(FORTUNE Magazine) – Mark Tanoury is an unlikely poster boy for the legal profession. He's soft-spoken rather than bellicose. His clothes suggest Dockers, not Brooks Brothers. His office is next to a Palo Alto industrial park. Even Tanoury's title fails to scream importance: chair of the business department of Cooley Godward, a partnership atop no one's list of the country's most prestigious law firms. Ah, but this is Silicon Valley, where access to venture capitalists, not a fancy haberdasher, makes the man. And Tanoury will forever be remembered by his peers for his unfortunately timed appearance, in April 2000, on the cover of The American Lawyer magazine, flashing a Cheshire Cat grin next to the headline SHOW ME THE EQUITY.

The article, describing a day in the life of a Silicon Valley attorney, detailed the dawn-to-dusk whirlwind that Tanoury's life had become: the grueling hours, the impossibility of finding enough young associates to handle all the work, and yes, the audacity of a lawyer's demanding equity from a prospective client for the privilege of providing legal advice. For in the beginning of 2000, Mark Tanoury wasn't an obscure provincial lawyer. He was a dealmaker whose technology-oriented law firm would oversee 25 IPOs that year, more than any firm in the country except Valley powerhouse Wilson Sonsini Goodrich & Rosati.

Tanoury--who has a table full of Lucite "tombstones" from the transactions he has shepherded, many for now-forgotten upstarts like Women.com--describes the period as if he were a war veteran with a faded adrenaline rush, noting that the flood of business at times seemed almost like a practical joke. "The phone was ringing off the hook with deal after deal," he recalls. "It felt great at first. But it never stopped."

Well, actually it did. And Cooley Godward became an on-the-ground example of what happens to the people and businesses of the infrastructure that builds up around a booming industry when the boom goes bust. For Silicon Valley, of course, the bust happened in the middle of 2000. Cooley's crucial business of advising on IPOs, M&A deals, and other transactions skidded to a halt. The firm, which had ballooned to nearly 700 lawyers, was forced to downsize by about 100--and more layoffs appear likely. The value of its ballyhooed equity investments in startup clients has dropped precipitously. Perhaps most painful of all, the bust has sparked some second-guessing about the way the firm behaved during the flush times. Now, two years after everything fell apart, Cooley is a firm fundamentally unsure of what it wants to be.

Long before the high-tech whirlwind, Cooley was an old-line San Francisco firm, founded in 1920, that focused on such mundane areas as insurance and taxation. For 60 years its only office was in San Francisco. Yet you could argue that Cooley was the first notable Silicon Valley law firm, because in the late 1950s it counted as a client the Valley's first venture capital firm, Draper Gaither & Anderson. Through that and subsequent venture capital connections, Cooley gradually built a practice serving technology startups. In 1980 it opened a satellite office in Palo Alto, a move that retired partner Frank D. "Sandy" Tatum Jr. calls "the defining moment in the history of our firm."

Palo Alto eventually came to dwarf Cooley's San Francisco operations, and Cooley became the rare full-service firm to make the transition from insurance fraud to the new economy. It was a slow progression. When Tanoury, now 47, joined Cooley in 1982, fresh from the University of Michigan Law School, the Palo Alto office was confined to just a few maverick partners; associates were required to start their training at headquarters. But the Palo Alto staff grew as it began winning big venture capital clients like Institutional Venture Partners (now Redpoint), Inter-West Partners, and Menlo Ventures. Helping venture funds raise money begot more work for fast-growing software and bio-tech startups, including such future giants as Genentech and Amgen, which in turn begot work for their investment bankers. In 1988, the year Tanoury made partner, he and three other Cooley partners opened another office a few miles from Palo Alto, strategically located on Sand Hill Road in adjacent Menlo Park. It was nestled among the string of low-slung office complexes that would become the largest concentration of venture capital firms anywhere.

At this point representing tech-related firms was still a niche business in the legal world. But when tech started taking off in the early '90s, Cooley took off too, snagging Valley clients like VeriFone, which makes point-of-sale verification terminals for retailers, and Siebel Systems, a software startup that remains a Cooley cash cow to this day. Wireless technology whiz Qualcomm proved to be such a good client that Cooley opened another office in San Diego in 1992 to serve the company.

By 1997 the tech boom was officially under way, and with it an insatiable demand for legal work. Every IPO, every private placement, and every M&A deal required at least one law firm and often several. From 1990 to 1997, Cooley had grown from 139 lawyers to 363--more than half of them in Palo Alto--and now the firm ratcheted up its hiring still more.

The demand meant that Cooley could raise its hourly fees, from an average of $200 in 1995 to almost $300 by the end of the decade. "The clients were pretty much fee-insensitive," recalls Tanoury. "They had plenty of money." But Tanoury and his partners saw that just raising fees wouldn't be enough to get them a fair share of the big money being made in the Valley. The true path to riches was equity, particularly stock options in just-formed technology companies.

Valley law firms, including Cooley, had long taken equity in some of their startup clients in lieu of fees, especially when the young firms had no money to spend. Cooley had also allowed partners to invest voluntarily in firm-run venture funds that would take small stakes in clients--say, a total of $100,000--alongside the venture capitalists. Every now and then Cooley partners would get stock distributions worth $5,000 or so, depending on how much of their previous year's income they'd plowed into the venture funds. (Each partner could invest a maximum of $500,000 annually.) But the lucrative investments did nothing for associates and ultimately didn't do enough for partners, who were watching colleagues and counterparts at other firms depart for options-rich pay packages at startups.

The typical trickle of lawyers jumping ship to work for clients, which exists at any professional services firm in every market, was turning into a flood. Brad Handler, a lowly second-year licensing attorney at Cooley, moved to online auctioneer eBay in 1997 as its first in-house lawyer. A bigger jolt followed the next year when Mike Jacobson, Cooley's resident securities law guru, left to become eBay's general counsel. Jacobson was the "consummate lawyer," says Tanoury. "You just didn't picture him working for some crazy Internet company."

But the psychological dam at Cooley really broke when eBay went public in September 1998. Overnight, Handler, who by this point would have been only a third-year associate, was a millionaire. Jacobson's new net worth? More than $75 million.

All of a sudden lawyers sticking with Cooley looked like chumps. In 1998, 65 defected; in 1999, 99 did, including 17 partners. Senior partners knew that they had to up the ante to hold on to their best talent--and to get a piece of the action for themselves. As a condition of providing legal representation, Tanoury and other senior-level business department partners argued, Cooley should start demanding pre-IPO stock valued at pennies per share, and a lot of it--as much as 1% of the total shares of a newly formed company--on top of its regular hourly fees.

Some old-timers at Cooley thought it unseemly to squeeze clients that way. "To Cooley's credit, there was some serious handwringing," says one former partner. But such firm bigwigs as managing partner Lee Benton, a mild-mannered corporate securities lawyer who led the firm from 1996 to 2001, were swayed in part by the argument that Cooley would merely be doing what most other Valley law firms were doing already. "Everyone was requiring equity," Tanoury points out, noting that even landlords and recruiters would demand equity from startups in return for leasing office space or providing search services. That had become standard operating procedure in the Valley. Some law firms even contended that it was in the best interest of the client. "Lawyers are advocates, not accountants," says Craig Johnson, chairman of Venture Law Group, a Valley law firm that started a decade ago with the sole mission of representing venture-backed companies and taking equity stakes in them. "Clients want us to have a small commitment to their companies."

So in mid-1999, Cooley began routinely requesting pre-IPO stock from startup clients as a condition of taking them on. And it got it, from 38 companies in 1999 and 59 in 2000. Under the old, fee-based system, such a client would have paid Cooley about $250,000 to shepherd its eventual IPO. Now, on top of that fee, Cooley was pocketing stock that shortly after the IPO could be worth $5 million to $10 million. With some of their equity gains, the partners set up a modest bonus pool to reward the younger lawyers, who began receiving checks in the several-hundred-dollar range whenever a Cooley client went public.

But the firm was still concerned about the crazy hours that its lawyers were working. In the early '90s, the typical Cooley attorney billed about 160 hours per month, a reasonable pace for the industry. By 1999 many of them were working in excess of 200 hours per month, a workload only accomplished by repeated late nights and weekends. That might have been acceptable at other Silicon Valley law firms, like Wilson Sonsini, which is famous for being a grind. Cooley, on the other hand, had always prided itself on its collegiality, on treating its young lawyers well and its partners with respect. "We're all human beings and have lives outside the firm," says retired partner Tatum, who still practices law in Cooley's San Francisco office.

To give its lawyers their lives back, Cooley began hiring at an even more breakneck pace. In just one 12-month period, beginning in mid-1999, Cooley poached 190 lawyers from other firms, "laterals" in legal-industry argot. At its peak the firm would number nearly 700 lawyers--five times more than at the beginning of the decade--in seven offices, including Kirkland, Wash., in Microsoft's backyard, and Reston, Va., where a Valley-like technology corridor had arisen.

But the workload didn't slacken. "We needed," says Tanoury, "some way to reduce the amount of work coming in." So in early August of 1999, Cooley formed a new-business screening committee for the business department, which by now accounted for two-thirds of the firm's lawyers. With Tanoury acting as referee, the committee would decide not only which new clients to accept but also which existing clients to keep. Says then-managing partner Benton: "I'm not sure what else we could have done."

The committee's first goal was to get rid of existing clients that abused associates and didn't pay bills on time. But there was another goal: economic upside. Startups whose shares could be worth a fortune one day seemed more valuable to Cooley than mature companies that just wanted plain ol' billed-by-the-hour legal advice. So Cooley did something that once would have been unheard of. It began jettisoning some of its existing clients in good standing, including telecom equipment makers SpectraSwitch and Vina Technologies. (Tanoury maintains that Cooley got rid of few such clients.) It stopped representing investment bankers in their role as underwriters of IPOs--a less lucrative business than representing startups. And it began turning away fortune 500 companies with good pedigrees but no IPO wampum to offer.

The new policy rubbed some partners the wrong way, to say the least. "I thought firing clients to pursue equity was unconscionable," says Alan Mendelson, a 27-year Cooley veteran who was one of the firm's leading corporate rainmakers. Mendelson, who says that Cooley's partners had "foolish notions of a new economic paradigm--that business would remain at extraordinary levels forever," argued that the firm would need its stodgier clients when the bubble burst. Particularly shortsighted, says Mendelson, was Cooley's decision to stop representing investment bankers. Morgan Stanley, he notes, begged Cooley to act as underwriter's counsel on several IPOs, but Cooley refused.

The partners dismissed Mendelson's warnings. After all, Cooley's equity strategy seemed to be working brilliantly. The $14.6 million that Cooley partners had invested in the firm's venture funds since 1995 had ballooned to about $95 million by the beginning of 2000. And the pre-IPO stock that the firm had been collecting was worth roughly $40 million. Cooley was feeling so flush that in May 2000 it flew every lawyer and senior staffer who wanted to go, plus spouses and kids--980 people in all--to the five-star La Quinta golf resort near Palm Springs to celebrate their good fortune. Cost: $1.3 million.

By the end of that month, Alan Mendelson was gone, having joined a local office of the Los Angeles firm Latham & Watkins. (He says he quit; current Cooley CEO Steve Neal says Mendelson was asked to leave but would not say why.) Mendelson's departure came as Cooley was still turning away wannabe clients--but by then the tech boom's fate was sealed. The middle of 2000 would prove to be the peak for Cooley's business, though the firm didn't know it at the time. "Two thousand was two different years," says Tanoury. The first half was robust; the second half, moribund.

At first the lawyers of Cooley Godward greeted the downturn with relief. Finally they would all get the break they deserved. But that relief evaporated when droves of highflying dot-com clients began imploding. For example, MVP.com, a glitzy online retailer with star-power financial backing from Benchmark Capital and sports greats John Elway, Michael Jordan, and Wayne Gretzky, downsized throughout 2000 and sold off its Website in a fire sale in January 2001. One client phoned Tanoury to inform him of a 25% miss in quarterly revenues and to ask if the company should preannounce to Wall Street. Because such misses had become commonplace, Tanoury told the client not to worry. But Tanoury had misunderstood. The client's quarterly revenues would not be 25% below expectations; they would be 25% of expectations. "It was that ugly," says Tanoury. "Things just started drying up."

It was no better in 2001. Though some of Cooley's tech clients, including AskJeeves, MP3.com, and Blue Martini, had survived, they were limping along at a fraction of their former value--and at a fraction of the billable hours they once provided to Cooley. Some clients went belly-up without paying the firm for work it had done. The IPO "window" had slammed shut. Cooley found itself facing the opposite of all its previous problems. Attrition had ceased completely. Lawyers who had left the firm to chase dot-com riches were pounding on Cooley's door, asking for their jobs back. And the value of the firm's venture funds and IPO stakes was falling fast.

Left to mop up the mess at Cooley was Steve Neal. A nationally known litigator, Neal was voted to lead the firm starting in February 2001, when Lee Benton's term as managing partner ended. With the fortunes of Tanoury's business department plummeting, Neal represented stability. At six-four, with salt-and-pepper hair, gray pinstripe suit, and tasseled loafers, the 53-year-old Neal is the old-style litigator from central casting. Indeed, he spent the first 22 years of his career at Chicago's white-shoe Kirkland & Ellis, where he picked up clients like USG, the old U.S. Gypsum, before coming to Cooley in 1995.

Neal broke with the Cooley managing-partner tradition by assuming the title of chairman and CEO and continuing to practice law for some of his clients. He says he thought it would be better for everyone if he kept on lawyering. (Good move: As Walter Hewlett's lawyer in his quixotic--and ultimately unsuccessful--effort to stop Hewlett-Packard's acquisition of Compaq, Neal accounted for what in the first part of 2002 was Cooley's highest-profile and probably most lucrative single piece of business.)

But Neal's leadership couldn't change market forces. Partners who had previously quibbled over who would be allowed to accept new clients suddenly were twiddling their thumbs--and ruing the days of incessant hiring. Everyone at Cooley started calling old clients they'd previously rejected, asking for their business back. But it was like getting the proverbial blood from a stone. "We've burned some bridges," Tanoury acknowledges. Pay suffered accordingly: In 2000 the average Cooley partner's total compensation before equity distributions was $904,000, 13% more than that of the average partner in the 100 biggest U.S. firms, according to The American Lawyer. In 2001 it was $715,000. And the value of the firm's IPO stakes has fallen to less than $5 million, Tanoury estimates. Cooley partners are careful not to comment publicly on internal recriminations or I-told-you-so's. But it's safe to say that Tanoury's department has lost some of its luster.

With too many Cooley lawyers idling, downsizing was inevitable. In August 2001 the firm that had so prided itself on its concern for its people became the first Silicon Valley law firm to lay off attorneys, 86 in all. (Virtually every other Valley law firm followed suit.) Even so, says Neal, "we still have the equivalent of 80 people who aren't working...and there are still practice areas not as heavily utilized as they'd like to be." Indeed, most of two floors of Cooley's main Palo Alto office tower sit empty. It doesn't take a lawyer to understand that means more attorneys are likely to be shown the door.

Now Cooley stands at a crossroads. Should it try to beef up its nontech practices and remake itself into a big national player? Or should it hunker down and focus on its tech-related strengths, a plan that would keep Cooley firmly in the legal world's minor leagues?

Neal, who likes talking about what he calls the firm's underappreciated "diversity of expertise," wants to pursue the former course. He thinks Cooley should open offices in New York and in Washington, D.C., for example, where it would compete for corporate litigation and antitrust cases. "The question is, Can you be a 600-lawyer firm with a largely regional focus and still aim to be a dominant firm nationwide?" asks Neal. "I think not. We need the ability to handle huge, huge transactions." And that, he says, includes international transactions, a need of the firm's Silicon Valley clients that Cooley currently can't meet.

Neal's strategy has sparked considerable controversy. Those who benefited most from the bubble--the commercial lawyers on Tanoury's team--remain the lifeblood of the firm, and the Cooley that Neal envisions isn't necessarily one they'd want to work for. "I think it's important that we remain best of breed at what we do," says Tanoury, appropriating the same language Valley tech firms use to describe why their single-function product is superior to some giant's full-service but inadequate offering. "And I think as a law firm focusing on technology companies, we are one of the preeminent firms in the country."

Can Cooley survive as a niche Silicon Valley firm? Sure--but almost certainly as a smaller and poorer version of its current self. And that would be a trying change for lawyers who have gotten used to the big rush, and the big dollars, of tech dealmaking. On the other hand, expanding nationally and internationally--and actually succeeding in stealing business from established East Coast firms--is an extremely daunting task. Even at its staffing peak, Cooley was still only the 33rd-biggest law firm in the country, far behind behemoths like Skadden Arps (1,441 lawyers) and Jones Day (1,298 lawyers). And few firms in recent memory have successfully made the leap from niche player to national powerhouse.

A likely scenario, say industry observers, is that Cooley will be merged into a larger firm within the next few years--a fate that may befall many of its competitors as well. Neal denies that he's setting up Cooley to be sold; when whispers that Cooley would merge into big Los Angeles-based O'Melveny & Myers became widespread earlier this year, Neal tried to scotch them in a late March e-mail to his staff. Still, the rumors continue. And if they prove true, then Cooley will itself become a tombstone on someone else's desk.

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