Zynga Chief Seeks to Claw Back Stock

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.

If you are one of these employees, talk to a good lawyer. You can definitely sue Zynga.

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.

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.

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."