I'm going to take a slightly controversial position here - so please read through my logic before you downvote me into oblivion.
If you read the article, you'll see that what's happening at Zynga is not "Taking Back" stock, instead it's talking about _future_ compensation. Every time I've been through a Compensation Review - one item that is made very clear to my manager, is how much _unvested_ stock I have in the company. That plays a role when they reviewing my salary and bonus, because Unvested Stock is a component of my forward-looking annual salary.
All Pincus is doing - is looking at his executives, and saying, "Hey, You are going to make $10 Million dollars NEXT YEAR, but you aren't doing $10 Million dollars worth of work - we're going to have to bring your NEXT YEAR's salary down to $1 Million" - He isn't talking about stock already owned by the employee.
California is an At-Will employment state, Zynga is located in California - Pincus could just fire these people and be done with it - as long as he wasn't discriminating unfairly (Based on Age, Race, Ethnicity, Marital status, or any of the other protected classes) - it would be completely legal, and, if these people weren't performing, completely rational, albeit really quite brutal.
In the scheme of "How can my company screw me on stock" - I put this in the 50 percentile category.
With all that said - dick move. I wouldn't want to work for someone who would do this to me.
I have to respectfully disagree with your logic. If you read the article, what is actually happening is they are retroactively trying to reduce restricted stock grants that were already made.
So, if I say "come work for me for free, and in exchange I will give you 10,000 RSU that vest over 4 years", then 3 years down the line say "just kidding, you don't get these last 2,500, but you get to keep working here", that is absolutely trying to take back comp. They can certainly withhold future restricted stock grants, but trying to take back already granted shares, vested or not, is beyond the pale in my opinion.
They can't touch the shares that have vested - I think we both agree here. They could just fire the non-performing executive, and put an end to the vesting schedule.
Here is the thing - Firing Non-Performing executives at startups with huge stock allocations happens ALL the time at _every_ company. It's not at all unusual - I've never been at a company where it hasn't happened. And frequently. It's absolutely business as usual.
I don't understand why Pincus didn't just fire these people and move on. That's the weird part of this entire thread.
Look at it from his perspective. He knows what the IPO is going to value the company at now. He's looking at some low-performing employees and calculating that they're simply not worth keeping around if it means giving them $20 million (or whatever) in the IPO.
If it's ethical to fire these people (in which case they lose all unvested shares) then it stands to reason it would be ethical to renegotiate a deal that both parties think is fair.
No. If he was looking at low-performing employees he would fire them.
He's looking at some high-performing employees in a terrible labor market, and calculating that their BATNA is not very good, so he's deciding to find a way to screw them.
That's true, but the alternative that we're already familiar with is simply firing the employee, which is not any better. If we're OK with being fired, shouldn't we be OK with this?
If the employer says "You're only providing $X in value (where your RSUs amount to $X+Y so now we're going to fire you or you'll agree to only take $X in RSUs" then, by working at a startup, you have a significant downside (the startup could well go belly up) but no upside.
Why no upside? Because your capital gain on the shares you took a pay cut for might at any time (for unvested stock) be reduced to your market value... which you could've simply earned elsewhere by taking that as a salary.
It's risk versus reward. What we see here, if true, is that the risk remains the same but the reward has been significantly chopped.
Dustin Markowitz [1] is a billionaire, largely by virtue of the "skill" of being Mark Zuckerberg's Harvard roommate. He "earned" ~$5 billion from Facebook, which if memory serves, is less than Steve Jobs made from Apple's second stint (where he, you know, turned a company on the verge of bankruptcy into a $300+ billion juggernaut with $80+ in cash and $100+ billion in annual revenue). Did Muskowitz provide comparable value? Of course not.
But he did take a gamble, like anyone joining (or founding) a startup. If this pseudo-clawback [2] behaviour becomes commonplace, it undermines the entire startup scene (IMHO).
> It's risk versus reward. What we see here, if true, is that the risk remains the same but the reward has been significantly chopped.
No, I don't think that's the case. The reward is being chopped because the risk has been chopped, right?
Presumably the company is worth much more and is much closer to IPO than when these employees joined, right?
I guess it's wrong if at the time of joining, the employee's risk/reward calculation used all of the equity they would be eventually granted. But that seems foolish because at any time they could be fired and be left with only their vested shares.
The typical option agreement says that the stock you may purchase is subject to a right of repurchase by the company, and that right (by the company) lapses over time. So, I imagine that is totally negotiable until such time that that right lapses. It means going back on your word from the time of hire, but corporations go back on their word all the time, usually because it's believed to increase value for shareholders overall.
I imagine one way to make it non-claw-backable is to give the right to purchase outright right away, or to have a much shorter vesting period, although that may have tax ramifications, and be messy for the stock plan/s to deal with.
Regarding whether anyone's contributions really are worth $4B or whatever -- that's the lottery. Lots of start-ups fail, and lots of possibly valuable contributions are then valued at 0 stock. If a person contributed to a healthy start for something that grows really big, they may win the lottery; that's part of the appeal of Silicon Valley start-ups. The more companies close off this lottery ticket avenue, the less that ticket will be worth, and the worse the ecosystem will do in the long run.
But if you stand to make billions in the short run, who cares about the long run? Probably true on both sides.
The right-of-repurchase grants that I've seen have always been 83-B grants where the company lets me buy all the stock up front so I can start the tax clock. The right of repurchase lapses on a vesting schedule, just like options.
From that perspective, there isn't much difference between (A) Vesting Stock, and (B) Lapsing over time a Restricted Repurchase agreements.
Nobody is going back on their word - it's just a different way of vesting.
I agree. In addition to the 83-B election, I've seen a right-of-first-refusal for share repurchase. (Third party offers you $X/share for your shares, the company has the right to purchase at that price instead.)
I've never seen a "we can repurchase shares as we see fit" clause.
By 'right of repurchase', are you referring to the right of the company to purchase your vested shares, should you choose to sell them? If so, it's not related to this issue.
No, i am referring to how vesting is actually expressed (at least in some grants I've seen). Another way to say it: "like it or not, unvested shares are re-negotiable." Get in early and vest as much as you can, if that's important!
California is an At-Will employment state, Zynga is located in California - Pincus could just fire these people and be done with it - as long as he wasn't discriminating unfairly
Actually California's At-Will employment is a bit different then standard At-Will. It's got an "Covenant of good faith and fair dealing" exception. Taking back option grants may be in breach of this (though it would have to be tested in court). Point being Pincus can't just fire these folks arbitrarily for not giving back shares with no risk involved.
If you read the article, you'll see that what's happening at Zynga is not "Taking Back" stock, instead it's talking about _future_ compensation. Every time I've been through a Compensation Review - one item that is made very clear to my manager, is how much _unvested_ stock I have in the company. That plays a role when they reviewing my salary and bonus, because Unvested Stock is a component of my forward-looking annual salary.
All Pincus is doing - is looking at his executives, and saying, "Hey, You are going to make $10 Million dollars NEXT YEAR, but you aren't doing $10 Million dollars worth of work - we're going to have to bring your NEXT YEAR's salary down to $1 Million" - He isn't talking about stock already owned by the employee.
California is an At-Will employment state, Zynga is located in California - Pincus could just fire these people and be done with it - as long as he wasn't discriminating unfairly (Based on Age, Race, Ethnicity, Marital status, or any of the other protected classes) - it would be completely legal, and, if these people weren't performing, completely rational, albeit really quite brutal.
In the scheme of "How can my company screw me on stock" - I put this in the 50 percentile category.
With all that said - dick move. I wouldn't want to work for someone who would do this to me.