The Real 'Scandal' Over Zynga Stock Options Is Over Misleading Reporting

from the let's-work-this-out dept

There were a bunch of reports last week about a so-called "scandal" at social gaming company Zynga, concerning reports that it demanded stock options back from employees or they would be fired. Zynga certainly has done some questionable things over the years, and hasn't always had the greatest reputation... so a lot of people jumped on this story, and plenty of people submitted it. But, the details suggest that the only real "scandal" here is in the attempts by reporters to make this into a scandal (kudos to Dan Primack for not getting fooled). The reporters doing so either don't understand what really happened or are just attacking Zynga for the hell of it. I've got no problem calling out Zynga when I think the company has done something bad, but the details here suggest that what Zynga did is actually pretty reasonable.

The part that gets lost in most of the discussions is the fact that Zynga was only asking about unvested stock options, rather than vested ones. Unvested stock options are just like future salary. You can lose it if you get fired. What Zynga did here was take a few employees that it felt weren't achieving up to expectations and, rather just fire them -- in which case they would have received none of their unvested options -- try to find another role for them in the company. That other role, however, would be somewhat lower on the totem pole, and thus, would be entitled to fewer stock options. Yes, it's basically a demotion, but for some people perhaps that's preferable to an outright firing.

But here's the key point. Most of the "Zynga bad!" reporting on this made it sound as though Zynga was taking back options that had already vested. That's false and misleading. Nothing was taken back from the employees. The already vested options remained untouched. Basically Zynga was offering a way for people, who otherwise would have been fired, to keep accumulating some options, just at a lower rate. That may be insulting, but it seems like a more reasonable and humane solution than just firing them outright.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    out_of_the_blue, Nov 18th, 2011 @ 4:40pm

    Carrying water for Zynga because it's against SOPA!

    http://www.techdirt.com/articles/20111115/02133216775/facebook-twitter-ebay-other-big-internet-compa nies-come-out-against-sopa.shtml

    You're pretty rabidly fixated on SOPA, don't want any of the companies you mention as opposing it to be cast in bad light.

    Seems pretty clear that Primack struggles for a favorable slant over the WSJ take: "As far as WSJ is concerned, this is a grievous abuse of power. By renegotiating, Pincus is breaking his word. And possibly the company's contractual obligations."

    Mike, you've shown that "renegotiating" is bad when done by the "free" bloggers at Huffington Post, so how can explicitly taking back (potential) pay be okay?

    And by the way, if it's "give back" or "be fired", that cannot be construed as commendable reasonableness, it's a flat out threat.

     

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  2.  
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    Anonymous Coward, Nov 18th, 2011 @ 4:43pm

    Renegotiating the stock option agreement on a bad performance review

    This leads to this question: What was in the original stock option agreement?

    Probable answer: It vests at the original rate if the employee is still employed-- regardless of title, salary, demotions, etc.

    I'm going to suggest this is still renegotiating a signed contract and using the ability to fire the employee as leverage.

    But I'll agree with Dan Primack that "Zynga could have avoided this entire mess". Having the stock option agreements tie the vesting rate to performance is one way of doing it. One where a bad performance review can not only reduce your salary but also your vesting...

     

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    Killercool (profile), Nov 18th, 2011 @ 4:45pm

    Re: Carrying water for Zynga because it's against SOPA!

    It's not "give back or be fired", it's "give back and keep your job, or get fired and lose them anyways".

    Basic reading comprehension, FTW

     

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    Mike Masnick (profile), Nov 18th, 2011 @ 4:49pm

    Re: Carrying water for Zynga because it's against SOPA!

    You're pretty rabidly fixated on SOPA, don't want any of the companies you mention as opposing it to be cast in bad light.

    Don't be ridiculous. I've called Zynga out for plenty of other crappy practices.

    And by the way, if it's "give back" or "be fired", that cannot be construed as commendable reasonableness, it's a flat out threat.

    The shares are unvested. There's nothing to "give back." That's the misleading part.

     

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  5.  
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    kenichi tanaka, Nov 18th, 2011 @ 5:02pm

    How is it misleading? I had no problem understanding what it was about. Leave it to Zynga to misunderstand the misunderstanding. They did something wrong and now they're trying to cover it up.

    The fact that they said they didn't want another "Google Chef" problem where the chef made more than the executives did.

     

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  6.  
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    Anonymous Coward, Nov 18th, 2011 @ 5:06pm

    wow dude, how much do they pay you to just sit and refresh techdirt until a new article comes up? Seems like an unhealthy fixation if you're whoring for free.

     

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  7.  
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    James T, Nov 18th, 2011 @ 5:32pm

    Vested / Unvested

    Zynga is bullshit for taking back something that an employee earned. I have had vested options myself and it's sold by the company as a payment or bonus but then might be taken away.

    In this case it seems that they didn't feel that the employee's were worth firing just demoting and taking back stock options. Possibly related to an IPO they are about to do.

    Anyway you slice it this is income the employees were told they can expect. Now that's it's due the employer is saying you don't deserve it. The timing might be to slacker employee's but I doubt it.

     

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  8.  
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    Anonymous Coward, Nov 18th, 2011 @ 5:33pm

    Big miss on Mike's part

    Mike, you are normally so spot on that this miss is really glaring. In absolutely every article I read about Zynga, it was clear that we were talking about unvested options. There was no bad reporting here no matter how much Zynga (and you, apparently) want to spin it otherwise.

    And this idea that it is OK because these employees would lose their jobs otherwise is a crock someone came up with to try and save face. In the end, it is the same thing ... give the unvested options back or you are fired. I agree with the previous poster that this is 'forced' renegotiation of a contract. I.e., blackmail.

    A final point, from Zynga's point of view, if they really had legitimate issues with these employees. If you have a poorly performing employee, and you take away perks that you have already committed to and put them in a different job, do you really think they are going to 'turn around' and become more productive?? Not going to happen. You are left with an even more disgruntled employee, and that poisons the entire work environment.

     

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  9.  
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    Anonymous Coward, Nov 18th, 2011 @ 5:38pm

    When you build a company based on shady practices and stealing other people's game ideas, of course everyone is going to assume the worst of you.

     

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  10.  
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    ChrisB (profile), Nov 18th, 2011 @ 5:44pm

    Re: Vested / Unvested

    Hey moron. What part of "unvested shares" did you not understand? I, too, had vested and unvested shares at a company. When I was laid off, I got the vested ones but not the unvested one.

    It isn't anything they "earned". That is exactly the reason why companies have vested and unvested options. If it was something you already earned, they would all be vested.

    Maybe try reading the article before spouting off like a dipshit.

     

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  11.  
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    Anonymous Coward, Nov 18th, 2011 @ 6:17pm

    If you stayed at a crappy job for years because you had fantastic stock benefits that take several years to vest, then years later when you're finally about to be rewarded per your contract with the company, the company decides it wants to go public and THEN demands your contract be renegotiated, then claims you're a shoddy worker and threatens to fire you... You're telling me you wouldn't feel scandalized? Of course you would. There's nothing "so-called" about this. If the employees were ACTUALLY underperforming for years, then that should have been dealt with years ago. By not dealing with it years ago, the company was clearly indicating its approval... Right up until they saw an opportunity to cheat their employees

     

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    That Anonymous Coward (profile), Nov 18th, 2011 @ 7:49pm

    I don't claim to understand vested vs unvested.
    What I do understand is employee is promised X to do their job. When it was no longer convenient for the employer, they take them back.

    They then want to offer those same things to new people, who in my mind would be insane to consider it any sort of perk as it has been shown they will take them back if they want to.

    Trying to avoid the Goggle Chef Millionaire thingy, well this shows that it has happened before. That if you were paying attention you should have known handing the options out like tissues would be a bad thing. Maybe they wanted to get a big stack of pre IPO stock options to drop on the congresscritters not to influence them of course not.

    This seems like a real reason for them to offer all new hires stock options, and just push out the dates they vest so they can take them back later once they are in the job.

    Someone educate me about this. I'm willing to hear things so I can understand better - but my mindset is if you promise to give me a cookie on friday then on wednesday you tell me your taking my cookie away to give to a new friend, I'm going to want to punch you in the face.

     

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  13.  
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    Mike Masnick (profile), Nov 18th, 2011 @ 8:39pm

    Re:

    When it was no longer convenient for the employer, they take them back.

    Nothing was taken back. Think of it this way: if I hire you to do job X at $100,000, and halfway through, I realize you're not doing a very good job, I could fire you -- give you the $50,000 you've actually earned and move on. Or, I could ask if you want to change jobs, to something more appropriate, noting that the new job only pays $25,000 more.

    Nothing is "taken away" from you that you've earned. The money you earned from the first half (the $50k) is still earned and still yours. The other $50k was never yours because you never earned (didn't do the necessary work). At that point, you'd either get fired (and not get the $50k) or are offered a different job for $25k (its going rate). At no point was anything taken back.

     

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  14.  
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    DickUnitely (profile), Nov 18th, 2011 @ 8:57pm

    The real scandal?

    Sorry Mike, you got this one dead wrong.

    First, if you are employee #5 at any start up and offered a heavy option stake in exchange for a below market salary, you take on massive risk of ending up with nothing. If the company does take off, employee #5 will always technically be "demoted" as professional managers and executives arrive and create a more formal corporate structure.

    Second, if the company is about to go public or be purchased, it is customary (and fully expected) to allow all employees to purchase their unvested shares at the current strike price. Ask anyone who has been there. Saying that employees were "under-performing" is total bullshit and nobody in the valley is buying it

    The greed and predatory business practices of Mark Pincus and his short sighted executive team just soiled the entire idea of taking stock options in exchange for salary. Future employees will be more inclined to politely refuse options in exchange for a market rate salary.

    And that is the REAL scandal.

     

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  15.  
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    Anonymous Coward, Nov 18th, 2011 @ 9:08pm

    Zynga screwed their employee's plain and simple. Unvested stocks are a "promise" given as an alternative to higher pay. The case of the Google Chef means nothing, he accepted lower pay initially and took a risk, he gambled and he won. Zynga didn't "gamble" anything, they got engineers at lower cost because of the promise of stock, now they don't want to pay out on that promise because they don't think those folks contributed enough. Bullshit, they wouldn't be where they are without each and everyone of those people or they "WOULD" have fired them previously.

    This is not the employee's problem, Zynga probably didn't expect the level of the IPO and promised more than they should have. This is not the employee's problem. Given they still work there, they are obviously doing the job and for only this reason subject to be fired. Most labour laws will side with the employee in any case of a firing in this situation, especially one where the company basically stated they don't want them to get the benefits.

     

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    PrometheeFeu (profile), Nov 19th, 2011 @ 8:13am

    I think the facts really are at issue. If indeed it is a case of underperforming employees being moved to a lower role with fewer stock options, then I don't see anything wrong. It's basically being fired and re-hired lower in the hierarchy. You loose unvested options and get fewer upon re-hire. It sucks, but in certain circumstances it's the fair thing to do. On the other hand, if the issue is that they wanted the stock options back, that's a very crass and dishonest thing to do. Either way, they handled this very poorly. They should have waited until after the IPO when things wouldn't have looked anywhere near as bad.

     

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  17.  
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    DickUnitely (profile), Nov 19th, 2011 @ 12:38pm

    Re: Re: Vested / Unvested

    Allow me to clarify this for you.

    If you are "laid off" your employment is terminated and you exercise anything that has vested up until that day. End of discussion.

    If you are an employee while the company is filing for their IPO and expect to be an employee at time of IPO (or sale of company) - standard operating procedure at 95+% of start ups in Silicon Valley and elsewhere is you have the OPTION TO EXERCISE all vested shares and portions thereof.

    Your unvested shares continue to vest per your original employee agreement. Allow me to repeat that for you. As an active employee, your UNVESTED OPTIONS CONTINUE TO VEST.

    Threatening an employee with termination post fact or taking away unvested options while maintaining employment is a scumbag move.

    Pincus & Co. damn well better be sure that management documented all of this "poor performance" in writing or not only will this blow up in their face, but they will end up paying court costs, lawyer fees and the employees they scammed.

    You do not change the rules of the game at the end of the game.

     

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  18.  
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    That Anonymous Coward, Nov 19th, 2011 @ 7:07pm

    Re: Re:

    So unvested stock options are like the promise of a bonus, rather than being used to get employees to accept less money during the early days of the startup? Or they are set to vest at a rate to help make up for the fact they were paying you just enough to live on ramen for a year.

    I myself dislike the idea of a promise of future compensation for taking less today, unless that compensation is confirmed. But then I don't program, so this is totally out of my arena.

    I guess me liking or not liking would depend on how the contract was worded, and if it was clear that there would be a review that could alter it moving forward after that meeting. If everyone knows what the deal actually is and accepts it... more power to them.

    If they were told they were working for ramen wages for 2 years and at the end of 2 years they would have X Stock options and suddenly had an issue with the work 23 months in, then I could see an office rampage. Its situational.

    Well that and I think Farmville is the devil.

    Thank you for explaining this Mike, it seems much more rational than the hyped up article I read.

     

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  19.  
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    Anonymous Coward, Nov 20th, 2011 @ 5:22am

    Unvested shares can accelerate!

    Unfortunately it's not as simple as vested or unvested. A typical vesting plan can include double trigger acceleration (additional vesting when company taken over and employee dismissed) and potentially even single trigger acceleration (additional vesting when employee dismissed). So depending on how the original vesting plan looks like, which I have no knowledge of, Zynga might still be trying to renegotiate it here to avoid acceleration, or, in other words, to "screw people over".

     

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  20.  
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    Anonymous Coward, Nov 21st, 2011 @ 7:51am

    Hmmm

    The company better have rock solid documentation about this "poor performance". If they pulled a stunt like this to get out of having to honor their agreements then they will get eaten alive in court. Even if it was not the case, the public perception is that they "found a reason" to demote these people so that the real insiders would get a bigger piece of the IPO money. Why risk it?

     

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  21.  
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    Anonymous Coward, Nov 21st, 2011 @ 10:00am

    Re: Re: Re: Vested / Unvested

    Another point that's missed: these incidents (only 2 have been mentioned) occurred in March 2010, not recently in the lead up to IPO.

     

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  22.  
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    James R., Aug 26th, 2012 @ 10:25am

    Re: Re:

    "Nothing was taken back."

    That's not true. What is being taken back is part of the existing option grant. That some of the grant hasn't yet vested doesn't make the grant itself "nothing." The vesting of an option grant is not usually tied to job title or performance, hence asking an employee to surrender the unvested portion of their grant is a renegotiation, which, as has been pointed out, is being conducted with the threat of firing as the stick.

     

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  23.  
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    George E, Feb 18th, 2014 @ 10:46am

    Wonder about volatility?

    The volatility factor does it's work if you can cut through the B.S. Pick right and sit tight, as the saying goes, you're in high cotton.

     

    reply to this | link to this | view in thread ]


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