cypress Semiconductor together, which , which was a thrill and, and, and a fun, a very fun company. Certainly LSI Logic, I told you that story. You know, I remember a lot of the relationships I had with people at Intel. I mentioned Bob Noyce, but Gordon Moore, Andy Grove, Les Vadasz, and the times that sometimes we socialized together, sometimes we played tennis together, and watched those enterprises grow. So the point is is that all of them were characterized by some common themes. One was this great desire to commercialize the technology. All of these enterprises were companies that had the vision to be built to last. They weren't just projects. They just weren't going to be short-term opportunities. They were driven by leaders that had visions. You know, a Jerry Sanders, a Wilf Corrigan, a Bob Noyce, a T. J. Rodgers, a Charlie Spork, the list goes on. The great commitment to technology, some of the great engineers that were put together in these enterprises I think really pioneered the United States in leadership in semiconductors. And it was a resilient group, and we still are resilient today. I remember when we, we thought we were losing market share to Japan, and people thought that we, we would fall behind in semiconductor technology and how we all got together and talked about that and rallied that. That isn't going to happen. So it, it's a wonderful story of the freedom of opportunity and the will of an individuals to, to build enterprises.
RW: Well, you were, you've been in the business long enough that you were here with the original Fairchild, with the Noyce and Moore Fairchild before ,...
RW: So what, what did you notice? What happened when the Motorola people came in? The Hogan people?
LS: I wasn't that close to it. You know, I, I think I'd really got involved much later.
RW: Well, how about the Schlumberger people? Were you involved with, with them at all?
LS: Just on the periphery of that.
RW:Oh, Okay. Well, they didn't do a real great job with the company there
LS: Not really
RW: How about some of the failures? We talked about all the successes. How about some of the failures? And what is, would have caused that? Obviously, the Silicon Valley, the ability to fail and not be personally destroyed by that, that's key to our whole culture here, but there have been some other failures that. Well, we talked about Schlumberger. Almost every time there's been an outside buy-out or take-over of a local company that has ended in disaster.
LS: Well, let's put that into perspective. I think that mergers are difficult to do in the technology industry. Maybe in any industry. But that doesn't mean they shouldn't be done and can't be done, and there's been a lot of great successes. I think that often times the failure is not in the concept of putting two companies together, but the lack of focus needed to integrate enterprises once they're together. I think if you look at the work that Hewlett-Packard is doing in integrating the acquisition of Compaq, you'll see the importance of that element in it. So a lot of failures that I've seen in mergers where outsiders have come have really been failures of omission to take the steps necessary to adapt the cultures and assimilate the culture and integrate the entrepreneurial spirit in the enterprises. If, if those things were done those mergers could have been very fine. Mergers are an important vehicle to the technology industry, to all industries. It not only allows you diversification, it allows you to leapfrog technology opportunities, and it gives you exit vehicles, or exit strategies. Other failures from companies that just didn't make it, gosh, you run the gambit. Sometimes I've seen technologies that was absolutely wonderful technology but the time and market was wrong. It was ahead of its time and it could not commercialize and get a price performance point where it needed to be to sustain itself. I've seen other enterprises that couldn't scale their operations to develop the cost structure and the performance structure. I remember I used to, at one point represented over eight or nine different disc drive companies. You look around today and maybe there are only two or three really truly independent companies, and I'm fortunate enough to represent a couple of them, Quantum and Seagate. But the same thing happened with a lot of the computer peripheral companies that were not able to develop scalability. But there are a whole host of factors that come in to play: competition at the moment, as I say, time-to-market issues, an inability to scale to the next level. Failure is a part of what we are in building enterprises in the technology industry. We're going to have failures. Without them we would not have successes.
RW: Well, for the future semiconductors, at least, manufacturing of semiconductors, with plants costs two, three billion dollars now, and they have a lifetime of five, seven, ten years, how, how is that going to shake out?
LS: Well, I think we are definitely in this country transitioning away from building our own great internal wafer manufacturing plants. I remember in the '80s it seemed that every semiconductor company we started, part of it was to build a wafer fab capability. That's much different today. We have many of our enterprises that are transitioning out of wafer fabrication. If you look at the business plan of LSI Logic you can see some of the transitions it's doing. And then you have some wonderful enterprises that had been built and are successful that have no wafer fab capability. They rely on outside sources. I think of companies such as Xilinx and Lattice Semiconductor and Altera to name a few that rely so much on their technology and their innovativeness and their designs. Clearly in the semiconductor industry we are in a major inflection point. We are going to very large offshore wafer manufacturing facilities. And you see the emergence of China in the semiconductor industry. Our firm was very much involved in the formation of the first truly independent large PRC or Chinese wafer semiconductor company. And we'll see more of that offshore. The United States I think will become more technology focused: innovative design, advancements in software, our whole electronic design capabilities, our semiconductor equipment capabilities, and I think the hardcore of producing wafers is probably going to be done more and more offshore.
RW: Well, finally, what would you recommend to, to some young people that were either considering getting into technology or maybe striking out on their own? I mean, is there a future for them or is that all passed now?
LS: Oh, I think there is a, a very big future. Technology will continue to drive the large economies of the world, I think, in the long run. I think technology is a very important part to the economy in this country. Technology creates jobs. Technology improves our lives, the quality of our lives. We always have the quest and the thirst for innovation. Technology's here to stay. And we'll go through periods of business cycles, of course. But the future looks very, very bright. We have so much to improve on. I think we're just in the infancy of the, of information technology. I think the Internet is in its infancy. I think what we're doing in biotechnology is in its infancy. And I think that what we're going to be able to do in digitizing the world to improve our efficiencies has a long, long way to go. I think the real future in technology is, is yet to come.
RW: Well, thank you, Larry.
LS: Thank you, Bob.