Skype options turn out to be worthless
blogs.reuters.com
Am I the only one who finds this pretty shocking?
blogs.reuters.com
I actually like the honesty of this quote:
"Silver Lake declined to comment. When asked about Lee’s situation, Skype spokesman Brian O’Shaughnessy said, “You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave, therefore he doesn’t get that benefit.”"
Most people will look at it and say "What an Asswad" - but at least he's not being a hypocrite. That's precisely what everyone in the M&A team is _thinking_ they just aren't _saying_ it.
This is another take on what Oracle did when they bought Oblix (I had just left Oblix in 1999) Oracle gave MegaBonuses to all the existing employees and executives, two of the founders, and paid absolutely nothing for the common shares. The acquisition price was still $100Million plus, but there was only enough money to cover the preferred options + liquidation preferences in the "on the record" purchase prices. Effectively, they wiped out all the employees who were common shareholders, but no longer with the company (or were part of the 15-20 out of 100 who were laid off during the acquisition) while taking care of the VCs and the acquired employees. (As a side bonus, they called the money they gave to the acquired employees "Retention Bonuses" - which resulted in the top people having to hang around for another year)
Lesson to be learned: When you leave a company, and it is still private - if they are Sold, instead of going public, there are probably any number of ways that you will get wiped out if you are no longer with them - possible exception if you are a founder with a significant percentage of the company, and you might be able to raise a stink for minority shareholder rights. Then you'll get a "consulting bonus" to shut you up.
This story is more common than not.
Curiously enough, one of the consequences of the rise of YC-like investors is that it will no longer be so easy to pull the sort of trick you claim Oracle pulled. We get common stock, so you can't screw the common sharedholders without screwing us, which most people would think twice about.
You can rest assured that if you put your 4+ years into a YC company, and it gets sold while you are no longer with it, your interests and YCs will be aligned. With a YC company, your vested common stock actually _means_ something when you leave the company. (Or, at least it means you and YC will get screwed equally - and as PG rather ominously said, that is something "which most people would think twice about." :-) )
I respectfully disagree with PG on how rare it is for employees who've left a company to get zeroed out or severely diluted compared to the ongoing-employees in an acquisition deal. I've heard enough anecdotes to convince me it is far from "very rare."
Like O'Shaughnessy said: "You’ve got to be in it to win it."
If so, perhaps you got lucky :)
Sounds like you didn't exercise the options and then didn't participate in the sale later.
The employees still at the company received substantial retention bonuses. The only one of these bonuses disclosed in the purchase papers I signed was that the president got an additional bonus of perhaps a year's salary, but later other employees told me they got substantial retention bonuses, too.
I don't feel like I got "screwed", exactly. I was a bit disappointed in the quantity, but it was a big improvement over what happened with KnowNow, where I never got back any of the US$6000 or so I spent to exercise my options, as the company's successive VC-approved management teams gradually mismanaged the company into bankruptcy.
It even said so at the top of the contract where it said the purpose of the options were retention and not remuneration.
In theory, the board of the acquiree thus has a "yes/no" decision to make, and whether or not it screws non-employee common stockholders, the "yes" decision might be in the greatest interest of the maximum number of shareholders.
It's a lot more complicated than this, but if you want an illustration of why it will cost you 6 figures to lose a court case over this issue, there you go.
Because only the best and brightest would understand what it actually meant?
> there are probably any number of ways that you will get wiped out if you are no longer with them
That's why Facebook employees sell their options on secondary markets.
I teach contract drafting to third-year law students. It's hard work to take a complex if-then-else concept and render it in plain English.[a]
And here's the rub: Few clients want to pay lawyers to spend extra time on readability -- "good enough" (whatever that means) is the goal.
2. [EDITED TO ADD THIS:] It's not unusual for a private company's employee stock plan to include a "call" option that gives the employer the right to repurchase employee-owned shares when the employee leaves the company.
That makes sense when you think about it -- if you're a private company, you don't want a lot of random ex-employees owning dribs and drabs of your shares, especially if you're worried about the 500-shareholder limit (under current law).
On the other hand, for a company with an upcoming exit to buy back the shares at the employee's cost, instead of at a good-faith estimate of the stock's then-current value -- well, that does indeed seem unusual.
(EDIT: Some documents like this provide that, IF: The company wants to do its buy-back EITHER: (i) after an exit is announced, OR: (ii) if an exit is announced within 30 days or so after the employee's departure; THEN: The employee is entitled to the exit pricing for the buy-back.)
3. Again, not to defend Skype, but conceivably they might not have had a choice about the buy-back price, at least not without jeopardizing some kind of favorable income-tax treatment.
If I had to guess, I'd venture that, X number of years ago, some overzealous junior lawyer decided to draft the relevant documents so as to put the company in the strongest position s/he could. Now that zealousness may be tying their hands. I stress that I'm speculating here.
* * *
[a] If you have occasion to write a complex if-then-else sentence, try using all-caps and punctuation like this: IF: It rains at least one inch today but not more than two inches; AND: It doesn't rain tomorrow; THEN: You will turn on the sprinkler system tomorrow; AND: You will not do so the day after.
In both cases we're talking about a highly specialized domain that takes, on average, years of training to be competent. And yet the engineer is expected to enter into a legal contract on equal footing with company lawyers?
I will agree that the contracts are not incomprehensible. Honestly, if given that contract, I would have complained vociferously about the language, but I would have taken the time to parse it. (This is one reason I rarely sign contracts, I guess.) Of course, as a translator I regularly deal with the same kind of language but in German and Hungarian, so your mileage may vary.
If the parties involved really trusted each other, there'd be no need for a contract.
When there's serious money at stake you'd be naive (to put it in the kindest possible terms) to sign a contract that you didn't fully understand.
There's a huge power disparity between a company and an individual. I suspect that there are many many cases where the individual got screwed for different reasons than naiveté.
More specifically, I think it's probably more in the nature of technical people to imagine that if any screwing is going to happen, that the screwing will be to the benefit of the company, and thus to their own benefit as well. Whereas I think the business mentality can much more easily gloss over details like division of labor and cut straight to "make more money for me".
@jeffreymcmanus, I'm in violent agreement ....
HN is not youtube, where there's no threading of comments and where it's impossible to divine who you're responding to without the @name.
Here it's quite obvious who you're responding to, because your comment is indented under the comment you've replied to.
Also, while we're at it, replies that say no more than "I agree" or "I disagree" are generally frowned on here, since they're almost completely contentless and don't contribute to the discussion.
Right now that's indeed true. If later on there were to be a lot of intervening comments, it'd be more difficult to tell immediately who the response was directed to. In that case, the @name convention likely would be helpful to readers.
> Also, while we're at it, replies that say no more than "I agree" or "I disagree" are generally frowned on here, since they're almost completely contentless and don't contribute to the discussion.
That's certainly true in the general case, when you have a random third party chiming in with his or her agreement.
In this case, though, the "I agree" was a useful clarification: It signaled, to someone who had responded to me with what could be interpreted as a challenge, that we were on the same page.
> Right now that's indeed true. If later on there were to be
> a lot of intervening comments, it'd be more difficult to
> tell immediately who the response was directed to.
Also "use my mouse to record the level of indention" is wrong. It is perfectly visual.
"On some sites" - maybe, but not on HN. And we're discussing (on HN) a comment made on HN.
To me, your argument makes no sense and looks like a rationalization of "damn it, I'm used to seeing this style, and I'm going to find an excuse to use it on HN whether it makes sense or not"
(1) Everyone, everywhere should have an attorney at all times in order to check every single thing they do, say, or sign in a public or legal forum. That's why the advice everyone always gives in this sort of situation starts: "Of course, you should check with your attorney..."
Is there a reason it needs to be in (harder to write and harder to understand) "plain English" rather than a "complex" series of if-then-else statements? Even dumb computers can understand if-then-else statements.
Or is the "plain English" more valuable because it leaves things open to interpretation after the fact?
Believe me, "plain English" is greatly desired by just about everyone, not least to head off later accusations of intentional obfuscation. But it takes time (which means legal fees), and to be honest, not everybody is good at it.
IF: It rains at least one inch today but not more than two inches; AND: It doesn't rain tomorrow; THEN: You will turn on the sprinkler system tomorrow; AND: You will not do so the day after.
is ambiguous and difficult to parse (I'm assuming you were using this an example not just for the caps and punctuation, but that this kind of ordering of statements is what is commonly used, even though it was a contrived example). At least two issues I see are:
- the terminology is based on today but requires knowledge about tomorrow.
This requires keeping more state to evaluate if the conditions are
being met for a longer time.
With this wording, it almost seems like it's setting me up to fail to
remember to turn on the sprinkler today.
This would be better worded as about today and having knowledge about
yesterday.
- The grouping of the last AND: isn't obvious as to if it's in the body
of the THEN: or an alternative/conjunction for the entire IF:
if ( (no rain-today) and
(rain-yesterday between 1 and 2 inches) and
(sprinker-not-on-yesterday)
) then {
you will turn on the sprinker
}
you will turn on the sprinker if (last time lawn received sufficient
watering was before yesterday)
sufficient watering is defined as ((sprinkler was on yesterday) or
(less than 2 inches of rain occurred yesterday))
Unfortunately, many, many lawyers (and clients) are allergic to contract forms that don't look "traditional." I can say with great confidence that the typical reaction to a pseudo-code contract would be "WTF is this?"
1. Lawyers have a bad habit of using "inline definitions" in contracts. That means that in the middle of a long sentence, they'll throw in a parenthesis such as ("Defined Term"). Now, any coder will immediately see that the scope of the "variable" Defined Term is ambiguous without a clear statement of assignment or equivalence. This is a structural issue. The lawyer instead should have put in the contract's glossary: "Defined Term means..."
2. Lawyers tend to use "or" with imprecision. That's why you see many "and/or" in contracts. They either need to use better logic operators, or be precise about logical OR vs inclusive OR.
3. Lawyers get sloppy with timeframes. "Within 30 days of..." is a common formulation in a contract. Do you think the drafter means 30 days before or after? Probably not both. Stuff like this is just sloppy structurally.
4. Lawyers screw up grammar. Commas are really important. Say I list off three conditions: You will do X if (a) thing that might happen, (b) thing that might happen, and (c) thing that might happen with reference to some other thing. Notice the "with reference to some other thing" at the end? If that is preceded by a comma, some courts will apply it to all of (a) through (c). Otherwise, it might only apply to (c). Stuff like that happens all the time.
Now, sometimes ambiguity is OK, or even a good thing. Every question has its own time for an answer, and that time may not necessarily be in the contract. It's important to be pragmatic in a business setting.
Since I said IAAL above, I'm including the standard ethics disclaimer: this is informational only, not intended as legal advice, and I don't represent the reader as legal counsel.
While I can appreciate being pragmatic in a business setting, I find this to be mildly offensive as someone who writes code that, if it isn't unambiguous and isn't explicit, will not do what I want or will crash. Wanting code to operate properly is pragmatic, otherwise you're just wasting your time. Why is leaving contracts ambiguous and open to interpretation pragmatic?
Now, I can see that it's not very pragmatic to quibble over wording/structure in a contract up front, that can just end up wasting time. This is tantamount to purposely writing pseudo-code into your .c file and expecting gcc to do something useful with it -- but programmers don't do that, (the good ones, perhaps those 10x more productive ones) try to write code the first time that the compiler will accept. It seems like it would be even more pragmatic, from a business standpoint, to be more precise in the wording and structure on the first pass and avoid (even the small) risk of there being debate over the interpretation later on. The only reason "being pragmatic" comes up is because it seems to be the norm to gloss over a bunch of stuff and purposely make it ambiguous (considering your 4 examples) rather than being, ahem, explicitly explicit.
In contracts, though, there are cases where a company will live with ambiguity because it has done an assessment of (1) the likelihood of a dispute, (2) its leverage vs the other party, and (3) its ability to prevail on the merits in the event of a dispute.
A contract is usually, although not always, a compromise between two or more parties with at least some divergent interests. In reaching a satisfactory compromise, sometimes you need to prioritize the parties' disagreements and move onward. That's why I mention the concession to ambiguity – because it just happens that way.
And guess what? There's a parallel in software development. Whether it's shipping dates, lack of resources, skills, whatever, software development is also often a compromise. We all know that stuff gets swept under the rug because it's an obscure edge case, or it only affects 0.x percent of the userbase, etc., etc.
My point and yours aren't mutually exclusive; I just wanted to acknowledge that sometimes reality intervenes and makes great things good enough.
For better or worse, lawyers don't write to entertain and enlighten a general audience...
The problem is rarely that the lawyer is invoking legalistic concepts. Sure, you might find a few references to statutory laws here and there in a commercial contract, but 99% of a typical commercial contract should be a simple statement of what the parties expect from each other.
Also, non-lawyers tend to get confused by concepts like indemnities, warranties, and limits on liability. These things are dead simple in reality, but lawyers have a nasty habit of dressing them up in coded language. The emperor has no clothes. There are a few places where "magic words" are required by law, esp. around intellectual property rights, disclaimer of seller's warranties, etc. These are the exception, not the rule.
It can get very difficult to clearly express business terms, but it's JUST LIKE WRITING CODE! Case statements, if-then-else, etc. If more lawyers approached contracts like code, contracts would be better. The problem is that contracts only have to "parse" in court. Runtime for contracts is a breakdown in the relationship, and no one believes that the relationship will break down until it's too late. Those of us who approach the contract as something that needs to parse before the shit hits the fan have a different problem: everyone thinks we're overdoing it because they refuse to consider the downside potential.
I could go on forever about this topic.
Since I said IAAL, I must say this is informational only, isn't legal advice, and I don't represent the reader as their lawyer.
Not necessarily actually testing (as in, let's go to court) but mapping out "given this scenario, x, y and z happen".
This sounds like a great service opportunity for startup/employee contract lawyers... if contracts are like code, then a parser (or maybe legal code pretty-printer) could easily allow a skilled professional to sift through code. Even easier if the contract is standard for a large company.
Any lawyers here care to pick my idea apart?
I've used scenario tables in some contracts. Each row is a scenario. For each scenario, there are columns for Plan A, Plan B, and Plan C. (Some column entries for a given scenario might be blank.)
There are a couple of made-up examples in a blog posting I did a few years back -- scroll down to "Situation tables" at http://www.ontechnologylaw.com/contract-simplification/.
// I have to ask here, as you have no contact info in profile. Reach me at my last name on Google's webmail service.
s/Our job is articulate and defend those positions/Our job is to articulate and defend those positions/
Normally I wouldn't mention it, but since we're talking about both legal contracts and precise prose here...
Excellent site, incidentally. I can mostly tell what you do, which is remarkable for a legal firm's site.
Maybe people don't pay enough attention to this stuff, and maybe they should seek better advice. But it seems unethical to structure a contract to make it seem like you've got a right, without actually giving you the right.
I'd be curious about the corporate representations of just what "vesting" was, and wasn't, and whether the obfuscations could rise to the level of fraud.
Those guys are worldclass experts at ownership control, contracting, the whole nine yards. In fact, I believe there are still lawsuits ongoing in Australia just to find out who _owns_ the Kazaa network.(!)
It is difficult to see this as private equity screwing over founders or early employees (Skype was founded in 2003 and had been valued at more than $2 billion for five years when Lee Yee came aboard). Indeed given the short tenure of many of the people involved in the story, there seems to be more smoke than fire.
[Lee Yee on Linkedin: http://www.linkedin.com/in/yeeguy]
[Business Week article correlating Linkedin profile to article: http://www.businessweek.com/magazine/content/11_27/b42350386...]
[my comments on previous versions of story: http://news.ycombinator.com/item?id=2672786]
For most contracts I suspect that the overhead on a plain English version would be very small, as the lawyers' understanding of the topics is necessarily deep to formulate the contract (or they're just shitty lawyers, another topic).
Plain English versions of contracts, with their plain English meanings of clauses, should be included in any contract between two parties of vastly different bargaining power, i.e. a corporation with loads of legal resources and a non-millionaire potential employee.
Update w.r.t. comments—I understand the points you're making, but I don't think it invalidates the argument. I'm racking my brain to find the examples I've seen, but there do exist in the wild "plain English" versions of contracts that are not binding (and they specify that) but instead contain comprehensible summaries of the salient parts.
Honestly (and I'm guilty of this as much as anyone), I doubt they even read the terms. Here we have this huge thread about contract language being hard to understand, but if one doesn't take the time to read through, understand, and _remember_ all the terms of the agreement, how can one act on that information?
Complex, perhaps, but it's a complex subject.
This would make it important for ppl to read the contract, and would push lawyers to make them simpler to read, and would also make it harder for ppl to push contracts onto people who don't really understand them.
The business danger is that your plain English suggests, or is ambiguous with regards to, the meaning of something which your legal code is not ambiguous about, and the court holds that the meaning extracted from the plain English is controlling because, well, if you hadn't intended it that way you're a billion-dollar corporation with a dream team and you should have been able to phrase what you actually wanted in the contract you had drafted.
What's something which could easily be misconstrued... ooh, vesting schedules. "We grant you 10,000 options with a 4 year vesting schedule of 2,500 options per year." Lawyers will probably not be that loose with language. For one thing, this doesn't address the somewhat significant issue of when those 2,500 options accrue -- if I end my employment on day 1,000, do I end up with 5,000 options? Or 6,843 options? Or, perhaps more significantly, is the maximum number of options accrued under this 10,000? Or 20,000? (Lawyers don't get a DWIM operator any more than we do, and "with" is one treacherous little beastie now isn't it.)
Patrick, it's not unheard of for lawyers to include simple hypothetical examples to illustrate how the legal language is supposed to work.
And sometimes I've included footnotes explaining why certain provisions are phrased the way they are. I do so mainly to educate the other side, but also with later readers in mind [read: litigation counsel and judges].
That assumes that the legalese is less ambiguous than plain English. Quite often it's the other way around.
This is a common misconception held by most people. It is wrong.
One of the most important goals of a contract drafter is to avoid all ambiguity and to provide certainty.
So I think the only answer is that if you do not understand a contract, hire your own lawyer to explain it to you. There are a lot of solo practitioners or small firms that will gladly do this for you for a small fee.
On the contrary, lawyers exist who can draft "plain English" contracts without pointlessly impenetrable copypasta legalese.
We've found that at the end of the day, plain English contracts create fewer problems because both sides understand what's on the page and don't object to it later.
Granted, such lawyers are hard to find.
NOTE: In the UK, in unequal contracts (business vs individual, for example), plain English is a legal requirement[1]:
"According to the UTCCRs, a standard term must be expressed in plain and intelligible language. A term is open to challenge if it could put the consumer at a disadvantage because he or she is not clear about its meaning - even if its meaning could be worked out by a lawyer. If there is doubt as to what a term means, the meaning most favourable to the consumer will apply."
1. http://www.oft.gov.uk/about-the-oft/legal-powers/legal/unfai...
Of course if it is possible to write the entire contract in plain English only that is to be preferred. But that is not always possible. There are certain things that simply cannot be worded in plain English with sufficient precision.
No offense, but that's exactly what I was talking about too. Please see my other comment in this thread, providing a real world example of such an "unlikely" document:
> But that is not always possible. There are certain things that simply cannot be worded in plain English with sufficient precision.
That is false.
Like docco for legal contracts.
If this is true, it sounds like somebody didn't properly perform their due diligence before signing their options agreement. Although it's never right for a company or investor to exercise this buy back when it comes to an honest, hard-working employee, the onus really falls on the employee ensuring that this clause never sees the light of day in their contract in the first place. Perhaps in the event of "cause", one could make a case, but certainly under no other condition.
EDIT: It's an unethical clause to begin with - absolutely agree with the comments. Just saying that you can't count on anyone besides yourself to act on behalf of your own best interests.
But this? It isn't so clear.
But you could, for instance, join together with other employees whose interests are more aligned with yours and join a union.
That is if there were any unions in the IT field.. and if they weren't nearly universally despised due to the omnipresent anti-union propaganda in the US.
If this type of agreement has been standard in the Valley for decades, it would be unreasonable for Lee to expect anything else. If it's a new kind of screw-job, we may have to see how courts handle the inevitable disputes. They might tell him "tough luck." Then again, they might decide that it is unreasonable for him to expect the repurchase of his options, and that the company knew it was unreasonable--or even went out of their way to make it difficult for him to appreciate the consequences of the contract he signed.
I have no idea how it will work out for him, but I do want to point out that when there's a massive imbalance of power and access to legal advice, the amount of due diligence expected of the weaker party is sometimes relaxed.
There's been a general consensus about what a "market" employee agreement contains, which lets people make decisions in a relatively uniform way between offers. If it becomes known that any company associated with a certain firm has wacko contracts and that you'll need to pay 20k in legal time to even evaluate their offer compared to others, it becomes an easy no all around.
Is there? What counts as general consensus?
That's meant to be a serious comment. I've seen contracts that have vested stock grants expire after 2 years and some where vested grants stock never expire.
it seems to me that there isn't really any such thing as a general consensus when it comes to stock options.
However, I was referring to when your options expire, which seems more appropriate to the story:)
http://blogs.reuters.com/felix-salmon/2011/06/24/upgrading-s...
Basically, Skype's claim is that the point of this clause is to retain employees -- you don't get cash in your vested stock unless you still work for the company. But as Salmon points out, none of the employees actually realized this -- the clauses are bafflingly worded, and refer to external documents, to the extent that you'd need a lawyer to figure them out -- so it doesn't make any kind of sense as a retention tool. Add in the fact that this policy is pretty radically different from standard tech industry practice, where if you're vested you're vested, and it really seems like it's just a way to screw employees.
It was explained to everyone, clearly, that you only benefitted if you were an employee at the time, and that when you leave the company for any reason, the founders would buy you out according to a specific, written formula.
There was absolutely no ambiguity about the mechanism.
But you say it explained to everyone at KL "clearly" what was going on. Don't you see that this is one complaint here is that not only wasn't this done, but perhaps the very opposite?
And were you given detailed instructions on how (and how quickly) you must exercise vested options if you quit,The only radical difference from standard industry practice is that it's actually spelled out in the contract.
Standard tech industry practice does, true, allow insiders (at the time of the liquidity event) to play a variety of games to screw common shareholders. Generally, though, the bigger the event in $ terms (and this is big) the less legal room you have to play these games. For instance, as others have pointed out, you can low-ball the offer price but offer "retention bonuses" to current staff. And VCs always have their preferences. But if you keep these things on the safe side of the law, they are less and less impactful as deal size increases. I'd love to hear of a commonly employed mechanism that washes common to zero in a multi-billion dollar deal. I doubt frankly that it exists.
Hey bizdev weenies out there that wonder why you can't find a technical cofounder/employee who will work for equity, here is your answer.
They shouldn't use the terms "vested" and "unvested" then. His options were vested, yet were callable. That's not what vested means. They should call all options unvested until the company goes IPO.
I'll have to add Skype to my list of "rotten ethics in Silicon Valley" (http://blog.fairsoftware.net/2011/06/01/rotten-ethics-in-sil...). When will the investors speak up?
On the other hand, you should have known Skype, incorporated in an international haven, was not your regular startup.
EDIT: also, the stock agreement just says "management partnership" on page 3, with no prior definition of what it might be. Later on, it gets more references, without ever being defined. A good lawyer may have a case?
But will Microsoft do such a thing? I doubt it very much. (I would love to be proven wrong, of course)
http://www.silverlake.com/partners/content.php?page=investme...
READ YOUR LEGAL DOCS (sock options, IP, etc) and negotiate sketchy terms before you sign them!
The sum effect of 1 and 2 being net-zero gain on the shares, minus a large chunk of cash out of pocket tied up in a tax withholding account.
Terrible.
Pure evil.
Income tax is only due on the portion of the asset that is not subject to a "substantial risk of forfeiture". Thus a letter claiming certainty of instant forfeiture cannot also claim income tax. (FYI, other limits to property rights, such as a lock-up agreement after an IPO, are not considered a forfeiture.)
So why did they lie to scare you out of doing something that would have been pointless? Because if they had been forced to buy back the stock at the exercise price, they would have had to pay income tax on the difference from the fair market value.
It will cost you less than $200, and it will be very annoying to Skype. It takes the same amount of paperwork and lawyer time.
It would actually make for a great short story or novelette to see former classmates on opposite sides of a deal like this. A lot of very smart engineers go straight into jobs in technology sector investment banking, private equity, etc. soon after college that could eventually put them on a collision course with erstwhile friends.
I wonder if that contract is subject to legal action, though? Seems to me that was a deliberate attempt to screw him over. He shouldn't have signed it, but they shouldn't have written it, either.
I'm now serious considering canceling my Skype subscriptions and finding alternatives, despite how useful they are to me a the moment.