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The whole situation can be fairly simply explained: a conflict exists between rapidly-growing companies and their early employees. It's kind of a flaw in the wa

The whole situation can be fairly simply explained: a conflict exists between rapidly-growing companies and their early employees. It's kind of a flaw in the way the system works, and it's not really just for pre-IPO companies. A common situation is an early "non-essential" employee receives something like 0.25% of the company, vested over 4 years. Suppose that at the time the employee is hired, this 0.25% is worth $10,000 or so ($4 million valuation). If the company manages to grow 100x in value, the company is now paying a non-essential employee $250,000/year in stock. With at-will employment, the company can legally fire them. The conflict arises because there is no legal incentive for the company to keep this employee at this point. Fortunately, it's not all that bad for the employees as long as they have some vested stock since this problem only arises if the stock value gets too high.

grandalf 15y ago
Couldn't you make the same argument and say there's a similar conflict between rapidly growing companies and their early investors? After all, those investors got the shares at pennies on the dollar. Early employees who have shares are also investors, but they pay with their time and skill. I look at the vesting period as an insurance policy for the firm that an employee who turns out to be extremely valuable won't decide to quit b/c of the ongoing upside. The only incentive the company should have to keep any employee should be that employee's ongoing value to the company. Sure the founder might feel loyal to some of the employees, but his/her job is to allocate resources to pick the best talent, not to wallow in sentimentality. Even a company like Zynga hasn't "made it", there is still a lot more work to do. Firing an employee before he/she is fully vested is akin to canceling an insurance policy. You only do so if you think the insurable event(s) you were worried about are unlikely to occur.
- fragsworth 15y ago
  To answer your initial question, an early investor is absolutely not in the same situation, because investors do not typically vest their stock over a period of time. They receive it all at once, and there are no future shares that can be withheld from them. Not to be argumentative, but I'm not quite sure how firing an employee before they vest their stock is in any way similar to canceling an insurance policy.
  - grandalf 15y ago
    The employee does receive all shares earned "at once" on the day that they are earned. If it's for 365 shares vesting after 1 year, then one share is earned each day (assuming no cliff). Just as there is nothing unfair about an investor selling his/her shares or an employee quitting, there is nothing unfair about an employee being terminated and not getting all of the shares he/she would have gotten if employment had continued. Stupid != unfair. Sure, you can go down the path of sentimentality and say, "Oh no, an investor who believes in the firm should never sell", or "If you're a good employee you'll be loyal to the end", both are absurd statements. Life is random and sometimes unexpected things (good and bad) happen that make existing arrangements non-optimal. The problem is the greed on the part of employees who counted the dollars before they vested. This may harm Zynga's ability to recruit and may harm morale, and if it does Pincus is to blame, and someday we may know whether he made the right decision.
    - einhverfr 15y ago
      I don't disagree with your analysis as far as you take it but I think it's different when an employee is told "give this back or quit so we can take it back." I think that's where you have potentials for issues and even the WSJ notes that this is an area that hasn't gotten much review from courts yet. It seems to me, it's permissible to: 1) Let the options vest, leave them with the employees 2) Outright fire the employees and recapture the shares 3) Offer to purchase back at some specific deal But that's different from saying "give them back or you are fired." At that point this is a renegotiation over not only compensation for current and future work but also for past work, and that's where I think a legal claim might come in.
      - grandalf 15y ago
        I agree. At the very least (from what we've all been reading) the process was messy. If I were one of the employees I'd prefer a threat (even a serious one) to just showing up one day and finding that I'd been fired. I too think that your third option would be best, and I wonder why there wouldn't have been some compromise made along those lines, but it's complicated by the reality that Pincus can simply fire the employees and have the shares w/o negotiating. Thus any negotiation becomes a sort of pretend dance and is as likely as not to result in bad morale. I think that at least for accounting purposes the shares are officially "earned" at the end of each work day during the vesting period. I think the argument could be made that while an employee may perceive a grant of unvested ISOs as compensation at the time they are granted, they are indeed not compensation but an optional incentive for the employer to use in the event that an employee is extremely valuable during a period of rapid growth where turnover would be harmful to the company's prospects. If the ISOs were meant to be compensation, why not have them vest immediately... the employee still would not have to pay taxes on them until they were exercised and the mechanism incentivizing performance is there simply via the purchase price.
exit 15y ago
so basically unvested stock are in no way a compensation for joining an early stage startup and the many draw backs of doing so. why are companies allowed to fool people into valuing this offer at all?
- ericd 15y ago
  That's not true at all. If you're good enough that they want to keep you around, then you automatically vest your stock. They're just not giving you x% of the future value of the company up front, and it shouldn't be thought of that way when joining.
  - nknight 15y ago
    But therein lies the conflict: They don't want to fire these people. They want them to keep working for Zynga, but not vest their options. This isn't Zynga saying "I'm sorry, you're not pulling your weight, I'm going to have to let you go.", this is Darth Zynga saying "I am altering the deal, pray I don't alter it any further.".

grandalf 15y ago

Couldn't you make the same argument and say there's a similar conflict between rapidly growing companies and their early investors? After all, those investors got the shares at pennies on the dollar. Early employees who have shares are also investors, but they pay with their time and skill. I look at the vesting period as an insurance policy for the firm that an employee who turns out to be extremely valuable won't decide to quit b/c of the ongoing upside. The only incentive the company should have to keep any employee should be that employee's ongoing value to the company. Sure the founder might feel loyal to some of the employees, but his/her job is to allocate resources to pick the best talent, not to wallow in sentimentality. Even a company like Zynga hasn't "made it", there is still a lot more work to do. Firing an employee before he/she is fully vested is akin to canceling an insurance policy. You only do so if you think the insurable event(s) you were worried about are unlikely to occur.

fragsworth 15y ago
To answer your initial question, an early investor is absolutely not in the same situation, because investors do not typically vest their stock over a period of time. They receive it all at once, and there are no future shares that can be withheld from them. Not to be argumentative, but I'm not quite sure how firing an employee before they vest their stock is in any way similar to canceling an insurance policy.
- grandalf 15y ago
  The employee does receive all shares earned "at once" on the day that they are earned. If it's for 365 shares vesting after 1 year, then one share is earned each day (assuming no cliff). Just as there is nothing unfair about an investor selling his/her shares or an employee quitting, there is nothing unfair about an employee being terminated and not getting all of the shares he/she would have gotten if employment had continued. Stupid != unfair. Sure, you can go down the path of sentimentality and say, "Oh no, an investor who believes in the firm should never sell", or "If you're a good employee you'll be loyal to the end", both are absurd statements. Life is random and sometimes unexpected things (good and bad) happen that make existing arrangements non-optimal. The problem is the greed on the part of employees who counted the dollars before they vested. This may harm Zynga's ability to recruit and may harm morale, and if it does Pincus is to blame, and someday we may know whether he made the right decision.
  - einhverfr 15y ago
    I don't disagree with your analysis as far as you take it but I think it's different when an employee is told "give this back or quit so we can take it back." I think that's where you have potentials for issues and even the WSJ notes that this is an area that hasn't gotten much review from courts yet. It seems to me, it's permissible to: 1) Let the options vest, leave them with the employees 2) Outright fire the employees and recapture the shares 3) Offer to purchase back at some specific deal But that's different from saying "give them back or you are fired." At that point this is a renegotiation over not only compensation for current and future work but also for past work, and that's where I think a legal claim might come in.
    - grandalf 15y ago
      I agree. At the very least (from what we've all been reading) the process was messy. If I were one of the employees I'd prefer a threat (even a serious one) to just showing up one day and finding that I'd been fired. I too think that your third option would be best, and I wonder why there wouldn't have been some compromise made along those lines, but it's complicated by the reality that Pincus can simply fire the employees and have the shares w/o negotiating. Thus any negotiation becomes a sort of pretend dance and is as likely as not to result in bad morale. I think that at least for accounting purposes the shares are officially "earned" at the end of each work day during the vesting period. I think the argument could be made that while an employee may perceive a grant of unvested ISOs as compensation at the time they are granted, they are indeed not compensation but an optional incentive for the employer to use in the event that an employee is extremely valuable during a period of rapid growth where turnover would be harmful to the company's prospects. If the ISOs were meant to be compensation, why not have them vest immediately... the employee still would not have to pay taxes on them until they were exercised and the mechanism incentivizing performance is there simply via the purchase price.

exit 15y ago

so basically unvested stock are in no way a compensation for joining an early stage startup and the many draw backs of doing so. why are companies allowed to fool people into valuing this offer at all?

ericd 15y ago
That's not true at all. If you're good enough that they want to keep you around, then you automatically vest your stock. They're just not giving you x% of the future value of the company up front, and it shouldn't be thought of that way when joining.
- nknight 15y ago
  But therein lies the conflict: They don't want to fire these people. They want them to keep working for Zynga, but not vest their options. This isn't Zynga saying "I'm sorry, you're not pulling your weight, I'm going to have to let you go.", this is Darth Zynga saying "I am altering the deal, pray I don't alter it any further.".