
Zynga Chief Seeks to Claw Back Stock - lsr7
http://online.wsj.com/article/SB10001424052970204621904577018373223480802.html?mod=WSJ_hp_LEFTWhatsNewsCollection
======
mlinsey
Anytime you have both vesting schedules and at-will employment, your employer
can fire you at any time and you will not get any unvested stock. Startups
need to do this all the time when employees are underperforming or a bad fit.
Renegotiating so that you can get a portion of that stock and stay employed is
perhaps, if this were an isolated incident, a much better deal for the
employee than getting fired.

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.

~~~
grellas
The oddball thing here is not that people are being let go so that a startup
can recapture their unvested stock (as you note, this happens all the time,
for reasons both good and bad) but that a company would create what amounts to
a "hit list" in order to systematically pressure employees to surrender shares
on threat of being fired. The company-wide message to employees is, in effect,
"we lured you to join us with promises of a high upside via this stock grant
in case we succeeded but, now that this has come to pass, we think you are
getting a windfall and want a good part of it back." Since employment is at
will, this tactic can be effective in reducing the equity base and maximizing
value for other shareholders in the company. But at what price? This effort is
being driven by a CEO who is clearly dominant, holding almost 40% of the
voting power in the company and using it, for example, to cause the company to
buy back nearly $110M worth of his personal stock pre-IPO. The overall effect,
then, is one of a leader who appears arbitrary and unfair to those who were
there early on. While cashing in for himself, he is "clawing back" on others.
It might be legal but it just plain looks bad and would hardly seem to be a
good way to motivate people or to keep strong people in your company for the
long term.

~~~
freshfunk
No one should be surprised that this is coming from Mark "I Did Every Horrible
Thing In The Book Just To Get Revenues" Pincus.

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.

------
ghshephard
I'm going to take a slightly controversial position here - so please read
through my logic before you downvote me into oblivion.

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.

~~~
gergles
I have to respectfully disagree with your logic. If you read the article, what
is actually happening is they are retroactively trying to reduce restricted
stock grants _that were already made_.

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.

~~~
ghshephard
They can't touch the shares that have vested - I think we both agree here.
They could just fire the non-performing executive, and put an end to the
vesting schedule.

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.

~~~
staunch
Good point. I'm positive I'd just fire them. It sounds like he made a list of
B/C players but wants to keep them around.

Maybe he's concerned how it would look if he fired a group of execs right
before the IPO?

------
smokinn
Wow this should be straight up illegal and yet:

"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.

~~~
harryh
They're not saying "you give us some of your compensation back", they're
saying "your future compensation will be less than you expected."

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.

~~~
smokinn
The difference between a pay cut and a stock restriction is that pay is
regular and vesting is not.

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.

~~~
harryh
> A vesting schedule though almost always accelerates towards the end.

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.

------
patio11
I think it is really important that people understand that stuff like this can
happen even when you _win_ the 100 to 1 bet that you are working for the next
Zynga and not the next $NAME_A_STARTUP_RANDOMLY.

~~~
cageface
Another potential gotcha is the post-IPO sales lockout period. I don't know if
it's the same in software, but in a previous life I was a chemist in a biotech
startup that had an initially successful IPO. The rank and file were
prohibited from cashing out options for six months after the IPO but somehow
all the execs were exempt and got rich while the stock was enjoying a post-IPO
high. Needless to say, by the time we peons could sell the value had
plummeted.

~~~
jamiequint
Thats what put options are for.

~~~
jpdoctor
Puts don't start trading immediately after the IPO. (There are also
lockout/reporting requirements on derivatives, but I've always wondered how
enforceable/detectable such transactions are.)

~~~
staunch
There are ways to hedge though, right?

~~~
jpdoctor
Not usually, you need someone on the other side of the transaction. And even
if the options were available, the volatility would make the spread very
costly.

~~~
lancewiggs
The standard way, if you are prohibited from trading that stock, is to buy
derivatives that are short on a basket of similar stocks. This hedges against
a general market fall, such as 2001.

------
Lambent_Cactus
Silicon Valley isn't a special place for invention and for startups because of
special infrastructure or special laws, but because of special ideas and
special norms. Those norms don't hold up in court, and they erode a little bit
every time someone like Pincus only thinks about what they can get away with
instead of what's right. This reduces the perceived value of equity for
everyone in the valley, makes everyone less open, less trusting, less willing
to take a risk. In the end, we all lose for that.

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.

------
qq66
Grellas, PG, or others with experience in this field -- is there a legal
document that I can make, as a startup CEO, that prevents my company from
doing this in the future?

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.

~~~
hristov
It seems that Zynga is using a provision that says that all unvested stock
grants are returned if the employee is fired. This is a pretty common
provision from the contracts I have seen.

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.

~~~
prodigal_erik
Employees can't rely on your decency because the investors might put someone
else's finger on the trigger if that time comes. I wish there were a way to
ensure everyone gets paid or screwed together, but tactics like share classes
and dilution and liquidity preferences seem to be so strongly customary that I
wonder if a VC would lose interest in a firm that relinquished the power to
selectively starve that VC's rivals at the banquet.

------
jeffreymcmanus
So their CEO has a list of executives that he feels did so little he considers
them "missing in action". If that were the case, why didn't he just fire them
for cause? That would have stopped the vesting clocks on their options.

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.

~~~
jpdoctor
It communicates to IPO investors: CEO is such a dick that he will happily
screw over employees in order to enrich himself.

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.)

~~~
tsotha
As an investor what this tells me is the CEO has no personal integrity, and I
begin to doubt the veracity of his IPO filings.

~~~
jpdoctor
You shouldn't believe them anyway, because they are selling you something.

~~~
tsotha
You're probably right about that. Still, I prefer not to do business with
people lacking integrity. There are a lot of different ways to get swindled.

------
DevX101
This is bad for the startup community. There isn't much reason for a great
hacker to join startup if he/she thinks you might want to play 'take-backs' if
the company succeeds.

~~~
ghshephard
Well - the hacker can be fired. That also takes back all the unvested stock.

------
strlen
What's really disgusting in the conversation is that there's some implicit
assumption that it was _wrong_ for the Google Chef to have received $20mm.
Indeed, the only thing wrong with that is that $20mm is far too little, given
the Chef's contributions to Google (I am assuming they're talking about
Charlie?)

------
prodigal_erik
> The equity recouped has been valuable as Zynga recruits experienced
> executives.

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.

------
SemanticFog
On the one hand, it's kind of a classic dick move by Mark, pretty typical of
his bloody mindedness. (He's more of a bulldog than Zinga ever was.)

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.

~~~
r00fus
This is ludicrous. If people are coasting in a company, those people should
not stick around (dis-incentivized is a word I've heard used before).

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...](http://www.silverlake.com/partners/investments.php?page=investments&id=43)

------
jasonshen
Can someone summarize the rest of this post for those without a subscription
to WSJ?

~~~
WillyF
Copy and paste the URL into Google. Then click the link when it shows up in
the SERPs. It should get you past the paywall.

~~~
jasonshen
Thanks!

------
prpon
More often, startups fire employees under the disguise of performance. I am
not sure what constitutes non-performance but it has been used countless times
as an excuse for getting back the unvested stock options.

------
shr3kst3r
I guess they want to make sure people don't want to come work for them...

------
damoncali
_But several lawyers say the practice has been so rare it hasn't been tested
in court._

Hopefully it remains rare. What a dick move. Bad for startups everywhere.

------
goodweeds
A rich man who made his money any way he could, ethics be damned, is trying to
steal money from the people who helped make him incredibly wealthy. Is this
really shocking?

~~~
aprrrr
"It made him sick to have to turn money over to the guys who stole it. He'd
rather whack 'em." -Goodfellas

------
rmc
This sounds like a good example of why 'at-will' employment should be
abolished and why there should be more employee rights.

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.

------
sbov
How much of Pincus' stock is getting clawed back? If this really is a problem,
isn't it afterall, his fault in the first place? So shouldn't he suffer?

~~~
3am
He's an enormous holder - the article cites almost 20%, and almost double that
in voting rights. It's hard to believe his contribution is worth $4B (1/2 of
what Steve Job's net worth was) if the $20B valuation holds up in the IPO.
Disgraceful.

~~~
gujk
Why? Zynga hit the (hypothetical) $20B in far less time and employees than
Apple did. That is far more return on invested capital.

------
gm
FWIW, you cannot get any Zynga employee's opinion in this because the pre-IPO
"quiet period" is in effect. So this is a pretty one-sided conversation.

------
ghshephard
None of these employees who have had their stock (possibly millions of dollars
of compensation) "clawed back" will be likely to do any productive work
whatsoever for Zynga - so why not fire them and get it over with? After all -
that would have the effect of instantly canceling all future vesting - no
discussion or agreement with the employee required whatsoever, and zero
controversy.

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.

~~~
gujk
Bingo. If a company stops paying you as much, stop working as much. If you are
annoyed that you aren't getting paid for as much as you were contributing
before, you learn for next time to pay attention and adjust course before
waiting a whole year for a payday.

------
feralchimp
So why do employees accept stock grants without a clause stating "If you
choose to fire me without cause, (x% of) my unvested shares shall vest
immediately"?

------
rdl
There's the obvious J. P. Morgan quote:

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."

------
gujk
The expected value of illiquid non-controlling stock is 0. There is no problem
here. Don't take a job that pays you in unicorn horns and pegassus tails,
folks.

~~~
cbr
The term "expected value" has a technical meaning, and is not zero here.

Your point that people should not expect to make money from illiquid non-
controlling stock is reasonable, though.

------
jdavid
It's sad to say, because I hate unions, but in this case Unions would solve
this problem.

Evil likes this, creates a need to create a counter force.

------
cppsnob
The real news is not that they're taking back stock, it's that their initial
stock plan was so screwed up that they have to do it.

~~~
rpwilcox
I thought that myself. "Wait, shouldn't they _know_ they've been giving out
more stock then they should have??!"

------
earl
Mark Pincus, the scum king of lead gen [1:5], is behaving in an unethical
manner? I'm shocked. Shocked!

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...](http://techcrunch.com/2009/10/31/scamville-the-social-gaming-
ecosystem-of-hell/)

[2] [http://techcrunch.com/2009/11/07/horrible-things-slink-
back-...](http://techcrunch.com/2009/11/07/horrible-things-slink-back-into-
zynga/)

[3] <http://cdixon.org/2009/09/28/the-new-economy/>

[4] [http://techcrunch.com/2009/11/08/zynga-to-stop-all-in-
game-o...](http://techcrunch.com/2009/11/08/zynga-to-stop-all-in-game-offers/)

[5] [http://techcrunch.com/2009/11/01/scamville-hotornot-
plentyof...](http://techcrunch.com/2009/11/01/scamville-hotornot-plentyoffish-
facebook-myspace/)

~~~
lawnchair_larry
I'm surprised that anyone is surprised. It's _Zynga_. Their business model has
always been slimey, and they add no value to society. Net negative, actually.

~~~
herbivore
Not only do they add no value to society, one could argue they are responsible
for decreased productivity of employees who waste their work day playing Zynga
games or come back to work tired after wasting 2 hours at night planting
cucumbers on FarmVille.

~~~
Vandy_Travis
Can you help me understand the contempt you have for the Zynga games? I don't
play, myself, but I do understand that the games exploit (negative?
compulsive?) psychology, and they've used unethical business strategies.

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."

~~~
wpietri
Do you know any writers? Because the ones I know mostly have a terrible
problem with procrastination, avoidance, etc.

Fulfilling a compulsion is not actually enjoyable. So unlike most game-makers,
I don't see them as creating fun.

~~~
jiggy2011
I've never really played any of these games, do they not involve at least some
level of skill or strategy?

What makes them worse than say, world of warcraft?

------
nirvana
I've seen people get cheated out of compensation this way, in some cases where
they took greatly reduced salaries, in exchange for shares, but the shares
vested, and after creating the major innovation the company wanted, they were
fired without cause before the first vesting cliff.

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."

~~~
ohashi
Viewed from an employers' point of view, the cliff means you've got to put in
some real sweat into it before the shares become worth anything. How long do
you think it takes for a new employee to be truly adding value? Perhaps it's
not a year, but I suspect many eat a lot of time and slow things down for a
while until they get comfortable. I think the cliff is just a balancing of
those interests.

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.

~~~
ootachi
Founders only need to exit once. There is surprisingly little incentive for a
founder to avoid screwing over employees.

~~~
gm
Spoken like a true non-founder... Reputation is everything.

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.

~~~
Silhouette
> Reputation is everything.

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.

