Business & Practice

Snowflake’s IPO Was a Startup Stock

Success For One Big Law Firm
By Brian Baxter
Sept. 30, 2020, 4:55 AM

Cooley lawyers have estimated $150 million stake in Snowflake

Critics see IPO stock holdings eroding lawyers’ independence

Snowflake Inc. raised $3.4 billion in a record-setting initial public offering that sent its stock price soaring
and provided blockbuster returns for investors, including the outside lawyers advising the company.

Cooley, a Palo Alto, Calif.-based firm with more than $1.3 billion in gross revenue, represented the cloud
data company on its stock market debut earlier this month. Current and former Cooley lawyers also have
a roughly $150 million piece of Snowflake through GC&H Investments LLC, an affiliated investment fund
that snagged a lucrative stake in the technology unicorn.

That puts the Cooley lawyers’ venture fund alongside larger Snowflake backers, like Warren Buffett’s
Berkshire Hathaway Inc. and Salesforce.com Inc.’s investment arm. GC&H’s stake in Snowflake is a boon to
the individual Cooley lawyers who have invested in the fund, rather than the firm itself.

Taking stock in startup clients is now a regular practice among firms and lawyers that advise technology
companies. Still, the investments also come with some risk and have raised questions about conflicts of
interest.

“It’s a practice that’s well understood and the SEC has issued a bunch of letters on how to structure this,”
said former Securities and Exchange Commission member Joseph Grundfest, a Stanford University law
professor who often advises startups.

“The law firm invests at the same price as everyone else—it’s no special deal—and the amount of the
investment is typically a small percentage of the total amount that’s coming in,” Grundfest said. “The
investment is done not through the law firm itself, but usually a separate fund where the money comes
from a law firm’s partners and associates.”

San Mateo, Calif.-based Snowflake, Cooley, and the lawyers managing GC&H largely declined to comment.
John Dzienkowski, a University of Texas at Austin School of Law professor, has raised concerns about
lawyers making equity investments in their clients. He said that relationship could threaten attorneys’
professional independence and poses questions about which hat a lawyer is wearing when advising a
company.

“The original Wall Street firms have usually stayed away from these investments because of their culture,”
said Dzienkowski, who once co-wrote a law review article looking at how such arrangements can influence
lawyer independence. “I think the conflicts we highlight are still there in all law firm equity investments.”

A Snowflake Windfall

GC&H collectively owned 611,573 shares of Snowflake’s “Class B common stock” at the time of its IPO
earlier this month, according to a company prospectus.

Snowflake’s public offering was an all-time high for a U.S. software company. The stock price hit $222.58
per share post-IPO, a valuation that put the small cut of the company held by GC&H—about two-tenths of
1% market capitalization—at $136 million.

This week Snowflake’s market cap hit nearly $72.8 billion and its stock price $259.13 per share, according
to Bloomberg data, putting GC&H’s potential haul at $158 million.

Mark Tanoury, a veteran corporate and securities partner based in Cooley’s headquarters in Palo Alto,
Calif., led a team from the firm counseling Snowflake on its IPO, which a securities filing shows generated
$2.3 million in legal fees and expenses. Goodwin Procter advised underwriters on the offering.

Tanoury is also one of seven current and retired Cooley partners named in fundraising filings as a director
and executive officer for GC&H. The outfit takes its name from three former name partners at what was
once Cooley, Godward, Castro, Huddleson & Tatum. The firm, despite shortening its shingle, has grown
into a 1,100-lawyer IPO powerhouse with offices in 16 countries.

In an email to Bloomberg Law, Tanoury confirmed the calculations used to determine the value of GC&H’s
Snowflake stake. He declined to discuss if—or when—the group would sell its stock in the company.

All About Equity

Tanoury knows well the rise and fall of the capital markets in Silicon Valley.

He was on the cover of The American Lawyer magazine in April 2000 as Cooley set aside $10 million to
invest in startup and early-stage clients, double the amount the firm earmarked for such investments in
1999. The trade publication reported at the time that a separate fund controlled by Cooley lawyers
handles its investments, and if the firm takes stock in lieu of legal fees, the client equity is held by Cooley
itself. Returns from the fund supplement Cooley salaries and partnership draws.
In order to offset an exodus of legal talent fleeing the drudgery of law firm life for potential stock option
riches at high-flying startups, Cooley in the late 1990s began requesting equity on top of the fees it was
charging some emerging company clients, according to a 2002 Fortune feature story. The piece noted that
partners had a $500,000 annual cap on venture fund investments and described how Tanoury and Cooley
survived the IPO market’s collapse and burst of the dotcom bubble by expanding the firm’s geographic
footprint.

Other large legal outfits with Silicon Valley roots—including stalwarts like Fenwick & West, Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, and Wilson Sonsini Goodrich & Rosati—have within the
last two decades continued to invest in their technology clients.

Grundfest said the profits from such investments are like those of a “sidecar venture capital fund” and
must remain with the fund itself so as not to integrate the performance of the legal services entity with
that of its investment arm.

“A small number of Grand Slam home runs will make your day,” Grundfest said. “But the investment funds
affiliated with the law firms are constrained—they put in relatively small amounts, so the real returns go
to the VCs.”

While Cooley’s Snowflake return was stellar, the firm’s venture arm has also had more modest, yet notable
investments.

Securities filings show Cooley lawyers had a “beneficial interest in an aggregate of less than 0.03%” of
Uber Technologies Inc.’s common stock at the time of the ridesharing giant’s IPO last year. GC&H also
owned nearly $12 million in Snap Inc. stock when Cooley advised Snapchat’s parent company on its IPO in
2017.

Balancing Interests

A wave of IPO litigation stemming from the dotcom bust cooled the amount of equity being taken by law
firms, as did other changes in the marketplace, said Dzienkowski, the Texas law professor.

He noted that if Vinson & Elkins had owned stock in Enron Corp. during the energy giant’s sudden decline
amid allegations of fraudulent business practices, for example, the firm would’ve been in an even more
difficult position to defend the legal advice it gave its controversial client. Vinson eventually paid $30
million to Enron’s bankrupt estate to avoid a possible lawsuit alleging that the firm overlooked warning
signs about problems with the company’s accounting processes.

Brobeck, Phleger & Harrison was a fast-growing Silicon Valley firm that through its investment fund took
equity in clients before imploding in 2003 on the back end of the tech boom. Dzienkowski said Brobeck’s
bankruptcy showed that law firms must get paid for their legal work and that shares in an IPO should
“only be an investment decided by a business team.”
J. Brad Bernthal, a Colorado Law School professor who began his career in 2001 as a Brobeck associate,
witnessed firsthand how tech-oriented firms were eager for equity stakes. He said that if managed
carefully—a firm must determine what constitutes a “reasonable fee” for legal services and be able to say
“no” to potentially fraudulent activity—such investments can be beneficial to both lawyer and client.

“Many entrepreneurs and startups favor it when a law firm or attorney gets behind their company in some
way that provides equity,” Bernthal said. “They believe it aligns interests around company growth and
signals belief that the company will succeed.”

To contact the reporter on this story: Brian Baxter in New York at bbaxter@bloomberglaw.com

To contact the editor responsible for this story: Chris Opfer at copfer@bloomberglaw.com

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