in a law firm when an associate becomes a partner does it dilute the equity of all the existing partners?

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As a prospective law student with limited knowledge of law firm operate, I’m curious: if a firm follows a traditional company structure, wouldn’t the addition of a new partner dilute the equity of existing partners? Moreover, where does the equity for the new partner come from? Are buy-ins commonly used to safeguard the equity of existing partners?

In: Economics

2 Answers

Anonymous 0 Comments

Yes, the more partners in a firm, the smaller share of the overall profits they receive. But, new partners should also add value to the firm. Part of that is a capital buy-in, which both adds to the overall value of the firm and ties the new partner to the firm. They are quite literally now invested in the firm’s performance.

But in addition, people are made partners because they generate business. They are skilled lawyers with clients, that come to that firm for them. In a perfect world, they add more profit than their share is worth. So even though existing partners have a smaller piece of the pie, each piece will hopefully be worth more.

I’m sure it doesn’t always work out that way. You hear stories of law firms that are too “top heavy,” with too many partners that remove more wealth than they generate. But I would say as a general rule, big firms with many partners generate more wealth for the partners than smaller firms with fewer partners.

Anonymous 0 Comments

Associates being made partner have made the firm’s pie bigger by more than their slice will reduce it.

If the firm gives 20 partners $400,000/yr ($8 million total) and a new associate lands clients that boosts the overall profit sharing to $9 million, the other partners aren’t going to grouse about getting a smaller share of $9 million (their individual payouts are rising by 5% plus any increases their own efforts add).