7 ms·

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

by mlinsey 15y ago

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.

harryh 15y ago
I wish I could upvote this twice. Best analysis & explanation in the thread. By far.
grellas 15y ago
The oddball thing here is not that people are being let go so that a startup can recapture their unvested stock (as you note, this happens all the time, for reasons both good and bad) but that a company would create what amounts to a "hit list" in order to systematically pressure employees to surrender shares on threat of being fired. The company-wide message to employees is, in effect, "we lured you to join us with promises of a high upside via this stock grant in case we succeeded but, now that this has come to pass, we think you are getting a windfall and want a good part of it back." Since employment is at will, this tactic can be effective in reducing the equity base and maximizing value for other shareholders in the company. But at what price? This effort is being driven by a CEO who is clearly dominant, holding almost 40% of the voting power in the company and using it, for example, to cause the company to buy back nearly $110M worth of his personal stock pre-IPO. The overall effect, then, is one of a leader who appears arbitrary and unfair to those who were there early on. While cashing in for himself, he is "clawing back" on others. It might be legal but it just plain looks bad and would hardly seem to be a good way to motivate people or to keep strong people in your company for the long term.
- marcf 15y ago
  I wonder if there is case for a lawsuit here especially if there is no across the board performance issue with all of these employees who are being asked to surrender stock. I would argue that they were promised something that the company is failing to deliver and it is thus engaging in fraud, but I am not a lawyer thus I am unsure how to make this into an effective legal argument.
- freshfunk 15y ago
  No one should be surprised that this is coming from Mark "I Did Every Horrible Thing In The Book Just To Get Revenues" Pincus. It not just looks bad. It IS bad. Arbitrarily deciding who does and who does not deserve to vest is ridiculous. If the person is not performing, let them go. They are an at-will employee. By negotiating them to keep their job by giving stock options back, they are simply trying to keep that employee at a cheaper rate. The employees must be performing effectively if they want to keep them. The notion that these people are doing nothing and still employed by Zynga is disingenuous. The naivete (or CEO apologism) around here is astounding. I understand keeping an unbalanced and impassionate point of view but at some point if it sounds like a duck and looks like a duck it IS a duck.
- cma 15y ago
  > [...] maximizing value for other shareholders in the company. But at what price? Unvested employees aren't shareholders, so "other shareholders" is disingenuous. You meant "all shareholders".
teflonhook 15y ago
I quit as CEO of my last company because some of my venture capitalists were intimating they wanted to do this.
- ovi256 15y ago
  Ouch. Hope you have better luck next time. Don't give up.
- damoncali 15y ago
  What vc?
rmc 15y ago
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. I do not understand why you need at-will employment. If an employee is behaving badly or underperforming, then you have an excuse to fire them. If you got rid of at-will employment, you can still fire bad employees. Abolishing at-will employment will just make it hard for companies to screw over employees unfairly. This is not a bad thing IMO.
- OstiaAntica 15y ago
  If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine. Of course, the reverse is true also. Employees can leave at any time for any reason as well. Overall, at-will employment keeps companies and labor markets flexible.
  - rmc 15y ago
    If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine. Then you make those positions redundant (or in british english terminology, you 'let them go'). It's perfectly legal (in EU which doesn't have this at-will stuff) to say "We no longer need a Django programmer, since we're moving to Ruby on Rails now, we know you're a great django programmer, but we're letting you go". You don't need 'at-will employment' to have this advantage. There are some limitations, like you actually have to make the position redundent, you can't hire your brother as a django developer the next day. But that's the point, it balances out the power.
coreyrecvlohe 15y ago
"I don't know anything about the internals of Zynga" You said it.
chernevik 15y ago
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.
T_S_ 15y ago
"A company that abused its bargaining position like this should not expect to be able to hire good employees in the future." It seems the company does not believe this to be the case. Possibly they are in a better position too know. Or they are beyond the phase where top talent is required to de-risk the business. Very calculating either way.
Vandy_Travis 15y ago
On the other hand, equity compensation in a startup is also based on the riskiness of the equity. Even if an employee is not that "valuable", they should still not have the original terms of their agreements altered. [I agree with all the points above, but wanted to add in the fact that early employees are rewarded for risk as well as production. Esp if they signed on for below market salaries, with stock calculated as deferred compensation.]

by mlinsey 15y ago

harryh 15y ago

I wish I could upvote this twice. Best analysis & explanation in the thread. By far.

grellas 15y ago

The oddball thing here is not that people are being let go so that a startup can recapture their unvested stock (as you note, this happens all the time, for reasons both good and bad) but that a company would create what amounts to a "hit list" in order to systematically pressure employees to surrender shares on threat of being fired. The company-wide message to employees is, in effect, "we lured you to join us with promises of a high upside via this stock grant in case we succeeded but, now that this has come to pass, we think you are getting a windfall and want a good part of it back." Since employment is at will, this tactic can be effective in reducing the equity base and maximizing value for other shareholders in the company. But at what price? This effort is being driven by a CEO who is clearly dominant, holding almost 40% of the voting power in the company and using it, for example, to cause the company to buy back nearly $110M worth of his personal stock pre-IPO. The overall effect, then, is one of a leader who appears arbitrary and unfair to those who were there early on. While cashing in for himself, he is "clawing back" on others. It might be legal but it just plain looks bad and would hardly seem to be a good way to motivate people or to keep strong people in your company for the long term.

marcf 15y ago
I wonder if there is case for a lawsuit here especially if there is no across the board performance issue with all of these employees who are being asked to surrender stock. I would argue that they were promised something that the company is failing to deliver and it is thus engaging in fraud, but I am not a lawyer thus I am unsure how to make this into an effective legal argument.
freshfunk 15y ago
No one should be surprised that this is coming from Mark "I Did Every Horrible Thing In The Book Just To Get Revenues" Pincus. It not just looks bad. It IS bad. Arbitrarily deciding who does and who does not deserve to vest is ridiculous. If the person is not performing, let them go. They are an at-will employee. By negotiating them to keep their job by giving stock options back, they are simply trying to keep that employee at a cheaper rate. The employees must be performing effectively if they want to keep them. The notion that these people are doing nothing and still employed by Zynga is disingenuous. The naivete (or CEO apologism) around here is astounding. I understand keeping an unbalanced and impassionate point of view but at some point if it sounds like a duck and looks like a duck it IS a duck.
cma 15y ago
> [...] maximizing value for other shareholders in the company. But at what price? Unvested employees aren't shareholders, so "other shareholders" is disingenuous. You meant "all shareholders".

teflonhook 15y ago

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

ovi256 15y ago
Ouch. Hope you have better luck next time. Don't give up.
damoncali 15y ago
What vc?

rmc 15y ago

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. I do not understand why you need at-will employment. If an employee is behaving badly or underperforming, then you have an excuse to fire them. If you got rid of at-will employment, you can still fire bad employees. Abolishing at-will employment will just make it hard for companies to screw over employees unfairly. This is not a bad thing IMO.

OstiaAntica 15y ago
If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine. Of course, the reverse is true also. Employees can leave at any time for any reason as well. Overall, at-will employment keeps companies and labor markets flexible.
- rmc 15y ago
  If the startup is struggling or making a pivot, it might need to lay off employees who are performing fine. Then you make those positions redundant (or in british english terminology, you 'let them go'). It's perfectly legal (in EU which doesn't have this at-will stuff) to say "We no longer need a Django programmer, since we're moving to Ruby on Rails now, we know you're a great django programmer, but we're letting you go". You don't need 'at-will employment' to have this advantage. There are some limitations, like you actually have to make the position redundent, you can't hire your brother as a django developer the next day. But that's the point, it balances out the power.

coreyrecvlohe 15y ago

"I don't know anything about the internals of Zynga" You said it.

chernevik 15y ago

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.

T_S_ 15y ago

"A company that abused its bargaining position like this should not expect to be able to hire good employees in the future." It seems the company does not believe this to be the case. Possibly they are in a better position too know. Or they are beyond the phase where top talent is required to de-risk the business. Very calculating either way.

Vandy_Travis 15y ago

On the other hand, equity compensation in a startup is also based on the riskiness of the equity. Even if an employee is not that "valuable", they should still not have the original terms of their agreements altered. [I agree with all the points above, but wanted to add in the fact that early employees are rewarded for risk as well as production. Esp if they signed on for below market salaries, with stock calculated as deferred compensation.]