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Skype options turn out to be worthless (reuters.com)
343 points by TWAndrews 2362 days ago | hide | past | web | favorite | 142 comments

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.

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.

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."

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

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.

It happened to me twice. Maybe I'm just bad at picking companies. :D The frustrating thing was the silence, once they'd decided to screw people over. All of a sudden HR is incapable of answering email.

In my experience, HR is often staffed by "phone people", not "email people".

It happened to a friend of mine (almost exactly the way 'ghshephard spelled out). In fairness, partly because of hearing that story, I didn't buy my vested options when I left my last startup; those options paid out when the company was later acquired.

Was this is US-based company? The way I understand ISOs in the US, they must be exercised within 3 months of leaving the company ("The option may be granted only to an employee [..], who must exercise the option while he/she is an employee or no later than three (3) months after termination of employment" -- http://en.wikipedia.org/wiki/Incentive_stock_option).

If so, perhaps you got lucky :)

Yes; you pay money to exercise the options and receive restricted stock. That's the thing I opted not to do, because friends of mine who did so at another large VC-funded success story got ripped off.

Right, I was confused about "those options paid out when the company was later acquired".

Sounds like you didn't exercise the options and then didn't participate in the sale later.


That does not sound like a success story.

Happened all the time in the 1st dot com boom/bust. See fuckedcompany.com, history of ArsDigita, etc. Not sure if it happens anymore. Seems like companies nowadays exit quickly or never, so maybe the issue doesn't arise. If it's a fire sale I'm not sure what the company can really do - the acquirer is going to dictate the acquisition terms.

I think that things like Second Market have the same effect. Because suddenly you risk not just screwing former employees, but also institutional investors, with large legal staffs.

Something similar but less severe happened to me with AirWave, an IdeaLab company, which got bought by Aruba in about 2007, after I left. The company had been through several rounds of expensive failed strategies and ensuing financing in the years before I joined, and so the stock option grants to the employees were quite small, as a percentage of the company. Some of the details are a little fuzzy in my memory now, but I did get paid for my shares: something like a month or two worth of the salary I'd earned during the three years I was there. (I think I wasn't fully vested, but mostly.)

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 happened to about half the people I work with when we got acquired a few years ago. Options, stock, everything the non-C-level people held was worthless. A lot of unhappy people and a few left over it, even some with single-digit employee numbers. Me, I always asked for a salary increase instead of options and it's worked out great so far. I would think different though if I was in early on something with more upside.

This is an incredible amount of leverage for the non-founder employees of YC-backed startups.

About a year ago Fred Wilson said straight up that common stock is unreliable and not suitable for investors. Since employees get common stock, the only point of leverage they have is their commitment to future employment. Thus buying options when leaving can be a risky proposition - not only is there risk of failure, there is the risk that the company's value gets laundered into retention packages.

I realize that these are two separate stories, but how is someone not "in it to win it" if they get laid off immediately prior to the acquisition?

I thinks its just a feeble attempt to rationalize their evil actions.

I'm really surprised that a senior guy would expect different. I used to have an options contract with similar language, I knew they were worthless.

It even said so at the top of the contract where it said the purpose of the options were retention and not remuneration.

> The company chose to include that clause in the contract in order to retain the best and the brightest people

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.

Was Skype reincorporated after acquisition from eBay? Some countries have legislation deeming "artificial reincorporation" to prevent aggressive tax planning and tax avoidance. There are should be something similar to protect rights of employees.

How is that not a breach of fiduciary duty?

The acquiring company controls the offer and structures it to maximize their benefit. The acquiring company does not benefit from paying people who no longer work at the company; they're incentivized to maximize the payout to current employees, in particular to aid retention.

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.

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.

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

Of course not, you're supposed to consult your legal counsel(1) before signing such documents. What? Don't you have the mad cash to pay a lawyer to give such an important document its due consideration right after graduating and joining a startup?

(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..."

> 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 ....

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.

> 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.

    > 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.

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.

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"

When the leaves in the tree move around (or disappear) based on points/scoring/etc, it's still harder to parse than something like slashdot where the positions don't change.

The parent child relationships never disappear.

He omitted the word "tech" in his quote, implying the statement should apply to all employees. That's minimal, but he is saying something.

@gnosis I disagree

I teach contract drafting to third-year law students. It's hard work to take a complex if-then-else statement and render it in plain English.

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?

I draft contracts for a living (IAAL). The goal is always to draft a contract so that any reasonably competent judge or juror could understand the parties' intent. A lot of lawyers (most?) are terrible at this. They say things like "in the event that" instead of "if". They pepper their sentences with meaningless crap like "any and all" or "unless the parties otherwise agree" or "notwithstanding anything to the contrary elsewhere in this agreement" – all of which are utterly superfluous.

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.

Interested in additional clients?

// I have to ask here, as you have no contact info in profile. Reach me at my last name on Google's webmail service.

Of course. I'll send you an email. Meanwhile, my firm's site is here: http://yusonirvine.com/

Meta note: It's not clear that your last name is Terretta but that's what I'm assuming. Also, saying "the email system most of us use" on your profile is really confusing.

It just says "Contact me with my name," which is clearly "Terreta." And I assume he means aol.com.


FWIW, you've got a glaring typo (to me) on your firm's web page:

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.

Perhaps "Test Driven" or "Test First" contracting will become hip in a few years?

Not necessarily actually testing (as in, let's go to court) but mapping out "given this scenario, x, y and z happen".

> mapping out "given this scenario, x, y and z happen".

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/.

Having a contract validation test would be a worthy exercise for the party who didn't write the contract.

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?

My firm is working on this, together with other like-minded law firms. Indeed, we are lawyers who write code (gasp!).

@thwarted, one of the things commonly taught in contract-drafting classes is to break down dense verbiage into (i) subparagraphs, or at the very least, (ii) numbered subdivisions -- like this sentence. See also the IF: ... THEN: ... example in my posting above.

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.

I guess my point is that that legalese "plain English" is harder to understand than if-then-else statements. And if it's harder to write to boot, then why bother? Even your example:

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

   - 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:
The intent would be a lot clearer as something like this (in some kind of mock-pseudo-code):

   if ( (no rain-today) and 
        (rain-yesterday between 1 and 2 inches) and
      ) then {
      you will turn on the sprinker
(at least, that's what I think your intent is, but I'm not quite sure since the goal is still somewhat impenetrable) But even this could be better written with more abstraction, perhaps by defining what it means for the lawn to be sufficiently watered:

   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))
(but, really, I'm not sure that matches your intent either).

A lot of the ambiguity in contracts today has to do with structure, and not so much content. This may seem counter-intuitive, but consider some examples:

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.

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.

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.

I take your point, and it's definitely a fair one. Ideally, we would anticipate and iron out all disputes up front. In software development, that's exactly what we try to do!

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.

Excellent list of the tradeoffs. Thanks.

IIRC Gary Reback points out that, ultimately, legal writing is writing that people are paid to read.

For better or worse, lawyers don't write to entertain and enlighten a general audience...

@thwarted, it'd be great if we could use pseudo-code. (One of my colleagues once proposed using flow-charting.)

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?"

So it's momentum and fear of change (which plays into a fear of no-one-will-need-a-lawyer-to-decode-this, perhaps). Makes sense, but obviously not ideal. What can we do to change this, if anything?

So clearly you have to compile it into legal English. I don't see a conflict here.

My take on the language was "Wait, what? That's a red flag." And I'm still not sure I agree. What is the point of vesting, and the various hoops to jump to get it, if it's obviated by a share re-purchase agreement?

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.

I'm not sure its being totally readable to a law professor who teaches contracts helps Joe Engineer.

@ianterrell, consider how often you've had to struggle to make sense of someone else's source code -- it's much the same with contract language. Seldom do lawyers go back and refactor their contract language for improved readability.

Sure, but I also don't ask lawyers to debug C++ for me.

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?

There you've put your finger on it. That's why this is evil on Skype's part (or Silver Lake, or whoever); engineers - the "best and brightest" want to do engineering, and trust the business people to do business. If the business people figure it's just good business to screw the engineers over a barrel on the way to buying their yachts, the engineers are just plain SOL.

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.

"That's why this is evil on Skype's part (or Silver Lake, or whoever); engineers - the "best and brightest" want to do engineering, and trust the business people to do business."

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.

I can think of kinder possible terms: inexperienced, young, needing health insurance, broke, out-of-your-legal-depth, suggestible, susceptible to Kool-Aid.

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.

Yes. Exactly. Naive in precisely the way that good technical people tend to be. Which is why it's just such a lucrative business model to screw them five ways from Sunday.

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".

Your guess seems reasonable in general, given your experience, but if you read about the history of Kazaa and Skype, I bet you change your opinion.

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.(!)

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...]

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

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.

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.)

> in general, legal code cannot have comments which are not executable code.

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].

"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.

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.

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

No lawyer would include a plain English version because if you do so you risk ambiguity. There may be differences between the legalese and the plain English version. In that case your entire contract will be ambiguous and you are risking costly litigation to determine the exact meaning of the contract. Even if there are no differences it is guaranteed that if it comes to litigation some other lawyer will argue there are differences.

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.

> No lawyer would include a plain English version because if you do so you risk ambiguity.

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...

No offense, but I do not think you understood what I was talking about. If you read the thread from the initial post we were discussing the possibility of having two versions of the contract a legalistic one and a plain English one written in the same document. As I said, this is unlikely to happen because there is too much danger there will be a real or perceived difference between the two versions which will cause ambiguity down the line.

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 I do not think you understood what I was talking about. If you read the thread from the initial post we were discussing the possibility of having two versions of the contract a legalistic one and a plain English one written in the same document.

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.

Just to be clear: this is about consumers, and doesn't apply to employment. The unequal part is about the balance that the term in question creates e.g. "if you unplug your PVR you will owe us all lost ad revenue and a reconnection charge £1000". From reading your post I had the impression that it applied to all contracts where the parties have an imbalance in power.

The problem with that is that the legalese version of the contract is supposed to be definitive. If they also provide a plain english and one of the terms when exercised invalidates a "plain english" provision, how is that supposed to be interpreted? In this case it was one of those details that mattered greatly. A plain english version would have just said "you get X options you can exercise on this vesting schedule, subject to terms(*)"

That doesn't seem to fix the underlying problem -- they understood/read the plain english version, just not the terms.

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.

It would be interesting to have a contract that had questions that must be answered at the end of each section. You must answer the questions correctly for the contract to be valid. And the question must properly represent the section -- that is, poor questions could invalidate the contract if challenged.

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.

> 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.

See http://bagcheck.com/terms

Like docco for legal contracts.

Interestingly, Microsoft's BPOS standard terms include summaries above the salient sections. They are entirely non-binding, and quite well done.

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.

it doesn't matter. there will be no hue and cry about the "retention" issues surrounding this merger, and most of the valuable Skype people will be gone from MSFT as soon as they can anyway. In >1 year, there will be little left of the Skype org chart but the lower part of the pyramid. All the valuable people that for whatever reason are still there at this late date in the company's history will go on to other opportunities.

What does this have to do with Microsoft?

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

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

"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.

In theory, everybody is responsible for reading everything they sign, regardless of who they are and who they are doing business with. In practice, certain clauses in certain contracts have been deemed unenforceable because it's "unreasonable" for one of the parties to have performed enough due diligence to give informed consent when they signed the agreement. (And often it's thought that the other party knew this. This comes into play when the party drafting the agreement is the powerful one with the lawyers.)

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.

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


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.

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.

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?)

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."

Add in the fact that this policy is pretty radically different from standard tech industry practice

The only radical difference from standard industry practice is that it's actually spelled out in the contract.

That's just not true, and I wonder if you can cite some statistics or qualifications to back that up. In the Valley vested/exercised shares are equity, common stock, a true ownership stake in the company (see next paragraph, I'm not utopian about that means). Here, he lost his right to the stock after he vested and exercised. _No_ stock! That is profoundly at odds with industry practice that I just don't know where you are coming from in suggesting it's normal.

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.

I agree that losing the right to exercised options in a highly public, billion dollar deal is odd. However, the end result is that guy has no stock or money. This is the same result of the "variety of games to screw common shareholders" which you seem to agree is standard tech practice. I guess there's a difference in the mechanism, but the result is the same for the guy getting screwed. Unfortunately, I cannot cite "real" statistics so feel free to write this off as internet hearsay. I should qualify that I made the mistake of spending too much time working in Boston where everyone secretly wants to be Thurston Howell III, not Steve Jobs or Larry Page. Thus, my experience is not really "the Valley" but then again neither was Skype's.

That's all well and good, but there are nontrivial costs to creating a system where you need to have a lawyer vet every line of every contract you sign.

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.

> 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.

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.

I'd say that 4 year vesting with a 1 year cliff is pretty much standard across the valley.

Also: with right of first refusal, not this crazy "we can steal them back at strike price" crap.

I've never had such a contract but i'll take your word for it.

However, I was referring to when your options expire, which seems more appropriate to the story:)

It's not a question of them expiring. It's that the company issuing them had an opportunity to rebuy them at cost. I.e. your vesting schedule is completely meaningless. It's one of those situations where someone uses a word that has a specific set of associations (i.e. "I vest 25%, that means I get them right?") and then attaches terms that make it mean something else entirely ("yes, you get them, but I can take them away at my option without compensating you").

I'm torn between agreeing that employees should carefully read their options agreement and believing that there are some things in life that are wrong with no grey area and stealing shares people have earned is wrong.

The two are not mutually exclusive. Leaving your car unlocked in a bad neighborhood is irresponsible, but someone stealing it in the night is still unquestionably wrong.

True, but where would a court of law fall on the situation? When the unlocked car, it clearly falls on the side of the car owner.

But this? It isn't so clear.

Clarification: it's an unethical clause to begin with - absolutely agree. Just saying that you can't count on anyone besides yourself to act on behalf of your own best interests.

Well, you probably can't count on employers who stand to profit by your loss.

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.

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.

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.

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


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...). When will the investors speak up?

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?

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)

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?"

Good luck to the Groupon employees.

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!

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.

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

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.

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

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?

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.


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.

It's almost like they want you to know that they are raising the price of admission to even challenge them to a fight.

Pure evil.

My sympathy. I am thinking the tax, as described by them, is not how the IRS would view it. I would imagine that you probably want all this behind you, but I would think a lawyer mightbhave a different interpretation. You would still net zero, but the tax things seems way out of left field.

Did you get the feeling before from your time there that they were this kind of people?

This sounds not only terrible but retributive. Did you know this would end this way?

>... demand tax withholding on the shares, valued at fair market value ...

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.

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.

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

"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.

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.

Yeah, I suspect they would have a decent chance at collecting some sort of payout with legal action even though they did sign contracts. It would be common sense to expect notification when such a substantial change was added to an original contract.

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

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

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

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