The latest from TechCrunch
- Skype's Worthless Employee Stock Option Plan: Here's Why They Did It
- I Found Out About This Gay Marriage Thing On Foursquare
| Skype's Worthless Employee Stock Option Plan: Here's Why They Did It | Top |
| Skype is being criticized for terminating employees immediately prior to the closing of the Microsoft acquisition, and people are assuming they’re doing this to keep the value of those employees stock options. Skype’s response boils down to saying that the employees were fired because they weren’t good employees, and that the value of the stock is negligible and didn’t affect the decision making process. Ok. But it gets worse. Employees aren’t even able to keep the vested portion of their stock options. The vast majority of stock options granted to startups have a vesting period, typically four years, with chunks of those options becoming vested during that four year (or whatever) period. If options are vested you can exercise them, pay for the stock and own that stock. At least that’s the way things have been done over the decades. Skype did things differently. With Skype stock options the company has the right to not only terminate unvested options, but also vested ones. And any vested options that you’ve exercised (meaning you paid cash for them) that were turned into actual shares could simply be bought back by the company at the price you paid, regardless of their current value. Here’s the relevant language in the stock option grant agreement. It refers to a Management Partnership agreement which isn’t public and it’s unclear if employees ever get to see it (my guess is not): If, in connection with the termination of a Participant’s Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement. And here’s the letter the employee received when he was terminated: CNN calls the language “intentionally incomprehensible.” Reuters agrees, adding that Skype is “evil.” Here’s What’s Going On This isn’t the first time I’ve seen a stock option plan like this. I actually worked for a company once that used the same mechanism. I dug up the clause from that agreement, which I kept because it was so audacious. Here’s the relevant clause – it says much the same as the Skype documents but in slightly more understandable language: Where, in the case of an Employee Participant, Executive Participant or a Consultant Participant, an Optionee's employment, term of office or consultant agreement is terminated for any reason, such Optionee shall immediately offer to sell to the Company all of the Common Shares owned by the Optionee which have been or may be issued to the Optionee upon the exercise of Options at a price equal to the Exercise Price of such Common Shares. Such offer will be irrevocable until the day that is 120 days from the Termination Date. The Company shall have the option (but not the obligation) to purchase such Common Shares. If the offer to sell Common Shares is accepted by the Company, the Company shall purchase such Common Shares for cash consideration. Until now that company I worked for long ago was the only example of this type of clawback provision that I’d ever heard of. The reason that company added that clause is that they didn’t want any outside shareholders, including ex-employees. If there was a liquidity event, fine, employees got the stock upside. But if they left or were fired before a liquidity event, they got nothing. There are only two real reasons for doing this. The first is that the company anticipates a long period of being privately held and doesn’t want to deal with outside shareholders. The second is that they don’t want to give away too much equity in stock options. Since they can take back the options of anyone who leaves, they can give equity more freely to employees coming on board. There’s a tradeoff, of course. If employees understand what they’re signing they will want a lot more compensation to work there – either a higher cash salary or a ton more options. Because they know the likelihood of payout is so small. If, for example, Facebook’s option plan was structured this way. all the early guys that left and founded companies like Quora and Asana would not have made any money at all (billions of dollars in value would have flowed back to Facebook). Multi-billionaire Shawn Parker , who was president of Facebook for a time, wouldn’t be a multi-billionaire. Or any other kind of billionaire. The fact that Skype adopted this plan in the first place isn’t in itself “evil.” But they’ve done two things wrong from what I can tell. First it appears that employees had no idea what they were signing and they probably expected it would be a normal stock option type deal that everyone in Silicon Valley has done for decades. If Skype wasn’t crystal clear with them, and explained it in normal human language that they understood, then these employees were intentionally misled. Skype had an incentive to make things unclear, because employees would demand far more compensation if they had understood. The fact that employees are so surprised that this is happening suggests that they didn’t understand the agreement. This is what lawyers call fraud. The second thing Skype did wrong was not to waive this clause with the looming acquisition. The company can deny all day long that they fired these employees for cause, not to save a few dollars on stock options. But the appearance is the exact opposite. These employees should simply hire a lawyer to sue Skype. There’s a valid fraud claim based on what I’m seeing, and the “atmospherics” (how lawyers describe the legally irrelevant facts surrounding the story that can nonetheless influence a judge and jury) are terrible for Skype. Also, Skype has to wrap up this deal. My guess is they’d just settle immediately and pay out on the vested part of the stock options. Get Ready For More Of This I bet that dozens of lawyers, venture capitalists and CEOs, now that they’re aware of this, are thinking “Hmmm, not a bad idea. We should do that.” And as long as they are crystal clear in their communications with new employees that these stock options, which are already a long shot, are likely to be extra-worthless, they’re probably in the clear legally. Then it’s up to the employees to take a stand. Or not. CrunchBase Information Skype Information provided by CrunchBase | |
| I Found Out About This Gay Marriage Thing On Foursquare | Top |
| Well actually it was an Instagram of a Foursquare check-in, posted to Twitter … So I actually haven’t been following news at all today, and when I say news I mean actual news, not tech news which I keep up with like an addiction. And I so had no idea that a bill to legalize gay marriage was passing through the New York State Senate at the very moment I was writing this post about the Quora redesign. I was actually pretty surprised when TechCrunch Managing Editor Erick Schonfeld Skyped me with “Look at your Twitter feed." In a quick game of Internet catch up, I scrolled through my feed. Yes, my Twitter feed confirmed that New York, as soon as Governor Andrew Cuomo signs off, will join Connecticut, Massachusetts, Iowa, New Hampshire, Vermont and the District of Columbia in permitting same sex marriage. So what heralded the news that the bill had passed 33-29? Well actually the above check-in to something called the Marriage Equalitocalypse . While a lot of my stream is still filled with the noise of people making the requisite clever quips (see below), there are other, more poignant digital artifacts of the historic moment: the hashtag #equalityforall is trending, this pic of a rainbow colored Empire State Building has gone viral and (perhaps the best part) NYC Mayor Bloomberg also checked into the Marriage Equalitocalyspe, the very same Foursquare check-in that was my gateway to the milestone. The Wikipedia entry for “Same Sex Marriage” was updated seemingly in a matter of minutes, of course. And so I’ll say it again, simply: Twitter, Facebook, Instagram, Tumblr, Foursquare and [insert social media platform of choice] are amazing. There was something so isolating as a kid when my family turned on the TV to absorb world news on a Friday night, and the only reactions I could see to current events would be that of the people in the room, and those of the people on the screen. I feel exactly the opposite of isolated when I’m sitting in the office finishing up work for the weekend, and one quick glance at Twitter allows me a glimpse into the opinions of my co-workers across town, or how people are celebrating the approval at the Stonewall Inn in NYC. I can even tap into the sentiment of strangers half way across the world if I so please. The future, to borrow an apropos phrase, it got better. Follow @MikeBloomberg @MikeBloomberg Mike Bloomberg I'm at Marriage Equalitocalypse (New York) w/ 248 others June 24, 2011 8:09 pm via foursquare Reply Retweet Favorite Follow @alexblagg @alexblagg Alex Blagg "New Yoooooooork, concrete jungle where gays can marry." – Gay-Z June 24, 2011 8:14 pm via Twitter for iPhone Reply Retweet Favorite Follow @mat @mat apocryphal mat honan Let's hear it for New York June 24, 2011 8:10 pm via Twitter for Android Reply Retweet Favorite Follow @Megan @Megan Megan McCarthy Hope whomever writes the NY Times Vows column qualifies for overtime pay. June 24, 2011 8:12 pm via TweetDeck Reply Retweet Favorite Follow @jasonkincaid @jasonkincaid Jason Kincaid Sources tell me a male couple near 6th and Bleecker are currently on pace to surpass Buttercup and Wesley for the greatest kiss ever. June 24, 2011 8:40 pm via Twitter for Mac | |
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