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Zynga Chief Seeks to Claw Back Stock

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Re: Zynga Chief Seeks to Claw Back Stock

#91

Post by chernevik »

mlinsey wrote: post #61

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…

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.

Re: Zynga Chief Seeks to Claw Back Stock

#92

Post by sethg »

qq66 wrote: post #19

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.

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.

Re: Zynga Chief Seeks to Claw Back Stock

#93

Post by losvedir »

cletus wrote: post #89
ghshephard wrote: post #24

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 co…

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 unves…

> 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.

Re: Zynga Chief Seeks to Claw Back Stock

#94

Post by damoncali »

teflonhook wrote: post #77
mlinsey wrote: post #61

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…

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

What vc?

Re: Zynga Chief Seeks to Claw Back Stock

#95

Post by lawnchair_larry »

earl wrote: post #33

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-t…

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.

Re: Zynga Chief Seeks to Claw Back Stock

#96

Post by damoncali »

davweb wrote: post #85
damoncali wrote: post #15

Earlier quoted context omitted.

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.

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.

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!")

Re: Zynga Chief Seeks to Claw Back Stock

#97

Post by damoncali »

harryh wrote: post #43
smokinn wrote: post #10

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…

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 ov…

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.

Re: Zynga Chief Seeks to Claw Back Stock

#99

Post by ootachi »

ohashi wrote: post #72
nirvana wrote: post #69

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…

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+dolla…

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

Re: Zynga Chief Seeks to Claw Back Stock

#100

Post by ootachi »

losvedir wrote: post #93
cletus wrote: post #89

Earlier quoted context omitted.

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 unves…

> 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/rewar…

"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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