Big Law’s Capital Call Conundrum
Tom Borman, LawFuel contributing editor
The legal profession has always had a peculiar relationship with money. Partners, after all, are supposed to be owners of their firms, yet increasingly, they’re being asked to prove their commitment with their wallets.
Welcome to the world of capital contributions, where making equity partner isn’t just about your billable hours anymore. It’s about how much cash you can pony up to join the club.
The Wild West of Capital Requirements
Here’s the thing about Big Law’s approach to partner capital: there isn’t one.
Survey data from about 80 Am Law 200 firms reveals a system that’s, to put it charitably, all over the shop. Some firms are demanding more than half of a new equity partner’s annual compensation as their entry fee. Others? They’re not asking for a penny.
It’s rather like discovering that some country clubs charge a million-dollar membership while others just ask you to bring a bottle of wine to the Christmas party.
The numbers tell the story. One Am Law 100 firm required 55 percent of new partners’ annual pay in 2024. Another wanted 42.5 percent. Some asked for 40 percent.
Down at the other end, a few firms requested between 1 percent and 2 percent, while others operated on an honour system that would make a Quaker meeting house look ruthlessly commercial.
And the methodologies? They’re wonderfully Byzantine. One firm calculates 33.5 percent of average trailing three-year compensation (because why use round numbers?). Another bases it on 4 percent of gross distributions.
One particularly creative outfit charges $23 per unit of capital, whatever that means in practice.
Why the Sudden Interest in Partners’ Bank Accounts?
The explanation, as usual, involves technology and the perpetual arms race that is modern legal practice.
“Firms are becoming more capital intensive—with both investments in technology/AI and investments in talent,” explains Lisa Smith, a consultant at Fairfax Associates (pictured). Translation: artificial intelligence isn’t cheap, and neither are the laterals being poached from rival firms at eye-watering salaries.
The data supports this. Among the 18 Am Law 200 firms that made capital calls in 2024, two-thirds cited technology investment as a reason.
Others pointed to expansion, cash flow concerns, real estate, and training.
Thomson Reuters’ State of the Legal Market Report notes that while direct and overhead expenses grew at about 3 percent annually through the 2010s, post-pandemic growth has exceeded 5 percent yearly. The culprits? Technology and knowledge management costs that have “came in well above the historical average level.”
In other words, ChatGPT and its cousins don’t come free, and someone has to pay for them.
The Middle Ground Approach
Mike Hammer, CEO of Dickinson Wright (pictured), offers a refreshingly pragmatic perspective. His firm required 13.3 percent of equity partners’ compensation last year for what he describes as “solidly in the middle” of their peer group.
“The percentage is the end result. It’s what our needs are, and it just happens to be that percentage fulfils our needs,” Hammer says. “If we don’t need it, we won’t ask for it.”
His firm caps contributions at $200,000 for US-based partners and $250,000 for Canadian partners. Interestingly, about 10 to 15 partners voluntarily pay more than required because the firm returns their capital with interest at the prime commercial rate plus 5 perccent.
“It’s kind of a safer investment,” Hammer notes. Which is perhaps the understatement of the year – in what universe is voluntarily giving your employer extra money considered an investment strategy? Only in Big Law.
The Bigger Picture
Industry consultant Joe Altonji from LawVision suggests the primary motivation is “strategic flexibility”, which is probably consultant-speak for “we want options when opportunities arise.”
“Anything where significant capital investment is required is definitely a reason to build a capital base. AI would be on the list. It’s certainly one of the most-discussed things right now,” Altonji observes. “But having the ability to make those kinds of investments without having to borrow money is always a good thing.”
Fair point. Debt has interest costs and covenants and all those tiresome banking requirements. Partner capital, by contrast, is essentially an interest-free loan from people who can’t easily demand it back.
The norm for capital contributions appears to fall somewhere between 25 percent and 35 percent of compensation, according to Smith at Fairfax. Wells Fargo’s Legal Specialty Group pegged the average Am Law 100 equity partner contribution at around 23% in 2023—though analysts noted this figure “belies a wide range.”
Indeed it does. When your range runs from 0 percent to 55 percent, “average” becomes rather meaningless.
What It Means for Partners
The practical effect is that partnership in Big Law increasingly resembles buying into a business rather than simply being promoted to a senior position. Which, to be fair, is probably how it should have been structured all along.
But it does create some interesting dynamics. Long-term partners at firms that don’t adjust capital requirements annually can end up with “very high balances,” Smith notes. These policies also interact with draw schedules and distribution policies in ways that would require a flowchart to fully understand.
For ambitious associates eyeing that equity partnership, the message is clear: start saving. Your brilliant legal mind and impressive book of business might get you the title, but you’ll need actual money to claim your seat at the table.
And in an industry that’s never been shy about demanding commitment, perhaps there’s a certain logic to asking partners to put their money where their mouth is. After all, nothing says “I believe in this firm’s future” quite like writing a six-figure cheque.
Though one suspects that if the AI investments don’t pan out, those capital contributions might start looking less like strategic flexibility and more like a very expensive mistake.
