Funding the Business of Law

Funding the Business of LawThe capital structure of the typical law firm has barely changed in living memory, but the traditional barriers to innovation are slowly cracking, creating opportunities for great lawyers to build the best professional homes for themselves. It is not accidental that funding the creation or growth of law firms and practice groups has tended to follow a traditional path. Rather, this circumstance is a combination of traditional legal temperament and structural barriers to innovation. Recently, there have been changes to both.

Let’s start with something simple: why the tech industry has venture funds and incubators, but the legal industry does not. Most obviously, there are widespread prohibitions to law firms being owned by non-attorneys, whereas anyone can own a piece of a tech company. While that limitation is weakening, especially in states like Arizona and Utah which are experimenting with non-lawyer ownership, it’s not likely to disappear any time soon. But there’s also a second reason that is less obvious. Traditional lenders have been willing to treat consistently generated fee revenue as an income stream against which to lend. But it is only more recently that the individual litigations themselves have begun to be treated as assets that can be monetized. This process, litigation finance, is by now familiar, but below I discuss the next step for that industry: financing the business of law itself.

Sources of Capital for Law Firm Operations