Skype options fake vesting – as stupid as it is evil

Recently there has been a lot of discussion (see Gigaom, CNN, and Reuters) around the options agreement at Skype in the wake of Silverlake’s sale of Skype to Microsoft. The short summary is that while the options “vest” over 5 years, you only keep your vested options if you are terminated without cause. If you quit or are terminated with cause, you lose your vested options. Yee Lee, an employee who left after a year, was surprised to learn that he would make no money from the stock options he thought had vested.

Much of the commentary has focused on the morality of the agreement. On a quick read, it appears to be designed to obfuscate what’s actually going on. I’m not a lawyer, but if the agreement was designed to deceive employees into thinking it was similar to most stock option agreements when in fact it was very different, that’s bad. But its not just bad in the sense of evil because it tricks employees out of options and makes people distrust the system. Its also bad in the sense of stupid for two reasons.

First, it will create enormous negative publicity for private equity in the technology space. In the future, private equity firms will have a harder time attracting talented tech people now that everyone has heard how they’re treated. Even if they clean up the option agreement to have more standard terms, people won’t be sure. They’ll either need to hire a lawyer, or, more likely for many entry-to-mid-level folks, just go work somewhere else because they can’t figure out if their options are “real”. If you make the cost of evaluating a job too high, lots of people won’t take it. If you believe, as I do, that employees are not fungible and getting the good ones matters a lot to the success of a tech company, this is a very costly mistake.

The second reason I think this is a stupid policy is it prevents employees who don’t want to work there from leaving. I believe that employee productivity depends on a combination of talent and passion for what they’re doing. A bunch of employees who aren’t quitting because they don’t want to lose their vested options is not a good thing. In particular, a bunch of employees who would like to be fired for poor performance (so they can keep their options and go work elsewhere) is a very bad thing.

If an employee joins and does good work for 3 years then wants to go elsewhere, its better for the company and the employee for that to happen. I’m a big believer in stability. I was at my last job for nearly eight years and the job before that for nine years. When I hire employees, I hope they’ll stay for a long time – five years or more. But I want them to stay because they love their job, not because they’re prisoners.

The Silver Lake folks are very smart, but in the attempt to outsmart the employees at their companies, they’ve created a stupid policy.

— Max

15 comments so far

  1. Cliff Elam on

    I hate to sound all Pollyanna (look, you get to learn to use crutches) but a couple of things….

    Why sign a contract you don’t understand? I read that paragraph and couldn’t make heads or tails out of it – but I’m sure a lawyer could have explained it easily.

    And if you thought you were leaving a company with stock in your pocket, why not make sure of it? Did I miss the part where he confirmed what he thought he owned?

    -XC

  2. Max Schireson on

    Yes, he was dumb not to check.

    But tricking dumb people out of their money isn’t a good idea, especially if it happens very publicly. You’ll lose trust, which I think matters a lot.

    I also think the silicon valley system works better if potential employees don’t have to spend lots of money on lawyers to choose their jobs.

    — Max

    • Cliff Elam on

      Look, if the situation is as described, then it’s pretty low end behavior. But these guys weren’t ‘tricked’ – they were given a contract, they over-estimated their ability to read legalese.

      I’m not smart enough to think I’m a lawyer.

      -XC

      PS – Reminds me of the old saying: If you can’t find the mug at the poker game, it’s you.

      PPS – I don’t even think you’d have to spend any money – who doesn’t have a buddy who went on to the dark side? Er, law school.

      • Ian Small on

        Of course, one cannot be 100% because we are all several degrees away from this, but it appears to me from what i’ve read is that:

        1) the first level of offending language is in the stock options plan agreement

        2) the options plan refers to a master agreement that i assume the partnership agreement between the buyout partners (including silver lake).

        for the first point, most companies don’t provide the actual options plan agreement as a part of your offer package. why?

        because in 99.99% of situations, it’s boilerplate. if candidates ask for it, they can get a copy of it. but in my experience that’s incredibly unusual.

        employees normally get a copy of it with their options paperwork. in most SV companies i’ve worked with, options paperwork shows up 3-6 months after you join, because of the delays associated with board approval, minutes approval, and then processing time. generally, this doesn’t matter because it’s well within the 12 month standard initial vesting “cliff”, so it’s not like you’re going to be running around trying to figure out the complexities of an option agreement before anything has vested.

        with respect to the second agreement, it’s far from clear that candidates OR employees would actually be given a copy of that agreement, even if they asked for it.

        but saying “they were given a contract” and it’s their fault for not reading it is taking a pretty narrow view of what would have happened, given the standard employment transaction that goes on all over silicon valley every day.

        max’s point about trust is right on, imho.

        what max hasn’t connected the dots on is that i believe at least one well-known silicon valley VC firm was a part of the buyout. 30 seconds of research on google and you can find them. i am far more concerned about the trust impact not on private equity firms, but the ripple on trust of VC firms that may follow because it’s possible a VC firm is hip-deep in this as well as part of a buyout consortium.

        trust + teamwork is the bedrock of building a startup. the skype situation, coupled with PE involvement and potential VC involvement, could cast a shadow of uncertain size – not just over skype, not just over PE, but also over some VC firms and lots of startups all over the valley.

        max, how many of us will be having all hands meetings next week at which we need to reassure employees that our company’s stock options plan don’t look like that. and given how trust, doubt and conspiracy theorizing works, what % of employees will doubt us?

        this skype thing hurts us all.

  3. Chris on

    Although dumb; when taking a new job, I would never consider combing over the options legalize or researching the VC firms. I have new people to meet and a code-base to learn.

    I would trust that points outside the common understanding of options vesting would be pointed out to me. Oh well.

  4. Martin on

    Ian and Chris are dead on. This is bad for everyone in the valley. While there are certainly edge cases, this place runs mostly on trust and speedy execution of mundane paperwork that is assumed to be more or less standard/competent/fair, so we can hit the ground running on building all this exciting stuff. Or that’s what the average engineer wants to believe, anyway – which is all that matters.

    Ironically, the local VC firm (who invested the least) has the most to lose here, reputation-wise, and should perhaps consider some kind of [well-publicized, of course] token good will gesture toward the former Palo Alto employees affected by all this cleverness.

    If you think what’s done is done and it no longer matters, you haven’t listened to enough recruiter pitches littered with financial backers’ names. In a hot market, this is poison.

    In the meantime, Google is perfecting Talk without golden-handcuffed employees or bad PR hurting talent acquisition. Just sayin’.

  5. Wile E. Quixote on

    Have you ever noticed that when a story like this is published you always have some guy like Cliff Elam who can’t wait to leap up and defend the assholes?
    Elam can offer no defense for Silver Lake’s behavior and in fact admits that it’s sleazy, but he’s OK with it and just dismisses anyone who was affected by it as being a mug. I have to wonder if Elam would be so sanguine if a piece of legal trickery was used to cheat him out of something he worked for and someone said “Well Cliff, you’re such a stupid retard, you should have hired a lawyer to go over your contract to make sure that they weren’t trying to screw you over and now your employer is invoking an obscurely written clause that allows them to claw back your stock options, your salary, plus interest and harvest your organs!” Somehow I doubt it. Guys like Elam see nothing wrong with the prospect of a world where you can’t trust anyone and employees have to hire lawyers to check out their employment contracts in order to make sure that they’re not going to be screwed by the companies they’re going to work for.
    Forget about studying engineering, math or science or trying to become a great artist, or a doctor or a nurse, or doing anything else to enrich humanity, just become a lawyer and get an MBA, you win either way. You can get rich by producing contracts that are designed to allow employers to screw employees or by being hired by those employees to make sure that they’re not going to get screwed. Sure, you’re not producing anything of value, but who cares? The boys on Wall Street have shown us that people who produce things of value are chumps and suckers.
    I for one can not wait until we achieve the libertarian paradise where everything is based upon signed contracts and I have to keep a lawyer on retainer for every single interaction with another human being, regardless of how trivial, just to make sure that the other guy isn’t trying to screw me over with obscure or abstruse legalisms. Concepts like “trust”, “honesty” and “fairness” are just completely and totally overrated, bogus and old-fashioned, if you’re not actively trying to screw everyone you deal with you’re a loser.

    • Max Schireson on

      I have known Cliff for a long time and like him, but I have to say I disagree with him on this issue. I’ll let him defend his own opinions on this one 🙂

      — Max

    • Cliff Elam on

      Who knew my boss AND my mother-in-law were reading Max’s blog?

      I am definitely not a big-L libertarian and am only a little-ell occasionally.

      But I do live in the United States of I Own My Mistakes, so while I have sympathy for the peeps at Skype, I do shake my head at their signing contracts w/o understanding them.

      Not that I’ve done that. 🙂

      -XC

      PS – Not a lawyer, MBA, or even a P/E shakko. (Obligatory Star Wars reference, not the hat.)

    • Martin on

      Yes, this is a problem in many places. Having grown up in an Eastern European country where this kind of mentality was rampant (if you got screwed, you deserved it – and if you didn’t cheat yourself, you cheated your own); all I can say compare the outcomes.

      Where the markets are for the most part fair and focused on the task at hand instead of trickery (legal or not), prosperity comes much more easily. The parasites and swindlers will always be present but must be kept at bay, lest the golden goose suffers.

      • Cliff Elam on

        Martin, keep in mind that you are replying to a straw man and *not* what I said.

        I would also point out that one of they key identifiable problems of kleptocracies (ex: communism) is the lack of rule of law, not onerous enforceable contracts.

        -XC

      • Martin on

        I’ve read several threads on the subject rife with the “he deserved it” sentiment and was more or less reacting to that – but Chris is right, that is not what he was arguing here.

        Just leaves a bad taste all around, I guess, that was my point.

  6. Philip Pointer on

    Did Lee actually exercise his options? Every agreement I ever had allowed only a short time after termination to exercise vested options.

    • Max Schireson on

      Yes he did, but he company (or some related entity) had the right to buy them back at the strike price.

      — Max


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