Zynga Chief Seeks to Claw Back Stock
online.wsj.com
online.wsj.com
Where this becomes very distasteful is if these aren't isolated incidents of very underperforming employees but Zynga using its leverage to negotiate compensation down arbitrarily. Even if a developer is performing just as well as expected upon hiring, it is unlikely that they could get a guaranteed offer of $1M from another company, and so Zynga could easily force a renegotiation of an unvested grant worth $5M down to $1M. This would be reprehensible - even if that employee isn't really adding $5M worth of value, if they are performing up to the expectations that were set when they were hired then the agreement should be honored - getting a chance of a huge upside is one of the reasons employees take lower salaries and work longer hours at startups in the first place. A company that abused its bargaining position like this should not expect to be able to hire good employees in the future.
There isn't really enough information in the article to know that this latter case is what's happening. There are scenarios in which this behavior is very malicious, and scenarios in which it's relatively reasonable. It all hinges on how the employees in question were performing and how common this tactic is. I don't think anybody here knows those details, so we should really try and avoid the typical internet rush-to-judgement here. I don't know anything about the internals of Zynga, but I have seen HN get out the pitchforks for other companies when the real story turned out to be much more mundane.
It not just looks bad. It IS bad. Arbitrarily deciding who does and who does not deserve to vest is ridiculous. If the person is not performing, let them go. They are an at-will employee.
By negotiating them to keep their job by giving stock options back, they are simply trying to keep that employee at a cheaper rate. The employees must be performing effectively if they want to keep them. The notion that these people are doing nothing and still employed by Zynga is disingenuous.
The naivete (or CEO apologism) around here is astounding. I understand keeping an unbalanced and impassionate point of view but at some point if it sounds like a duck and looks like a duck it IS a duck.
I would argue that they were promised something that the company is failing to deliver and it is thus engaging in fraud, but I am not a lawyer thus I am unsure how to make this into an effective legal argument.
> [...] maximizing value for other shareholders in the company. But at what price?
If employers are worried about a serious disconnect between performance over time and equity payout, they might cap the valuation of an equity stake by taking back call options with high strike valuations. They could then give more shares or extinguish calls in response to performance. But this would reduce the apparent value of the up-front stock grant, and thus the employee's incentive to come on board.
I don't know enough to support firm conclusions, but this doesn't sound like behavior I'd hope to emulate.
I do not understand why you need at-will employment. If an employee is behaving badly or underperforming, then you have an excuse to fire them. If you got rid of at-will employment, you can still fire bad employees. Abolishing at-will employment will just make it hard for companies to screw over employees unfairly. This is not a bad thing IMO.
Of course, the reverse is true also. Employees can leave at any time for any reason as well.
Overall, at-will employment keeps companies and labor markets flexible.
Then you make those positions redundant (or in british english terminology, you 'let them go'). It's perfectly legal (in EU which doesn't have this at-will stuff) to say "We no longer need a Django programmer, since we're moving to Ruby on Rails now, we know you're a great django programmer, but we're letting you go". You don't need 'at-will employment' to have this advantage. There are some limitations, like you actually have to make the position redundent, you can't hire your brother as a django developer the next day. But that's the point, it balances out the power.
It seems the company does not believe this to be the case. Possibly they are in a better position too know. Or they are beyond the phase where top talent is required to de-risk the business. Very calculating either way.
[I agree with all the points above, but wanted to add in the fact that early employees are rewarded for risk as well as production. Esp if they signed on for below market salaries, with stock calculated as deferred compensation.]
You said it.
If you read the article, you'll see that what's happening at Zynga is not "Taking Back" stock, instead it's talking about _future_ compensation. Every time I've been through a Compensation Review - one item that is made very clear to my manager, is how much _unvested_ stock I have in the company. That plays a role when they reviewing my salary and bonus, because Unvested Stock is a component of my forward-looking annual salary.
All Pincus is doing - is looking at his executives, and saying, "Hey, You are going to make $10 Million dollars NEXT YEAR, but you aren't doing $10 Million dollars worth of work - we're going to have to bring your NEXT YEAR's salary down to $1 Million" - He isn't talking about stock already owned by the employee.
California is an At-Will employment state, Zynga is located in California - Pincus could just fire these people and be done with it - as long as he wasn't discriminating unfairly (Based on Age, Race, Ethnicity, Marital status, or any of the other protected classes) - it would be completely legal, and, if these people weren't performing, completely rational, albeit really quite brutal.
In the scheme of "How can my company screw me on stock" - I put this in the 50 percentile category.
With all that said - dick move. I wouldn't want to work for someone who would do this to me.
So, if I say "come work for me for free, and in exchange I will give you 10,000 RSU that vest over 4 years", then 3 years down the line say "just kidding, you don't get these last 2,500, but you get to keep working here", that is absolutely trying to take back comp. They can certainly withhold future restricted stock grants, but trying to take back already granted shares, vested or not, is beyond the pale in my opinion.
Here is the thing - Firing Non-Performing executives at startups with huge stock allocations happens ALL the time at _every_ company. It's not at all unusual - I've never been at a company where it hasn't happened. And frequently. It's absolutely business as usual.
I don't understand why Pincus didn't just fire these people and move on. That's the weird part of this entire thread.
Maybe he's concerned how it would look if he fired a group of execs right before the IPO?
If it's ethical to fire these people (in which case they lose all unvested shares) then it stands to reason it would be ethical to renegotiate a deal that both parties think is fair.
He's looking at some high-performing employees in a terrible labor market, and calculating that their BATNA is not very good, so he's deciding to find a way to screw them.
If the employer says "You're only providing $X in value (where your RSUs amount to $X+Y so now we're going to fire you or you'll agree to only take $X in RSUs" then, by working at a startup, you have a significant downside (the startup could well go belly up) but no upside.
Why no upside? Because your capital gain on the shares you took a pay cut for might at any time (for unvested stock) be reduced to your market value... which you could've simply earned elsewhere by taking that as a salary.
It's risk versus reward. What we see here, if true, is that the risk remains the same but the reward has been significantly chopped.
Dustin Markowitz [1] is a billionaire, largely by virtue of the "skill" of being Mark Zuckerberg's Harvard roommate. He "earned" ~$5 billion from Facebook, which if memory serves, is less than Steve Jobs made from Apple's second stint (where he, you know, turned a company on the verge of bankruptcy into a $300+ billion juggernaut with $80+ in cash and $100+ billion in annual revenue). Did Muskowitz provide comparable value? Of course not.
But he did take a gamble, like anyone joining (or founding) a startup. If this pseudo-clawback [2] behaviour becomes commonplace, it undermines the entire startup scene (IMHO).
[1]: http://whoownsfacebook.com/
[2]: I say "pseudo-clawback" because "clawback" has a far more evil meaning. Just look at Skype. http://blogs.reuters.com/felix-salmon/2011/06/27/skypes-evil...
No, I don't think that's the case. The reward is being chopped because the risk has been chopped, right?
Presumably the company is worth much more and is much closer to IPO than when these employees joined, right?
I guess it's wrong if at the time of joining, the employee's risk/reward calculation used all of the equity they would be eventually granted. But that seems foolish because at any time they could be fired and be left with only their vested shares.
You've just hit on why startup equity for employees is very, very risky.
I imagine one way to make it non-claw-backable is to give the right to purchase outright right away, or to have a much shorter vesting period, although that may have tax ramifications, and be messy for the stock plan/s to deal with.
Regarding whether anyone's contributions really are worth $4B or whatever -- that's the lottery. Lots of start-ups fail, and lots of possibly valuable contributions are then valued at 0 stock. If a person contributed to a healthy start for something that grows really big, they may win the lottery; that's part of the appeal of Silicon Valley start-ups. The more companies close off this lottery ticket avenue, the less that ticket will be worth, and the worse the ecosystem will do in the long run.
But if you stand to make billions in the short run, who cares about the long run? Probably true on both sides.
From that perspective, there isn't much difference between (A) Vesting Stock, and (B) Lapsing over time a Restricted Repurchase agreements.
Nobody is going back on their word - it's just a different way of vesting.
I've never seen a "we can repurchase shares as we see fit" clause.
Actually California's At-Will employment is a bit different then standard At-Will. It's got an "Covenant of good faith and fair dealing" exception. Taking back option grants may be in breach of this (though it would have to be tested in court). Point being Pincus can't just fire these folks arbitrarily for not giving back shares with no risk involved.
"One lawyer said that over the past year, he has heard executives of three social-media sites discuss the possibility of clawing back equity from some employees. Another lawyer, who has handled stock-compensation issues with technology companies for decades, said he never saw a company try to take equity from employees until about two years ago, but has since seen three such cases at start-ups."
I don't see how this is anything other than theft. They're saying that either you give us some of your compensation back (you may not have joined if it were not for those stock options/grants) or you're fired and lose it all. Insane.
Take note white collar workers & high paying professional programmers, at-will employment and lack of employee rights can screw you too.
If it was illegal to fire someone "for no reason", then it would be much harder for a company to screw employees like this.
Now that it's HN's ox being gored, there's a different feeling about it. Labor rights aren't just for farmhands and Walmart workers.
Here it seems people are being asked to take a pay cut not because their company is having problems buts because is doing very well indeed.
But... he could just fire them. Which is a problem in itself.
This is why I have a major problem with typical employee stock options. It is just flat out not worth as much to employees as it is to investors and founders. Employees are basically put in the position of having to trust that their management (and their management's acquisition overlords) will do what they said they'd do. Between the employers and the tax man, employee equity can be a real bitch.
Translated into english, most stock option agreements say, "We'll give you XXX options per month (after you pay us for them, of course). IF we feel like it - we can always fire you and owe nothing more, as you know. Taxes are your problem (good luck!). Oh yeah, and you don't get shit for a year."
Ever try to improve the situation up front? Oh, the howling and moaning you'll witness from the company and their lawyers. ("That's highly irregular! Nobody does that! It's a standard vesting period! Why are you so greedy! You could just walk away with stock!")
So Pincus should be willing to essentially write futures contracts on the proceeds from his own shares and trade those with employees, who should be willing to accept them in trade, even at precisely equal expected value.
Meanwhile, he's likely to see an exodus over the coming months of other good employees whom he didn't try to screw (this time) but who also now realise that the benefits of staying long term aren't necessarily worth the paper they're printed on.
You can pretty much write the rest of the story when something like this happens. The only question is whether people like Pincus himself will manage to cash out at some stage before Facebook intentionally or otherwise pulls the rug out from under Zygna in much the same way and the potential value of an IPO plummets.
It's kinda like if someone gets you to join their company by offering to pay you 100k/year, but then 6 months in drops your pay to 50k/yr.
And really it's not even that. It's "you got hired at 100k/yr, but then the company was WILDLY SUCCESSFUL and you then expected to make 10M over the next year but they're dropping your pay to 1M for that year"
Skeezy? Definitely to some degree. Theft/Illegal? I don't think so.
The option price and amount was set previously, and should be honored as long as the employee is performing their duties reasonably.
This is greed in it's simplest form.
Let's say you renegotiate down 50% like you suggested. That means from now on you make 50% and before you made 100%.
A vesting schedule though almost always accelerates towards the end. So if you renegotiate down 50% towards the end you may in fact be likely losing 75% or more. That's the problem with renegotiating stock grants/options, you likely still have a large amount left unvested and you put in all the hours and work beforehand with the promise that loyalty would be rewarded over time.
Really? That's hasn't been my experience. In every situation I've seen (or even heard of) vesting has been on a regular schedule with the exception of a cliff at the beginning of employment (generally 1 year).
If the zynga situation involves people who have not yet reached their 1 year cliff the skeeziness factor would go WAY UP imho.
If the employee continues to do the work he promised to do at the time of the grant, firing him, or attempting to renegotiate, simply to get the stock back is a form of theft.
You can't just hire someone at $100k a year and then decide you want to pay them less, at least not without risking a losing a lawsuit.
"After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had."
http://www.fastcompany.com/magazine/63/fasttalk.html
So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.
>> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.
If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.
I should note though that the executives and venture capitalists are ALSO locked out, which is why you don't see LinkedIn stock entering the market currently.
Yes. As another example: Several hardware companies did reverse splits + share issuance (to holders of preferred) right before IPO. Atheros comes to mind iirc.
If I had my way, Pincus would never work in this town again. Anyone involved in this decision should be made a pariah. If we don't defend the norms that make innovation possible, we'll lose them.
I would never do something like this but I want that to be legally "handcuffed" so that no employee can ever think that we would/could do this.
They then seem to be saying "give us back some of the stock voluntarily or we will fire you and you will lose it all."
If you want to make this impossible you can make your contracts such that unvested stock is not lost when one is fired. However, in that case you may end up with a lot of stockholders that are previously fired employees which may not be good for the company.
You can put in a provision in the contract that says that people can only be fired for good cause and that cause cannot be that they did not want to give their stock back. However, while this seems a very fair provision, it will invite a lot of lawsuits and may cost you a lot of money even if you do follow it.
You can put in a provision that says that one cannot ask employees to give back shares in exchange of not getting fired, but it is doubtful that will be effective. The courts usually allow contracts to be renegotiated if both parties agree to it, even if the provision that is to be renegotiated is the one that says "no renegotiation."
So, honestly, I cannot see a good way to "handcuff yourself" as you put it. You may as well just rely on being a decent person.
__________
PS: None of this is legal advice. This is just hypothetical discussion regarding a hypothetical situation. Please do consult a lawyer for your specific situation.
What's unfair about this situation is if you are fired just before reaching your next vesting event, you see none of it (but oddly, you will still be given back-pay). If I had the legalese to vest continuously, I would.
TC = Time of the Company from founding to liquidity event in days (or weeks as long as the unit is small relative to the expected duration of the company)
TE = Time in days that the employee worked at the company
It's actually really that simple. Obviously other factors like impact, performance, seniority, etc. play a role but those get adjusted by the magnitude of the stock grant and not the vesting process. We use a reverse vesting shares to give employees tax advantages but the same concept could work for vesting options.
The advantage of this approach is that everything is nice and linear (expect the 3 months probation cliff). A lot of sneaky behaviour is just not worth it when things are linear. Remember, lack of alignment is the big killer of start-ups.
IANAL, but there are a few ways you could lock yourself into this. Could you have your company in an EU member state, hence making yourself abide by EU law? Could you put something in employment contracts saying that you never will hire someone 'at will'? etc.
I applaud your attitude of making your company a good place.
This type of program is really good for retaining highly paid employees in established companies, but might not be ideal for startups.
Of course, “good cause” is an inherently slippery term, but if a CEO announces in the frigging Wall Street Journal that he’s trying to twist employees into giving their stock back, and then turns to Fred and says “Fred, I haven’t mentioned this before, but I think your performance has been really poor over the past year”, then Fred’s lawyer does not have a very difficult case.
Or was he paying so little attention to who was and was not contributing that firing them didn't occur to him at the time? In that case, who's really "missing in action" here?
If I were going to take my company public soon, the impending litigation shitstorm is exactly the kind of thing I would not want to have hanging over me.
Believe it or not, there will be a coterie of investors who will get behind that. (They will perceive that their interests are aligned with the CEO after IPO.)
The obvious question is how they could ever expect to convince executives they won't be defrauded the same way a couple of years from now. This tactic seems so unscrupulous as to be self-defeating.
On the other, in any company as big as Zynga there are people who coast along and don't really earn their shares. Zynga isn't trying to take back what's vested, just clamping down on future shares for people who aren't doing a great job, maybe playing a lesser role than they were originally hired for. That seems like a perfectly valid thing to do -- in fact it's only fair to the employees who are pulling their weight.
The fact that this is happening right before launch is pretty reminiscent of Skype's fiasco prior to exit (sale to MSFT). In fact, both of these companies have one VC that's in common, Silver Lake Partners: http://www.silverlake.com/partners/investments.php?page=inve...
Hopefully it remains rare. What a dick move. Bad for startups everywhere.
There is a power inbalance here. Companies give stock, but that can be taken away if the company fires you. Even if you work hard and are a good worker, the dollar price of what they get if they fire you might be too high. The best way to stop this is rebalance the power. Prevent the company from being able to fire you for no reason.
After some deeper thought on this topic - my new assessment is that these people are actually experiencing what is called a "Soft Termination" - they've been fired, but they are allowed to stay on as employees for things like Medical, Job Hunting, etc....
Instead of appreciating it, though - they are squawking about having their stock pulled back in return for not being "officially terminated". I bet this type of thing goes on more often than we know, particularly with Executives who may have a significant percentage of the company and are not working out.
Asked: "Is not commercial credit based primarily upon money or property?" "No sir," replied Morgan. "The first thing is character." "Before money or property?" "Before money or anything else. Money cannot buy it...Because a man I do not trust could not get money from me on all the bonds in Christendom."
Your point that people should not expect to make money from illiquid non-controlling stock is reasonable, though.
Evil likes this, creates a need to create a counter force.
Is it rude to think these employees laid down with dogs and are bitching about fleas?
[1] http://techcrunch.com/2009/10/31/scamville-the-social-gaming...
[2] http://techcrunch.com/2009/11/07/horrible-things-slink-back-...
[3] http://cdixon.org/2009/09/28/the-new-economy/
[4] http://techcrunch.com/2009/11/08/zynga-to-stop-all-in-game-o...
[5] http://techcrunch.com/2009/11/01/scamville-hotornot-plentyof...
But who cares? After all, it's unlikely the next Vonnegut is going to spend his time playing MafiaWars instead of writing "Slaughterhouse Five" or anything.
I am reminded of the aphorism, "Time you've enjoyed wasting is not wasted time."
Fulfilling a compulsion is not actually enjoyable. So unlike most game-makers, I don't see them as creating fun.
What makes them worse than say, world of warcraft?
I think vesting, as a mechanism, is problematic. Especially when you make a founder vest stock they've already bought and paid for (with sweat equity and the money they put up to start the business.)
Unfortunately, a lot of startups play fast and loose with this. Its common to ask someone to take a lower salary, where, say, they're making $5,000 less each month, but they aren't vesting any shares each month. Some companies only vest in blocks each year. Which means that if employment ends for any reason, the employee will effectively be shortchanged for the months of work before the cliff.
Yet it is pitched as if the stock or options is like the salary.
Its not uncommon for startups to fire employees right before their first cliff... if there is a shorter downturn in outlook (or if the founders are on the down side of the roller coaster and are panicking...)
I think a better solution would be for any kind of equity reward to be given monthly, with the paycheck.
Rather than grant a huge block of shares, vesting over 4-6 years, maybe give the employees a small amount each month. This amount would be fully vested, and it can be adjusted whenever you have your reviews.
As the startup grows, naturally, the shares will become more valuable, and the grants in future years will likely be lower for everybody. They could just decline faster for the under-performing employees and maybe not even decline at all for the star performers.
This eliminates the stress and unfairness of cliff vesting.
For the situation where an employee might leave within the first year, you could have a clause that gives the company the right, upon termination, to buy back the employees equity at the highest price during the year (e.g.: if you raised two angel rounds, then it would be at the higher) plus a dollar a share. This way the employee isn't screwed over, and you don't have people who were there for just a year clogging up your investor rolls. If it isn't buying back the stock at the price you've been selling to investors (plus a dollar a share) then your expectations of the value of that stock are so low that its wrong to cheat the employee out of the roll of the dice for a big upside.
I might be missing something, but this is an attempt to create something fair, for an environment where cash is short and people want to use stock or options as regular compensation.
Paychecks don't vest, and imagine how many people would work for you if you said "We'll pay you $100,000 a year, but only on January 1st of each year. If you leave before then, or we decide to fire you, you get nothing."
The last round+dollar per share seems silly. First because shares are somewhat arbitrary, it's the % of the company that matters. Also if there is a down round, why should the employee benefit? The whole company is struggling, why should there be a bonus for leaving/getting fired?
It seems to me that if you want to work for a startup and are taking equity compensation you should understand the RISK involved. You should be prepared to accept the pay and be comfortable knowing that your equity, real or imagined, could be worth nothing.
That said, the cliff issue could probably be negotiated more favorably for employees and screwing over your employees seems like a horrible policy in a world where every tiny detail of your life could possibly be published and forever archived publicly.
If a founder ever wants to start a company again, screwing over employees will haunt him in the long term much worse than any legal repercussion that can be fixed with money.
So I wager there is a lot preventing founders from screwing employees, specially in startups, where people are hyper connected.
The comments in this story are running rampant with hearsay and people who have no involvement making up facts and jumping to uninformed conclusions. Zynga employees cannot comment on anything anywhere because of the quiet period.
Not if you, as founder, really are in it for the money and your first exit sets you up for life. Can anyone think of a company that might be relevant to this discussion where such a description might apply?
> Zynga employees cannot comment on anything anywhere because of the quiet period.
I can't believe no-one is going to sue over this, given the amounts of money presumably involved, and I doubt a judge is going to seal the records in such a case. I'm sure we'll find out the details soon enough.
Other than being treated like toxic waste by every prospective VC and business partner until the end of time.
If nothing else this sort of approach might get one a well paid consulting gig in maximizing the throughput of a child labour force or something similar?