Silicon Valley's Atrium pulled in $75 million from venture capitalists who observed that the legal industry lagged as tech transformed other businesses. Now most of its lawyers are looking for new work as it moves to more general "advisory" services for startups. In the wake of the pivot, some ethical questions still need to be answered. Want to weigh in? Email me here. Want this dispatch in your inbox every Thursday? Sign up here.

Lawyers, Time to Exit the Atrium

Some weeks, it takes a little time for me to figure out to focus on for the Law Firm Disrupted. This was not one of them. When it comes to efforts to rethink how the legal industry works, the biggest story of the last seven days was undoubtedly the sudden pivot at Silicon Valley's Atrium.

Several of my colleagues on the West Coast had heard murmurings that something was afoot at the venture capital-backed "disruptor." By Monday, the picture became more clear: At a company-wide meeting last Tuesday, Atrium CEO Justin Kan had informed the workforce that the law firm side of the two-pronged business would be slashed in size. While several of the Atrium lawyers, who had been recruited to serve startups with their legal needs, were offered the opportunity to become partners in a new, substantially smaller version of the firm, most were instead encouraged to hang their own shingles, serving Atrium's clients using the company's software as part of a referral network.

By the end of the day, Kan and the company were finally willing to address the situation publicly. Atrium was pivoting away from lawyering. Instead, the beneficiary of $75 million in venture capital would now be focusing on a wider suite of professional services for startups. Little was said about Atrium's other business, a software enterprise, except for the indication that the soon-to-be outside lawyers would continue to have access to the platform, and that it would continue to leverage technology in support of its new "holistic" approach to advising clients.

A "Fascinating Idea," with Limits

On first blush, this is a lesson in the challenges in disrupting the status quo in the legal industry. The company offered startup clients a subscription plan starting at $500/month–that included one hour a month of general legal advising along with unlimited consultations on new matters and access to the Atrium platform for document generation, records management and more. That's a nice deal compared to hourly rates at a boutique, much less Big Law.

But, considering that many of the company's attorneys were former Big Law associates with certain salary expectations, costs were likely high too. As the company burned through capital, that meant it was time to pivot, just like Kan did when he turned his prior "lifecasting" startup Twitch into a gaming-focused platform. He ultimately sold the business to Amazon for nearly $1 billion.

"They've made what I'm sure was a sensible business choice to leave a business that wasn't growing fast enough, and focus on a business that will create value," Liam Brown, chairman and CEO at Elevate, told me.

Brown, who's raised millions in capital for Elevate and previous startups, said he'd had conversations with the Atrium founders early in the life of the business and that he had been enthusiastic about the concept: "It's a fascinating idea for for consumers that don't have an existing relationship with counsel."

Nonetheless, the mechanics of what just went down are a little puzzling, particularly as I'm currently playing close attention to the question of outside ownership of law firms. If Atrium was structured as two parallel enterprises, a venture-backed software company and a law firm organized as an LLP, then how was the LLP side even able to tap into that pot of venture capital? And what put Kan, a non-lawyer, in the position to say that the law firm isn't quite going to be a law firm any longer?

The California State Bar may be seriously looking into eliminating these prohibitions, but until that day comes, Atrium is still bound like everyone else to heed bar rules on the unauthorized practice of law.

Marketing and Conflicts?

I'm hoping you're still with me here, because there's one other part of the Atrium model I wanted to explore. Obviously, the company had close relationships with venture capital investors–it raised $75 million from them. But what if its marketing strategy relied on using these funders to nudge their other portfolio companies to hire Atrium too?

That's the scenario that start-up attorney Jose Ancer, a partner at Austin's Egan Nelson, discussed in a post on his Silicon Hills blog which conveniently arrived just before the shakeup at Atrium.

To sum it up, these funders and their portfolio companies' interests aren't always aligned–take deal structure or corporate governance, for example. Consequently, the funders, who've been through this a time or two, would prefer their companies remain in the dark about certain things One way to do that is to sell them on cheaper, less experienced lawyers, maybe ones who work on a subscription basis.

Ancer writes: If an experienced investor knows the lawyer across the table needs time to explain to inexperienced founders why the terms or decisions such investor is pushing for should be resisted, and such investor prefers that the lawyer stay quiet, the answer is not to explicitly tell the lawyer to shut up. Too visible. The investor instead gets the founders to do it themselves, by suggesting that they should focus on minimizing their legal bill.

As I probe the question of non-lawyer ownership, I'm hearing over and over again about the need for careful rules to delineate how to deal with conflicts, lawyer independence and other ethical issues. This is a fine example.

A Word From Atrium

I did reach out to Atrium about these issues, receiving the following response from Atrium LLP's Managing Partner Hans Kim and Atrium LTS's CEO Justin Kan: Atrium operates in a two-entity structure where both the law firm and the technology company are run independently of each other. There is no non-lawyer ownership of the law firm and no prohibited fee-sharing with non-lawyers.

Conflicts of interest, if and as any arise in the course of the legal practice, are appropriately disclosed to the involved parties and resolved in accordance with applicable legal and professional obligations.

In the News

➤➤Atrium's pivot was more than just a legal industry story. The tech press dug into the matter, with TechCrunch casting a sympathetic eye on the move. And it was local news too, with the San Francisco Chronicle checking in with Indiana University's Bill Henderson on the company's business model.

➤➤Andrew Arruda, co-founder of AI tool ROSS Intelligence, is another voice in favor of revisiting how the legal profession is regulated. In this interview with American Lawyer editor-in-chief Gina Pasarella, he makes the case for allowing non-JDs both to own firms and to offer some legal services.

➤➤Finally, I'll nod to some Harvard Law School students who found an opportunity to follow the title of this briefing, if not its spirit. As environmentally-minded publication Grist chronicled and my colleague Karen Sloan reported, on Wednesday night 30 students unfurled a #DropExxon banner at a Paul, Weiss recruiting event in Cambridge and launched into a protest song as partner Kannon Shanmugam began a speech. The firm has defended Exxon in several lawsuits over the energy giant's role in climate change.

You'll hear from me again next Thursday! Thanks again for reading, and please feel free to reach out to me at [email protected]. Sign up here to receive The Law Firm Disrupted as a weekly email.