Skype / Silver Lake options scandal – top 5 mistakes on all sides

Over the last 24 hours since I posted on this previously, the discussion has evolved. A few more comments:

One thing that has only been briefly mentioned is Yee Lee’s history of job hopping. He’s had 9 jobs in 12 years. This is one area where I strongly believe past history will predict future results. If you’re looking for this guy to stick around, you’ve hired the wrong guy. So as bad as I feel for how he was treated, I wouldn’t hire him.

Now, on to the nature of the agreement itself. Certainly Skype and Silver Lake and their VC’s can structure their options however they want to. Given the time it can take to build a successful company nowadays, I think their 5 year vesting period is a good idea. I still maintain that the repurchase rights on vested shares, while they may be common practice among some investors, are a terrible idea.

Why? It depends what you think you are hiring employees to do. Maybe you’re hiring the CEO and CFO to sell the business. But most of the team needs to be focused on operational jobs – growing the business, improving the product, or managing costs. If they deliver value in those roles over a few years and want to move on, you’re better off to let them move on that to try to keep them prisoner to their options indefinitely. Allowing a culture of “we’re all here to flip this thing” to permeate through the company is a recipe for trouble. All other things being equal I wouldn’t want to buy a company that had been run that way. You might yet sell it, but for how much less than if it had been run properly?

If its a bad idea to structure the options that way, its an even worse idea to do it without clearly communicating it. Silicon Valley is built on innovation, hard work, talent, and trust. If you remove the trust from the picture, it creates friction everywhere in the process. Employees hiring lawyers to review their options agreements, for example. This reduces the free flow of talent and thereby makes the allocation of talent to opportunity less efficient. This is not good for Silicon Valley.

Surprising people is bad. If Skype had done a better job communicating the nature of the options agreement, Lee might not have quit, and if he did he might not have had the public fit that he had. And if it does come down to a lawsuit, if Skype had clearly and unambiguously communicated how their options agreement differed from what employees may be familiar with, they’d be on much firmer ground.

Finally, the firings right before the acquisition don’t help the optics of the situation. This hurts the reputation of the investors and the CEO, and if there is a suit, it definitely doesn’t help.

So, here are my top 5 mistakes on all sides of the process:

  1. Yee Lee should stick with his jobs longer – Skype and otherwise
  2. Yee Lee should have read his options agreement more carefully (though many people don’t)
  3. Silver Lake / Skype should have used more standard options terms for all but a handful of senior execs
  4. Silver Lake / Skype should have very clearly spelled out the nonstandard terms to avoid any possibility of surprise
  5. Skype should have found a way to improve the optics of the executive terminations right before the acquisition
— Max

2 comments so far

  1. Matt on

    Max – you’re way off base here.

    Clearly, everyone should read any contract they sign. That said, the document looks quite standard – with a 12 month “cliff”, “vesting”, and all the typical terms that have become standard in the Valley over the years. The only thing that was different was this:

    http://framethink.wordpress.com/2011/06/24/how-employees-get-screwed-in-private-equity-deals/#comment-815

    “If, in connection with the termination of a Participant’s Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.”

    Would you have caught this? In my experience, only a trained venture or PE lawyer would have, and they typically charge $500+ per hour. Would you recommend that all employees spend perhaps $1500 or more looking for landmines like this from a company backed by trusted names like Andreesen Horowitz? Even as a former VC I might have easily missed it, although with a PE firm rather than a VC firm behind the deal I’d be more careful and I’d like to think I’d flag it for an attorney.

    As to the job hopping charge – I think you’re off base here as well. I see only 4 real jobs in 15 years, plus an (extremely common) short work stint before grad school and lots of startup advisory stuff:

    http://www.linkedin.com/in/yeeguy

    Not everyone is a good fit for a 5+ year tenure – many startup folks have a sweet spot in getting a new company, product, or team off the ground, then handing it off to people who are best at the next stage. In many cases, if it takes more than a year or so to do that, you’re not doing it right. Clearly he’s a very valuable employee given his impressive resume – eg. EIR at Venrock and Matrix. I’d probably hire him in a second… for the right job.

    It’s also not clear how many jobs he left, and how many left him – although perhaps you have inside info here. It’s very common for startup folks to have short tenures when their company fails. As one of the best engineers I know says: he’s not afraid of the company going out of business; he’s a startup guy and can get another job in less than 24 hours – he’s constantly turning away offers. This isn’t a bad thing – the entrepreneur community has clearly embraced the “fail fast” ethos.

    This clearly has hurt Silver Lake’s reputation – as it should – and I don’t imagine they’ll be getting the same talent in the future without having to pay a lot more cash up front. I look forward to hearing what – if anything – Andreesen Horowitz has to say about it.

    For further reading:

    http://en.wikipedia.org/wiki/The_Scorpion_and_the_Frog

    • Max Schireson on

      While I don’t condone sneaking in that language, I still believe _some_ of the blame goes to everyone who didn’t read their agreement. That doesn’t make it right; I think as with most bad situations, there is fault in multiple places. See my other post on the topic, where I am quite uncharitable towards Silver Lake and Skype.

      Yes, some of the short stints were entrepreneurial. But of the 4 jobs prior to Skype that weren’t EIR/consulting, he had 3 of them for 2 years or less. Add this to the other stints, and it looks like a a guy who prefers to change gigs every year or two.

      I agree that not everyone is a good fit for a 5+ year tenure. Would I hire him for launching something short term? Maybe. Would I hire him with an expectation of him being around for the long term, which seemed to be what they wanted at Skype? Doubt it.

      No inside information on this one, just my quick read of his profile. That said one other thing that irritates me about his profile is the non-title titles: “Product” or “Product + BD”. Were you a Product Manager or VP of Product? Chances are you actually had a title, and I am irritated by people who leave them out on linkedin. I’m sure lots of people will blast me for that, but its true, and probably colors my views a little in this case.

      — Max


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