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This came up on Quora yesterday: http://www.quora.com/How-legal-or-illegal-are-Zyngas-actions-in-clawing-back-equity-from-employees-before-its-forthcoming-IPO h

This came up on Quora yesterday: http://www.quora.com/How-legal-or-illegal-are-Zyngas-actions-in-clawing-back-equity-from-employees-before-its-forthcoming-IPO http://www.quora.com/How-legal-or-illegal-are-Zyngas-actions... My gut instinct was that was a jerk move, but after thinking about it I'm not so sure. Here's my answer from Quora... I'd love to know what others think. (On a side note, the article cited on Quora mentions that employees were asked to give up some unvested options, but that their vested options are not affected.) ============== This is a slight oversimplification, but a typical stock option grant of, say, .4% of a company is akin to the CEO telling you, "for every year that you work for us, I will give you .1% of the company." For early startup employees who typically take below market salaries, this kind of stock grant is one of the things that makes working at a startup more worthwhile (financially speaking). It's exceedingly rare that a startup grows to a billion dollar valuation within a few years of founding, but when that happens, it makes sense for the company to re-evaluate whether it's worth giving someone an extra .1% for one more year of work. When a company is young and not worth much, giving someone $10k in paper value as a loyalty bonus is a no-brainer; when a company is worth billions, giving the same person a 50 million dollar loyalty bonus requires a lot more thought. It might still make sense if they're the COO or CFO or something like that, but does it make sense if they are a "Lead Software Engineer" or "Senior Product Manager"? How many "Lead Software Engineers" could you hire with 50 million dollars of stock? Put this way, I think it's reasonable that Zynga wants to let some early people go at their current compensation rates (and California has at-will employment, so you can quit or be let go without reason at any time.) Note #1: I think this sucks for the early employees, and I certainly would not want to work for a company whose founders have a history of these kinds of practices, but that doesn't make the practices unethical. Note #2: My answer would be very different if Zynga were trying to take back options that had already vested. I am not a laywer, so my assumptions about how at-will employment works might not be 100% correct.Edit

jquery 15y ago
The execs at Zynga who did this should not only lose their jobs, they should be facing criminal penalties for fraud. I had a phone call interview scheduled with Zynga today, but I read this story first. I didn't even pick up the phone when they called me.
- carbocation 15y ago
  If you had answered, declined verbally (explaining why), written a blog post on the topic, and then submitted it to HN, then you would likely have the top post on HN right now.
  - evolve2k 15y ago
    Call them Back, tell them what you think then do a blog post, would still love to read it.
    - irrumator 15y ago
      Why?
earl 15y ago
Employees got these options when they were worth virtually nothing as compensation. Now they're worth something, Pinkus wants to change his mind. This is equivalent to employees taking options for a company that had failed then three years in going back to the ceo and saying, "You know, I'd like to trade these worthless options for the $20K/year of salary that I gave up. Thanks"
- lpolovets 15y ago
  But this only affects future options, not options already received, right? Here's a possibly analogous scenario: Imagine this was salary instead of stock: an employee was hired because he was the foremost expert on technology X. To entice him to join, the employee was offered $1m/year for each year that he stayed, up to 4 years. Now it's 2.5 years in, and for various reasons the employee is no longer worth $1m/year to the company: perhaps X is no longer a useful technology, or expertise on X is no longer needed, or there has been an explosion of experts on technology X who would be happy with $200k/year. Would you say it was unethical to tell the employee that while the $2.5 million he has earned so far is obviously his, you can't justify paying him another 1.5 million in the next year and a half, and that he can either accept a pay decrease or be asked to leave?
  - earl 15y ago
    your analogy is flawed. Employees got these options in exchange for something -- less salary, or risk. Your hypothetical didn't give up anything for that salary -- it's not like the employee turned down $1.1M for $1.0M. I refer you to the symmetric situation in my previous comment: if Zynga hadn't worked out, would Pinkus be giving long term employees the cash they gave up for their options?
  - cheald 15y ago
    That's not analogous, because you take stock options as compensation for not taking a market-rate salary and for accepting the risk inherent in working for a startup. The stock isn't a bonus - it's a part of the total compensation package that is negotiated when the employee is hired. I'm going to accept $Xk/year because I'm getting Y% of the company in stock options, and I believe that the company has what it takes to make it big and for those stock options to be worth above and beyond what I'm giving up in salary and stability for the years that it takes to get there. Furthermore, if you hire someone whose skills become unnecessary, you just lay them off. You don't keep them on board and try to renegotiate them down to a lesser compensation. Here's another analogous scenario: Imagine that you are hired under a contract that says "We don't have the cash on hand today to pay you full market rate today, so we're going to pay you $X per month (which is significantly below market rate), plus $250k bonus at the end of each full year that you're working for us, up to $1m over 4 years, assuming the company lasts that long". Two years pass, and they come back and say "You know what? We decided we don't want to pay you your remaining $500k in promised compensation over the next 2 years. Forfeit that part of your compensation package, or we're going to fire you." You accepted the original compensation deal because the year-end bonuses were adequate compensation for the monthly pay cut you were taking. Stock options aren't just icing handed out on top of already perfectly-acceptable contracts just because.
elliottcarlson 15y ago
"Put this way, I think it's reasonable that Zynga wants to let some early people go at their current compensation rates (and California has at-will employment, so you can quit or be let go without reason at any time.)" At-will employment does not mean without reason at any time, and while I am not a lawyer, I believe making a threat of termination if you don't sign over your unvested options would be a good case for wrongful termination. See also: http://en.wikipedia.org/wiki/At-will_employment#Covenant_of_good_faith_and_fair_dealing_exceptions_.28aka._.22Implied-in-law.22_Contracts.29 http://en.wikipedia.org/wiki/At-will_employment#Covenant_of_...
- lpolovets 15y ago
  Did not realize there were restrictions on the reasons for terminations (other than obvious restrictions like wrongful termination). Thanks for the info!
klochner 15y ago
You're forgetting that when employees took their compensation packages, it was based on factoring in some probability of hitting a mega upside. By capping that upside, any vesting option package is worth less in expectation, so employees would have demanded higher base salaries knowing that they wouldn't fully participate in a huge win.
- lpolovets 15y ago
  The employees already have a huge win... the article talks about employees being worth $200 million once they are fully vested. If they're halfway to vesting, they might be worth $100 million, and it seems like Zynga is saying that it's not worth $100 more million to keep the employee for two more years. It's a weird problem that I think is only there because Zynga grew so freaking fast. Normally an early employee's 4 years are up way before a company is worth billions of dollars. Even in the last year or two of a 4-year option plan, the employer's implicit choice is "is it worth another .1% for me to keep this person for one more year?", and .1% might be worth 20k or even 50k, and so the employer doesn't even consider ways of reducing that cost because it's tiny compared to the early employee's value. But when the cost is $10m or $25m or $50m a year, it's definitely something to think about. And only the hyper-grown companies that popped up recently (Twitter, Zynga, Groupon) have had to face this problem.
  - rhizome 15y ago
    it seems like Zynga is saying that it's not worth $100 more million to keep the employee for two more years. It's not Zynga's money. Zynga wants it to be, but it isn't.
    - Bud 15y ago
      Slight correction in wording: "Zynga" doesn't really want it to be. The 2-5 or so guys at the very top of Zynga want it to be, because they think Zynga should create a few more billionaires, instead of several dozen more millionaires. To wit, they think THEY should be made into billionaires rather than paying the folks who created the value of the company. Hard to be shocked by this, since this has been the direction American business has been traveling in for a few decades now, but usually the PR side of it is handled better.
justinhj 15y ago
if i have a company with no products a top 100 company ceo is worthless compared to a lead software engineer that could provide what you need to develop and polish a product that wins the market
nphase 15y ago
Why bother negotiating options at all if what you end up with is a fraction of what you negotiated for to begin with? If the company isn't willing to honor the agreement, it shouldn't offer it at all. Future options are precisely what was on the table when negotiating and subsequently accepted an offer form a startup.
rayiner 15y ago
It's not a situation of how many lead software engineers can you buy for $50m. If Zynga had had $50m to begin with they wouldn't have given out options. What they offered, instead, was a 0.5% shot at $50m. It's a fundamental concept of contract law that the damages for breaching a contract are what are necessary to put the aggrieved party in the same position he would've been but for the breach. The rule exists precisely for this sort of scenario: when people bargain up front about highly uncertain things like this, they come to an understanding about risk/reward, potential cost and potential upside. In retrospect one party or the other is almost certainly going to get more or less than he or she expected. If courts didn't hold people to their promises, one party would nearly always have an incentive to back out, and nobody would ever enter into uncertain transactions. What Zynga is doing is at best unethical. The rub here is that we're dealing with unvested options. If it were trying to force employees to give up vested options it wouldn't be just unethical, it would be straight-up illegal. An options contract is a property interest, and can be readily valued in this circumstance. Even dealing with unvested options Zynga might've opened themselves up to liability. "At will employment" doesn't mean "anything goes." Also, the contract the employees had re: the options could be a second source of liability.
- einhverfr 15y ago
  The way I look at it, it isn't about employment so at will is largely irrelevant save the 'but we could have' arguments which I don't think fly here. Instead it is about compensation for said employment. If lawyers get involved, I bet this is where it will go. Also understand the last thing Zynga should want is for lawyers to get involved in this for two reasons: 1) It's distracting to management and 2) From what the WSJ says about it, this sort of thing hasn't gone much before the courts so there is a lot of uncertainty as to what the law allows and Zynga could lose big. If the affected employees are smart they will use these factors to their advantages and get lawyers involved right now, forcing Zynga to back off or fight.

jquery 15y ago

The execs at Zynga who did this should not only lose their jobs, they should be facing criminal penalties for fraud. I had a phone call interview scheduled with Zynga today, but I read this story first. I didn't even pick up the phone when they called me.

carbocation 15y ago
If you had answered, declined verbally (explaining why), written a blog post on the topic, and then submitted it to HN, then you would likely have the top post on HN right now.
- evolve2k 15y ago
  Call them Back, tell them what you think then do a blog post, would still love to read it.
  - irrumator 15y ago
    Why?

earl 15y ago

Employees got these options when they were worth virtually nothing as compensation. Now they're worth something, Pinkus wants to change his mind. This is equivalent to employees taking options for a company that had failed then three years in going back to the ceo and saying, "You know, I'd like to trade these worthless options for the $20K/year of salary that I gave up. Thanks"

lpolovets 15y ago
But this only affects future options, not options already received, right? Here's a possibly analogous scenario: Imagine this was salary instead of stock: an employee was hired because he was the foremost expert on technology X. To entice him to join, the employee was offered $1m/year for each year that he stayed, up to 4 years. Now it's 2.5 years in, and for various reasons the employee is no longer worth $1m/year to the company: perhaps X is no longer a useful technology, or expertise on X is no longer needed, or there has been an explosion of experts on technology X who would be happy with $200k/year. Would you say it was unethical to tell the employee that while the $2.5 million he has earned so far is obviously his, you can't justify paying him another 1.5 million in the next year and a half, and that he can either accept a pay decrease or be asked to leave?
- earl 15y ago
  your analogy is flawed. Employees got these options in exchange for something -- less salary, or risk. Your hypothetical didn't give up anything for that salary -- it's not like the employee turned down $1.1M for $1.0M. I refer you to the symmetric situation in my previous comment: if Zynga hadn't worked out, would Pinkus be giving long term employees the cash they gave up for their options?
- cheald 15y ago
  That's not analogous, because you take stock options as compensation for not taking a market-rate salary and for accepting the risk inherent in working for a startup. The stock isn't a bonus - it's a part of the total compensation package that is negotiated when the employee is hired. I'm going to accept $Xk/year because I'm getting Y% of the company in stock options, and I believe that the company has what it takes to make it big and for those stock options to be worth above and beyond what I'm giving up in salary and stability for the years that it takes to get there. Furthermore, if you hire someone whose skills become unnecessary, you just lay them off. You don't keep them on board and try to renegotiate them down to a lesser compensation. Here's another analogous scenario: Imagine that you are hired under a contract that says "We don't have the cash on hand today to pay you full market rate today, so we're going to pay you $X per month (which is significantly below market rate), plus $250k bonus at the end of each full year that you're working for us, up to $1m over 4 years, assuming the company lasts that long". Two years pass, and they come back and say "You know what? We decided we don't want to pay you your remaining $500k in promised compensation over the next 2 years. Forfeit that part of your compensation package, or we're going to fire you." You accepted the original compensation deal because the year-end bonuses were adequate compensation for the monthly pay cut you were taking. Stock options aren't just icing handed out on top of already perfectly-acceptable contracts just because.

elliottcarlson 15y ago

"Put this way, I think it's reasonable that Zynga wants to let some early people go at their current compensation rates (and California has at-will employment, so you can quit or be let go without reason at any time.)" At-will employment does not mean without reason at any time, and while I am not a lawyer, I believe making a threat of termination if you don't sign over your unvested options would be a good case for wrongful termination. See also: http://en.wikipedia.org/wiki/At-will_employment#Covenant_of_good_faith_and_fair_dealing_exceptions_.28aka._.22Implied-in-law.22_Contracts.29 http://en.wikipedia.org/wiki/At-will_employment#Covenant_of_...

lpolovets 15y ago
Did not realize there were restrictions on the reasons for terminations (other than obvious restrictions like wrongful termination). Thanks for the info!

klochner 15y ago

You're forgetting that when employees took their compensation packages, it was based on factoring in some probability of hitting a mega upside. By capping that upside, any vesting option package is worth less in expectation, so employees would have demanded higher base salaries knowing that they wouldn't fully participate in a huge win.

lpolovets 15y ago
The employees already have a huge win... the article talks about employees being worth $200 million once they are fully vested. If they're halfway to vesting, they might be worth $100 million, and it seems like Zynga is saying that it's not worth $100 more million to keep the employee for two more years. It's a weird problem that I think is only there because Zynga grew so freaking fast. Normally an early employee's 4 years are up way before a company is worth billions of dollars. Even in the last year or two of a 4-year option plan, the employer's implicit choice is "is it worth another .1% for me to keep this person for one more year?", and .1% might be worth 20k or even 50k, and so the employer doesn't even consider ways of reducing that cost because it's tiny compared to the early employee's value. But when the cost is $10m or $25m or $50m a year, it's definitely something to think about. And only the hyper-grown companies that popped up recently (Twitter, Zynga, Groupon) have had to face this problem.
- rhizome 15y ago
  it seems like Zynga is saying that it's not worth $100 more million to keep the employee for two more years. It's not Zynga's money. Zynga wants it to be, but it isn't.
  - Bud 15y ago
    Slight correction in wording: "Zynga" doesn't really want it to be. The 2-5 or so guys at the very top of Zynga want it to be, because they think Zynga should create a few more billionaires, instead of several dozen more millionaires. To wit, they think THEY should be made into billionaires rather than paying the folks who created the value of the company. Hard to be shocked by this, since this has been the direction American business has been traveling in for a few decades now, but usually the PR side of it is handled better.

justinhj 15y ago

if i have a company with no products a top 100 company ceo is worthless compared to a lead software engineer that could provide what you need to develop and polish a product that wins the market

nphase 15y ago

Why bother negotiating options at all if what you end up with is a fraction of what you negotiated for to begin with? If the company isn't willing to honor the agreement, it shouldn't offer it at all. Future options are precisely what was on the table when negotiating and subsequently accepted an offer form a startup.

rayiner 15y ago

It's not a situation of how many lead software engineers can you buy for $50m. If Zynga had had $50m to begin with they wouldn't have given out options. What they offered, instead, was a 0.5% shot at $50m. It's a fundamental concept of contract law that the damages for breaching a contract are what are necessary to put the aggrieved party in the same position he would've been but for the breach. The rule exists precisely for this sort of scenario: when people bargain up front about highly uncertain things like this, they come to an understanding about risk/reward, potential cost and potential upside. In retrospect one party or the other is almost certainly going to get more or less than he or she expected. If courts didn't hold people to their promises, one party would nearly always have an incentive to back out, and nobody would ever enter into uncertain transactions. What Zynga is doing is at best unethical. The rub here is that we're dealing with unvested options. If it were trying to force employees to give up vested options it wouldn't be just unethical, it would be straight-up illegal. An options contract is a property interest, and can be readily valued in this circumstance. Even dealing with unvested options Zynga might've opened themselves up to liability. "At will employment" doesn't mean "anything goes." Also, the contract the employees had re: the options could be a second source of liability.

einhverfr 15y ago
The way I look at it, it isn't about employment so at will is largely irrelevant save the 'but we could have' arguments which I don't think fly here. Instead it is about compensation for said employment. If lawyers get involved, I bet this is where it will go. Also understand the last thing Zynga should want is for lawyers to get involved in this for two reasons: 1) It's distracting to management and 2) From what the WSJ says about it, this sort of thing hasn't gone much before the courts so there is a lot of uncertainty as to what the law allows and Zynga could lose big. If the affected employees are smart they will use these factors to their advantages and get lawyers involved right now, forcing Zynga to back off or fight.