

Skype options turn out to be worthless - TWAndrews
http://blogs.reuters.com/felix-salmon/2011/06/24/upgrading-skype-and-silver-lake-to-evil/
Am I the only one who finds this pretty shocking?
======
ghshephard
Absolutely zero surprise on my side. VCs, and acquiring companies are always
looking to maximize their return, as legally as possible during an M&A deal,
even (sometimes particularly) if that means screwing over employees who are no
longer with the company.

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.

~~~
pg
In my experience it's very rare for employees with vested stock to get ripped
off in an acquisition. Usually the amounts involved are so small that it would
not be worth the bad publicity.

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.

~~~
ghshephard
That, single handedly, has to be one of the strongest reason I could ever
think of someone wanting to work for a YCombinator company. In particular,
because YC doesn't take very large portions of the common stock, they wouldn't
be able to leverage their position into a "Consulting Fee" agreement with the
acquirer, so their _only_ recourse is the documentation surrounding the
common.

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."

~~~
joshu
Nit: Employees don't vest stock. They vest options.

~~~
ironchef
Nit: Some employees vest stock. Some vest options. Companies are different.
I've been in a multitude of startups. Two were stock, one was options. For
example, the current startup grants restricted stock units.

------
dctoedt
1\. By no means do I want to defend Skype here, but the prose in the linked
documents isn't especially incomprehensible, at least not for documents of
this type.

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._

~~~
jeffreymcmanus
Tech employees should not be required to take a third-year law school
contracts course to understand their employment agreement.

~~~
dctoedt
> _employees should not be required to take a third-year law school contracts
> course to understand their employment agreement._

@jeffreymcmanus, I'm in violent agreement ....

~~~
gnosis
Please don't use the @name convention on HN.

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.

~~~
dctoedt
> _Here it's quite obvious who you're responding to, because your comment is
> indented under the comment you've replied to._

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.

~~~
kwantam

        > 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.
    

Not really. Making relationships between messages clear is kind of the point
of tree-structured comments.

~~~
cshesse
It is the point, but it doesn't always work. I have had to use my mouse to
record the current level of indentation and then scroll up to find the parent
post on some sites.

~~~
beagle3
But you do remember who said what without scrolling, even if it is 3 screens
up? (do you even care WHO said it at all or just what was said?)

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"

------
brudgers
The article leaves out some relevant context. It appears that Yee Lee was at
Skype for one year one month 3/2010 - 4/2011. That entire period of time was
after Silverlake had purchased Skype and more importantly after the right to
repurchase vested options was in place.

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...](http://www.businessweek.com/magazine/content/11_27/b4235038625596.htm)]

[my comments on previous versions of story:
<http://news.ycombinator.com/item?id=2672786>]

------
ianterrell
While I understand that legalese is necessary since English is ambiguous in
its best moments, the only reasons I see not to include a "plain English"
version of a contract are A) to save on lawyer hours, or B) to screw someone
over.

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.

~~~
patio11
Lawyers don't include plain English because, in general, legal code cannot
have comments which are not executable code. Imagine the sort of comments you
would write if they were all executable (and you could not trivially break
this constraint -- it's a metaphor, work with me).

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.)

~~~
gnosis
_"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"_

That assumes that the legalese is less ambiguous than plain English. Quite
often it's the other way around.

~~~
eropple
No, it really is not the other way around "quite often." Legal English is
quite specific and not particularly or regularly ambiguous.

This is a common misconception held by most people. It is wrong.

~~~
gnosis
I'm not sure I fully understand what you mean. Could you please rewrite it in
legalese?

------
kenjackson
A big part of business is who you're in bed with. MS should cancel the Skype
deal, if at all possible. That would be one sign that they've turned a corner.
I will never fork over a dime for any Skype service. This, while legal, is
clearly unethical on a broad scale. And its the worst kind of unethical. Apple
and MS play hardball with competitors -- but you don't do that with your
employees.

~~~
powertower
What does this have to do with Microsoft?

~~~
JoeAltmaier
If you lie down with dogs, you get up with fleas.

~~~
joenathan
and if you rock'em sock'em you'll turn into a robot!

------
jsherry
"It turns out the investor group...had secured a so-called repurchase right
that gave them authority to buy back the shares at the grant price."

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.

~~~
jfruh
Felix Salmon makes a good case that Skype's stock agreement was deliberately
obfuscative:

[http://blogs.reuters.com/felix-
salmon/2011/06/24/upgrading-s...](http://blogs.reuters.com/felix-
salmon/2011/06/24/upgrading-skype-and-silver-lake-to-evil/)

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.

~~~
raganwald
Clearly nonsense. When I worked for KL Group, a unique incentive program was
put into place to allow employees to participate in any "liquidity event" that
might take place.

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.

~~~
bxg
There's nothing wrong with such an agreement (as you describe KL), and though
this type of explicit inventive plan is not so common in Silicon Valley, it is
surely valid, ethical, and and useful wherever it arises. (To be more
complete, in Silicon Valley there is usually such an incentive plan concerning
liquidity events, but it's tacit and is anyway orthogonal to stock/option
grants.)

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,

even though this had no meaning at all whatsoever? If the answer is no, please
imagine it was yes. Would you have still been totally confident that you
understood the mechanism (wouldn't you have wondered: why are they explaining
something that is in practice irrelevant?)

~~~
raganwald
When I said, "nonsense," I meant that it's nonsense to call it a retention
plan if you don't actually tell people they have an incentive to stay after
their options so-called "vest."

------
johngalt
This is why cash is king and "equity" is worthless.

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.

------
unreal37
I understand that Skype is a private company, and so that when they grant
options it will have some odd terms that employees of public companies don't
have.

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.

------
NonEUCitizen
Silverlake is not the only investor in Skype; e.g. Andreessen Horowitz is too:

<http://a16z.com/portfolio/>

~~~
alain94040
Good point. I'd like to hear either (Andreessen or Horowitz) speak out and say
they opposed such tactics.

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...](http://blog.fairsoftware.net/2011/06/01/rotten-ethics-in-silicon-
valley/)). When will the investors speak up?

------
alain94040
Amazing, this is the first time I see a stock options agreement where the
employee is forced to enter into a partnership for his vested shares. I agree
with the blog's title "upgrading Skype to evil".

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?

------
ajays
What is Microsoft doing about this? As the acquirer, they may still be able to
"do the right thing" and make some of these guys whole. Sure, it may cost them
a few million bucks; but can you imagine the goodwill it will generate for
Microsoft? You can't buy that kind of good publicity!

But will Microsoft do such a thing? I doubt it very much. (I would love to be
proven wrong, of course)

~~~
contextfree
If I were "Microsoft", I'd be thinking more along the lines of "if they went
out of their way to sneakily screw over their employees like this, what hidden
traps lie in store for us?"

------
NonEUCitizen
Silverlake portfolio companies:

[http://www.silverlake.com/partners/content.php?page=investme...](http://www.silverlake.com/partners/content.php?page=investments-
current)

~~~
kenjackson
Good luck to the Groupon employees.

------
arturadib
I wonder how many of us are now scrambling to dig up a copy of our stock
option agreement. This sets a terrible precedent. In case you didn't get it
yet:

READ YOUR LEGAL DOCS (sock options, IP, etc) and negotiate sketchy terms
before you sign them!

------
paradox95
So the people who lost out here have any recourse? I hope they are talking to
lawyers. I'm not typically the type of person to sue over everything but this
is screaming for a lawsuit.

------
nestlequ1k
Anyone interested in joining GoDaddy after the SilverLake deal should have
their head examined.

------
va_coder
What's to stop a disgruntled software dev who gets treated this way from
secretly using his knowledge to support an open source competitor? It doesn't
have to be anything close to a line by line copy, just subtle hints here are
there about better, but generic, ways of doing things.

~~~
eli
The threat of being sued, regardless of whether the lawsuit would be
successful

------
protomyth
in the other thread on this <http://news.ycombinator.com/item?id=2691455> the
article had the following line "the company's decision to repurchase would
also cause a tax hit to him" - anyone know how that works?

~~~
yeeguy
I'm the guy in the article. So, I got a letter from the Skype HR folks
indicating that if I were to persist on the path of exercising my options,
then they would: (1) exercise their right to repurchase the shares at grant-
price, leaving me with net zero gain; (2) demand tax withholding on the
shares, valued at _fair market value_ (substantially higher than grant price,
given that the MSFT deal had already been announced)

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.

~~~
alain94040
At a minimum, if you are concerned with a huge tax liability, exercise ONE
option. And tell everyone else in your situation to do the same.

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.

------
madmanslitany
I don't really have much to contribute on the story itself, but I suddenly
realized that my former CS472 Artificial Intelligence project partner and
friend from Cornell works for Silver Lake, which has led me down an
interesting path of daydreaming now that I'm starting work with a Valley-based
company in a few weeks.

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.

------
daimyoyo
This is yet another reason I refuse to use Skype. I won't patronize a company
that treats it's employees like that.

------
wccrawford
"that you will receive no value" is hardly opaque, even if the rest is. Any
contract that said that would have me pouring over it with a fine-tooth comb.
Or more likely, just rejected it and finding work elsewhere.

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.

~~~
akamaka
The "receive no value" language is not in the original contract -- that's from
a June 13, 2011 letter from one of Skype's attorney's.

------
cypherpunks
I've seen swarms of employees get screwed in ways similar to this. It's not
uncommon in Silicon Valley.

------
lanstein
I'm sure I'm not the only one who reviewed their stock grants... (good news
:))

------
joshu
They could also have executed their options to purchase the stock...

