If you’ve been here a few times, no doubt you’ve read about the use of stock options in the current war for talent in Silicon Valley. It’s nothing new, and the hope of a big payday can help attract employees for less than they’d cost otherwise. Once upon a time, it worked well: back in the dotcom boom, the path to liquidity was relatively short. This time around, however, companies are more inclined to wait. Sometimes, they have a choice (Facebook); sometimes, they don’t (Zynga). Nonetheless, the practice is still crucial, which makes Zynga’s latest move pretty strange.
Zynga’s shareholder structure has been in the news a lot lately. In a market where founders are inclined to protect control through ‘super-shares’, the social gaming company has gone even further, creating anunprecedented third tier of stock held by CEO Mark Pincus alone. From a corporate governance perspective, it’s pretty hard to swallow.
Well, it pales in comparison to the company’s latest equity game.
According to CNET, which cites a Wall Street Journal report, Pincus and Zynga’s other executives have demanded that employees return options in which they are not yet vested … or ‘face termination’. The reason given is that the top dogs at Zynga feel the company has doled out too much equity to its employees.
It only gets stranger:
In order to determine which employees would be asked to give stock back, Pincus and his executives tried to pinpoint those folks whose contributions to Zynga didn’t necessarily justify the potential cash windfall they could receive when the company went public, the Journal claims. One Journal source said that Zynga executives were especially concerned with not creating ‘a Google chef’ scenario.
OK, what’s with the ‘Google chef’? It’s the same thing as the ‘Microsoft secretary’ scenario. At Google, the company’s chef scored $20 mn when the search company went public. Microsoft’s secretaries gained a moment of notoriety, as well, for their stock gains.
So far, one Zynga employee has bailed, and another is sticking around. Both hired lawyers. Many, it’s safe to assume, are irate. Of the two employees mentioned in the report, both reached settlements in which they surrendered some of their unvested shares.
Will this affect Zynga’s IPO? My guess is that it won’t, although it could create future hiring and retention challenges. And, suffice it to say, the notion that the company is a corporate governance nightmare is gaining momentum.