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Zynga Chief Seeks to Claw Back Stock (wsj.com)
151 points by lsr7 1255 days ago | 124 comments



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.

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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.

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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.

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I wonder if there is case for a lawsuit here especially if there is no across the board performance issue with all of these employees who are being asked to surrender stock.

I would argue that they were promised something that the company is failing to deliver and it is thus engaging in fraud, but I am not a lawyer thus I am unsure how to make this into an effective legal argument.

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     > [...] maximizing value for other shareholders in the company. But at what price?
Unvested employees aren't shareholders, so "other shareholders" is disingenuous. You meant "all shareholders".

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We all know what happens when a startup's stock "underperforms": absolutely nothing. I'm not entirely sure why an employer should reasonably expect to manage its exposure to employee underperformance risk on a dimension where the employee doesn't have similar recourse.

If employers are worried about a serious disconnect between performance over time and equity payout, they might cap the valuation of an equity stake by taking back call options with high strike valuations. They could then give more shares or extinguish calls in response to performance. But this would reduce the apparent value of the up-front stock grant, and thus the employee's incentive to come on board.

I don't know enough to support firm conclusions, but this doesn't sound like behavior I'd hope to emulate.

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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.

I do not understand why you need at-will employment. If an employee is behaving badly or underperforming, then you have an excuse to fire them. If you got rid of at-will employment, you can still fire bad employees. Abolishing at-will employment will just make it hard for companies to screw over employees unfairly. This is not a bad thing IMO.

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If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine.

Of course, the reverse is true also. Employees can leave at any time for any reason as well.

Overall, at-will employment keeps companies and labor markets flexible.

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If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine.

Then you make those positions redundant (or in british english terminology, you 'let them go'). It's perfectly legal (in EU which doesn't have this at-will stuff) to say "We no longer need a Django programmer, since we're moving to Ruby on Rails now, we know you're a great django programmer, but we're letting you go". You don't need 'at-will employment' to have this advantage. There are some limitations, like you actually have to make the position redundent, you can't hire your brother as a django developer the next day. But that's the point, it balances out the power.

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"A company that abused its bargaining position like this should not expect to be able to hire good employees in the future."

It seems the company does not believe this to be the case. Possibly they are in a better position too know. Or they are beyond the phase where top talent is required to de-risk the business. Very calculating either way.

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I wish I could upvote this twice. Best analysis & explanation in the thread. By far.

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On the other hand, equity compensation in a startup is also based on the riskiness of the equity. Even if an employee is not that "valuable", they should still not have the original terms of their agreements altered.

[I agree with all the points above, but wanted to add in the fact that early employees are rewarded for risk as well as production. Esp if they signed on for below market salaries, with stock calculated as deferred compensation.]

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I quit as CEO of my last company because some of my venture capitalists were intimating they wanted to do this.

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What vc?

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Ouch. Hope you have better luck next time. Don't give up.

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"I don't know anything about the internals of Zynga"

You said it.

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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.

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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.

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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.

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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?

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Look at it from his perspective. He knows what the IPO is going to value the company at now. He's looking at some low-performing employees and calculating that they're simply not worth keeping around if it means giving them $20 million (or whatever) in the IPO.

If it's ethical to fire these people (in which case they lose all unvested shares) then it stands to reason it would be ethical to renegotiate a deal that both parties think is fair.

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No. If he was looking at low-performing employees he would fire them.

He's looking at some high-performing employees in a terrible labor market, and calculating that their BATNA is not very good, so he's deciding to find a way to screw them.

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That's true, but the alternative that we're already familiar with is simply firing the employee, which is not any better. If we're OK with being fired, shouldn't we be OK with this?

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I guess the employee equivalent of this rational valuation would be to wait for the most critical part of the project and then ask for a major raise.

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The typical option agreement says that the stock you may purchase is subject to a right of repurchase by the company, and that right (by the company) lapses over time. So, I imagine that is totally negotiable until such time that that right lapses. It means going back on your word from the time of hire, but corporations go back on their word all the time, usually because it's believed to increase value for shareholders overall.

I imagine one way to make it non-claw-backable is to give the right to purchase outright right away, or to have a much shorter vesting period, although that may have tax ramifications, and be messy for the stock plan/s to deal with.

Regarding whether anyone's contributions really are worth $4B or whatever -- that's the lottery. Lots of start-ups fail, and lots of possibly valuable contributions are then valued at 0 stock. If a person contributed to a healthy start for something that grows really big, they may win the lottery; that's part of the appeal of Silicon Valley start-ups. The more companies close off this lottery ticket avenue, the less that ticket will be worth, and the worse the ecosystem will do in the long run.

But if you stand to make billions in the short run, who cares about the long run? Probably true on both sides.

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The right-of-repurchase grants that I've seen have always been 83-B grants where the company lets me buy all the stock up front so I can start the tax clock. The right of repurchase lapses on a vesting schedule, just like options.

From that perspective, there isn't much difference between (A) Vesting Stock, and (B) Lapsing over time a Restricted Repurchase agreements.

Nobody is going back on their word - it's just a different way of vesting.

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I agree. In addition to the 83-B election, I've seen a right-of-first-refusal for share repurchase. (Third party offers you $X/share for your shares, the company has the right to purchase at that price instead.)

I've never seen a "we can repurchase shares as we see fit" clause.

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By 'right of repurchase', are you referring to the right of the company to purchase your vested shares, should you choose to sell them? If so, it's not related to this issue.

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No, i am referring to how vesting is actually expressed (at least in some grants I've seen). Another way to say it: "like it or not, unvested shares are re-negotiable." Get in early and vest as much as you can, if that's important!

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Here's the problem with your position.

If the employer says "You're only providing $X in value (where your RSUs amount to $X+Y so now we're going to fire you or you'll agree to only take $X in RSUs" then, by working at a startup, you have a significant downside (the startup could well go belly up) but no upside.

Why no upside? Because your capital gain on the shares you took a pay cut for might at any time (for unvested stock) be reduced to your market value... which you could've simply earned elsewhere by taking that as a salary.

It's risk versus reward. What we see here, if true, is that the risk remains the same but the reward has been significantly chopped.

Dustin Markowitz [1] is a billionaire, largely by virtue of the "skill" of being Mark Zuckerberg's Harvard roommate. He "earned" ~$5 billion from Facebook, which if memory serves, is less than Steve Jobs made from Apple's second stint (where he, you know, turned a company on the verge of bankruptcy into a $300+ billion juggernaut with $80+ in cash and $100+ billion in annual revenue). Did Muskowitz provide comparable value? Of course not.

But he did take a gamble, like anyone joining (or founding) a startup. If this pseudo-clawback [2] behaviour becomes commonplace, it undermines the entire startup scene (IMHO).

[1]: http://whoownsfacebook.com/

[2]: I say "pseudo-clawback" because "clawback" has a far more evil meaning. Just look at Skype. http://blogs.reuters.com/felix-salmon/2011/06/27/skypes-evil...

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> It's risk versus reward. What we see here, if true, is that the risk remains the same but the reward has been significantly chopped.

No, I don't think that's the case. The reward is being chopped because the risk has been chopped, right?

Presumably the company is worth much more and is much closer to IPO than when these employees joined, right?

I guess it's wrong if at the time of joining, the employee's risk/reward calculation used all of the equity they would be eventually granted. But that seems foolish because at any time they could be fired and be left with only their vested shares.

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"But that seems foolish because at any time they could be fired and be left with only their vested shares."

You've just hit on why startup equity for employees is very, very risky.

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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

Actually California's At-Will employment is a bit different then standard At-Will. It's got an "Covenant of good faith and fair dealing" exception. Taking back option grants may be in breach of this (though it would have to be tested in court). Point being Pincus can't just fire these folks arbitrarily for not giving back shares with no risk involved.

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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.

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or you're fired and lose it all

Take note white collar workers & high paying professional programmers, at-will employment and lack of employee rights can screw you too.

If it was illegal to fire someone "for no reason", then it would be much harder for a company to screw employees like this.

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Yeah, honestly this whole situation feels like a "come to Jesus" moment for HN. This type of screwage by corporations happens all the time to people across the U.S., whether it is pay cuts for the peons, unpaid overtime, layoffs where you have to do twice the job for the same pay, whatever. And HN has always danced right over them: "Sucks to be you, suckers! If you were really smart, you'd have joined a startup!! LOLOLOLOLOLOL!!!11!!"

Now that it's HN's ox being gored, there's a different feeling about it. Labor rights aren't just for farmhands and Walmart workers.

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Maybe my perception is wrong, but I thought HN attitude is usually "found your own startup" instead of "join someone else's startup".

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To be fair, people are asked to take cash pay cuts all the time. They're talking about unvested stock (future compensation). It's tough to defend this, though. I would assume that it would be a breach of contract, but I'm no lawyer.

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Usually people are asked to take pay cuts because the company isn't doing well, often with the understanding that pay will go back up if things get back on track.

Here it seems people are being asked to take a pay cut not because their company is having problems buts because is doing very well indeed.

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Agreed. It's a major dick move. And it's not quite the same as a salary cut, as option prices and amounts were set before the outcome was known. They could well have been worth zero. As long as the employees are doing their jobs, they've earned the equity, no matter how inflated it may seem to the CEO.

But... he could just fire them. Which is a problem in itself.

This is why I have a major problem with typical employee stock options. It is just flat out not worth as much to employees as it is to investors and founders. Employees are basically put in the position of having to trust that their management (and their management's acquisition overlords) will do what they said they'd do. Between the employers and the tax man, employee equity can be a real bitch.

Translated into english, most stock option agreements say, "We'll give you XXX options per month (after you pay us for them, of course). IF we feel like it - we can always fire you and owe nothing more, as you know. Taxes are your problem (good luck!). Oh yeah, and you don't get shit for a year."

Ever try to improve the situation up front? Oh, the howling and moaning you'll witness from the company and their lawyers. ("That's highly irregular! Nobody does that! It's a standard vesting period! Why are you so greedy! You could just walk away with stock!")

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It would seem that this could be solved through negotiation. Pincus needs the shares now to recruit top talent, and without the shares everyone's chances of a great exit are diminished. Pincus could sell his own shares, but would risk losing control.

So Pincus should be willing to essentially write futures contracts on the proceeds from his own shares and trade those with employees, who should be willing to accept them in trade, even at precisely equal expected value.

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The irony of course being that anyone good enough to be in his target market for "top talent" is probably going to take one look at a move like this and run away very fast.

Meanwhile, he's likely to see an exodus over the coming months of other good employees whom he didn't try to screw (this time) but who also now realise that the benefits of staying long term aren't necessarily worth the paper they're printed on.

You can pretty much write the rest of the story when something like this happens. The only question is whether people like Pincus himself will manage to cash out at some stage before Facebook intentionally or otherwise pulls the rug out from under Zygna in much the same way and the potential value of an IPO plummets.

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If I were one such employee I'd be lawyering up like RIGHT THE FUCK NOW.

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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.

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I would argue it is a breach of the initial options agreement (at least in spirit). Those shares were negotiated under a set of conditions- the stock was very risky, and as a result worth very little. Now that everything has turned out well, you can't go back and say, "Wait, I didn't think it would be worth this much - give it back.". Pincus wouldn't be going back after a failed venture and forking over huge amounts of cash to compensate for worthless stock, now, would he?

The option price and amount was set previously, and should be honored as long as the employee is performing their duties reasonably.

This is greed in it's simplest form.

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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.

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> 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.

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Actually, it is theft. The grant is a commitment to issue the equity on the vesting schedule. Attempting to change that schedule is attempting to deny employees the compensation they are morally due.

If the employee continues to do the work he promised to do at the time of the grant, firing him, or attempting to renegotiate, simply to get the stock back is a form of theft.

You can't just hire someone at $100k a year and then decide you want to pay them less, at least not without risking a losing a lawsuit.

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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.

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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.

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Thats what put options are for.

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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.)

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I just remember there being a famous story of Mark Cuban buying out of the money puts on Yahoo stock after the acquisition of Broadcast.com. Obviously a different scenario, but always reminded of this whenever IPO lockup talk comes up.

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Cuban used a synthetic hedge.

"After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had."

http://www.fastcompany.com/magazine/63/fasttalk.html

So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.

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  >> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.
True, although at that time those two were highly correlated.

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There are ways to hedge though, right?

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yes, any good broker can set you up with a collar. you miss the upside but it will keep your price locked in until the lockout period expires. A lot of people do that.

If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.

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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.

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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.

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You cannot buy put options during the lockout period. It's specifically spelled out in the option agreement. It's pretty airtight.

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Yep. I'm one of the locked up employees at LinkedIn and I can't buy options (puts or calls) as part of my agreement. So there's no way to hedge.

I should note though that the executives and venture capitalists are ALSO locked out, which is why you don't see LinkedIn stock entering the market currently.

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Typically employees of a public company have to agree to never trade in options involving the company for the duration of their employment.

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If the derivatives market expects the value of the stock to settle downward post-IPO rush, then anybody selling you a put option would charge that expected difference and you still don't make any money.

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The market is not perfectly efficient; that's why people can make money in it.

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> I think it is really important that people understand that stuff like this can happen

Yes. As another example: Several hardware companies did reverse splits + share issuance (to holders of preferred) right before IPO. Atheros comes to mind iirc.

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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.

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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.

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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.

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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.

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"Unvested" means just that: The shares have not vested. The shares are not yours yet. You cannot lose something that is not yours. People who get fired before their shares vest, are not "losing" their unvested shares, nor are they "giving back" their unvested shares.

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As mentioned, there's a very simple solution as mentioned below: vest monthly. IMO startup employees, especially engineers in this market, should start demanding it during negotiations -- it's a very simple way to defend yourself as an employee.

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Vest regularly, as often as you send paychecks. My co-founders have monthly vesting setup in our stock purchase agreements.

What's unfair about this situation is if you are fired just before reaching your next vesting event, you see none of it (but oddly, you will still be given back-pay). If I had the legalese to vest continuously, I would.

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It's actually fairly straightforward to achieve. What you want is a structure that rewards people linearly for the time that they contributed to the company relative to the "duration" of the company. To achieve this you only need two mechanism: 1. All incentive equity goes away if the employee is terminated for cause or leaves during probation (some number of months, we use 3). 2. For all other scenarios the employee gets to keep TE/TC shares (the rest are re-purchased if you are using reverse vesting or don't vest if you use options).

TC = Time of the Company from founding to liquidity event in days (or weeks as long as the unit is small relative to the expected duration of the company)

TE = Time in days that the employee worked at the company

It's actually really that simple. Obviously other factors like impact, performance, seniority, etc. play a role but those get adjusted by the magnitude of the stock grant and not the vesting process. We use a reverse vesting shares to give employees tax advantages but the same concept could work for vesting options.

The advantage of this approach is that everything is nice and linear (expect the 3 months probation cliff). A lot of sneaky behaviour is just not worth it when things are linear. Remember, lack of alignment is the big killer of start-ups.

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Part of the problem in this case is that the company can fire someone for no reason, even if they are working well and doing their job. This is 'at-will employment' and is common in USA, but outright illegal in, say, the EU. If the employee was able to sue the company (potentially getting compensation) for a wrongful dismissal, then the company would not be able to fire people who didn't agree to the new vesting options.

IANAL, but there are a few ways you could lock yourself into this. Could you have your company in an EU member state, hence making yourself abide by EU law? Could you put something in employment contracts saying that you never will hire someone 'at will'? etc.

I applaud your attitude of making your company a good place.

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It's actually pretty easy to make an employee friendly "deferred compensation" program in the U.S. as evidenced by the way most financial firms structure stock grants. Under these plans, the stock continues to vest, even if the employee is laid off. The only way to lose unvested shares is to quit or get fired for cause.

This type of program is really good for retaining highly paid employees in established companies, but might not be ideal for startups.

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Include a clause in the options agreement stating that if an employee is laid off, or fired without good cause, they become fully vested.

Of course, “good cause” is an inherently slippery term, but if a CEO announces in the frigging Wall Street Journal that he’s trying to twist employees into giving their stock back, and then turns to Fred and says “Fred, I haven’t mentioned this before, but I think your performance has been really poor over the past year”, then Fred’s lawyer does not have a very difficult case.

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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.

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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.)

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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.

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

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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.

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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.

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

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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?)

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> 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.

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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.

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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...

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

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http://pastebin.com/RaZzwZ8C

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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.

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Thanks!

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Just google the headline and click through from there, they let search-referred traffic see the full article.

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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.

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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.

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

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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.

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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?

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

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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?

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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.

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

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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.

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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.

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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.

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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"?

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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."

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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.

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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.

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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.

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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.

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

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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...

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

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

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

[5] http://techcrunch.com/2009/11/01/scamville-hotornot-plentyof...

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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.

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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.

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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."

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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.

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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?

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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."

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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.

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

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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.

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> 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.

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> There is surprisingly little incentive for a founder to avoid screwing over employees.

Other than being treated like toxic waste by every prospective VC and business partner until the end of time.

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I think there are certain business cultures that might celebrate this kind of approach as an innovative scheme for maximizing profits, where there is a philosophy that anything that makes one rich must be a good thing.

If nothing else this sort of approach might get one a well paid consulting gig in maximizing the throughput of a child labour force or something similar?

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