In high tech, startups are a gamble, which is why they offer stock and options to attract talent that could go elsewhere. But a recent development in the Microsoft (MSFT) acquisition of Skype — private equity firm Silver Lake allegedly screwing employees out of compensation they had earned — has sent a shock through the industry.
As engineers, marketers, and executives learn that they can no longer count on getting a strong upside in deals, especially if private equity firms are involved, expect the recruits to bring in lawyers and start looking for forms of compensation that come in green-and-black presidential portraits.
Oh, guess we screwed you, huh?
The recent kerfuffle started last week when Skype canned a number of executives before closing the Microsoft deal. The firings limited the compensation those executives would normally have expected from the “change in control,” which typically accelerates the vesting of stock options. Without the accelerated vesting, the execs are screwed and the company’s owners get to pocket the money they’d otherwise have paid out.
When the news first hit the Web, Skype went on a PR offensive, arguing that the employees were fired for cause and that they’d get 75 per cent of what they would have otherwise received, so what’s the big deal?
The deal is the appearance that Skype lead investors Silver Lake has created, even if it argues that the firings were all the doing of the CEO, who is supposed to be running the company as if the acquisition wasn’t happening. Please. Even if true, it’s a way for a company to poison good will from people it will eventually need to make some deal or other work in the future.
How to bury your startup rep
But then Kuo-Yee Lee wrote about how he got screwed by leaving before the deal closed because, after all, his options had vested and maybe working for the Microsoft Man wasn’t his idea of a fun time.
If you read his explanation, it becomes clear that he has partly done this to himself, because he didn’t understand part of the employment contract and should have hired a lawyer (which he now advises others to do):
Now, I’ve seen my share of legal documents for tech companies. I’ve worked in Valley tech companies for over 15 years, have founded startups, done VC financings, and invested in companies. None of that prepared me for the kinds of legal shenanigans that the PE guys at Silver Lake pulled because I had never come across those kinds of terms before, let alone the fact that these clauses were hidden as one-liners in otherwise pretty standard-looking documents.
The contract had a claw-back provision, which meant that the company could force an employee to sell back exercised options at the exercise price, so the employee made no money from them. Unfortunately, it was contained in another document that employees may not have received. (If you’re used to reading contracts, it’s a classic tactic you look for.)
Michael Arrington at TechCrunch argues that there are two reasons a company might do 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.
Why make this obscure? Because then people would want a lot more cash, given that the potential upside could be nonexistent, no matter how hard you had worked to keep up your end of the bargain. It’s no surprise that many venture capitalists, entrepreneurs, and the like are all now considering such language.
And that’s a problem. In the quest to grab a little more value for themselves now, the folks that fund high tech are likely to find cheap employees much harder to come by. Why work for a startup earning next to nothing when the odds that you’ll actually see your options pay off have just plummeted? Large companies pay better and are more stable.
Much of the discussion has devolved into whether Silver Lake was “evil.” But the bigger issue is whether investors and entrepreneurs will let greed get so far ahead of them that they poison the entire ecosystem that’s made their success possible in the first place. Maybe the issue isn’t how evil this is, but how stupid.
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