Way to build employee morale, Zynga

http://www.itworld.com/software/223167/way-build-employee-morale-zynga

by junioreven • 15 years ago

136 53 15 years ago

lpolovets4• 15 years ago

This came up on Quora yesterday: http://www.quora.com/How-legal-or-illegal-are-Zyngas-actions...

My gut instinct was that was a jerk move, but after thinking about it I'm not so sure. Here's my answer from Quora... I'd love to know what others think.

(On a side note, the article cited on Quora mentions that employees were asked to give up some unvested options, but that their vested options are not affected.)

==============

This is a slight oversimplification, but a typical stock option grant of, say, .4% of a company is akin to the CEO telling you, "for every year that you work for us, I will give you .1% of the company." For early startup employees who typically take below market salaries, this kind of stock grant is one of the things that makes working at a startup more worthwhile (financially speaking).

It's exceedingly rare that a startup grows to a billion dollar valuation within a few years of founding, but when that happens, it makes sense for the company to re-evaluate whether it's worth giving someone an extra .1% for one more year of work. When a company is young and not worth much, giving someone $10k in paper value as a loyalty bonus is a no-brainer; when a company is worth billions, giving the same person a 50 million dollar loyalty bonus requires a lot more thought. It might still make sense if they're the COO or CFO or something like that, but does it make sense if they are a "Lead Software Engineer" or "Senior Product Manager"? How many "Lead Software Engineers" could you hire with 50 million dollars of stock? Put this way, I think it's reasonable that Zynga wants to let some early people go at their current compensation rates (and California has at-will employment, so you can quit or be let go without reason at any time.)

Note #1: I think this sucks for the early employees, and I certainly would not want to work for a company whose founders have a history of these kinds of practices, but that doesn't make the practices unethical.

Note #2: My answer would be very different if Zynga were trying to take back options that had already vested.

I am not a laywer, so my assumptions about how at-will employment works might not be 100% correct.Edit

jquery• 15 years ago

The execs at Zynga who did this should not only lose their jobs, they should be facing criminal penalties for fraud.

I had a phone call interview scheduled with Zynga today, but I read this story first. I didn't even pick up the phone when they called me.

carbocation• 15 years ago

If you had answered, declined verbally (explaining why), written a blog post on the topic, and then submitted it to HN, then you would likely have the top post on HN right now.

earl2• 15 years ago

Employees got these options when they were worth virtually nothing as compensation. Now they're worth something, Pinkus wants to change his mind.

This is equivalent to employees taking options for a company that had failed then three years in going back to the ceo and saying, "You know, I'd like to trade these worthless options for the $20K/year of salary that I gave up. Thanks"

lpolovets4• 15 years ago

But this only affects future options, not options already received, right?

Here's a possibly analogous scenario: Imagine this was salary instead of stock: an employee was hired because he was the foremost expert on technology X. To entice him to join, the employee was offered $1m/year for each year that he stayed, up to 4 years. Now it's 2.5 years in, and for various reasons the employee is no longer worth $1m/year to the company: perhaps X is no longer a useful technology, or expertise on X is no longer needed, or there has been an explosion of experts on technology X who would be happy with $200k/year. Would you say it was unethical to tell the employee that while the $2.5 million he has earned so far is obviously his, you can't justify paying him another 1.5 million in the next year and a half, and that he can either accept a pay decrease or be asked to leave?

elliottcarlson• 15 years ago

"Put this way, I think it's reasonable that Zynga wants to let some early people go at their current compensation rates (and California has at-will employment, so you can quit or be let go without reason at any time.)"

At-will employment does not mean without reason at any time, and while I am not a lawyer, I believe making a threat of termination if you don't sign over your unvested options would be a good case for wrongful termination.

lpolovets4• 15 years ago

Did not realize there were restrictions on the reasons for terminations (other than obvious restrictions like wrongful termination). Thanks for the info!

klochner• 15 years ago

You're forgetting that when employees took their compensation packages, it was based on factoring in some probability of hitting a mega upside.

By capping that upside, any vesting option package is worth less in expectation, so employees would have demanded higher base salaries knowing that they wouldn't fully participate in a huge win.

lpolovets4• 15 years ago

The employees already have a huge win... the article talks about employees being worth $200 million once they are fully vested. If they're halfway to vesting, they might be worth $100 million, and it seems like Zynga is saying that it's not worth $100 more million to keep the employee for two more years.

It's a weird problem that I think is only there because Zynga grew so freaking fast. Normally an early employee's 4 years are up way before a company is worth billions of dollars. Even in the last year or two of a 4-year option plan, the employer's implicit choice is "is it worth another .1% for me to keep this person for one more year?", and .1% might be worth 20k or even 50k, and so the employer doesn't even consider ways of reducing that cost because it's tiny compared to the early employee's value. But when the cost is $10m or $25m or $50m a year, it's definitely something to think about. And only the hyper-grown companies that popped up recently (Twitter, Zynga, Groupon) have had to face this problem.

justinhj• 15 years ago

if i have a company with no products a top 100 company ceo is worthless compared to a lead software engineer that could provide what you need to develop and polish a product that wins the market

nphase• 15 years ago

Why bother negotiating options at all if what you end up with is a fraction of what you negotiated for to begin with? If the company isn't willing to honor the agreement, it shouldn't offer it at all.

Future options are precisely what was on the table when negotiating and subsequently accepted an offer form a startup.

rayiner• 15 years ago

It's not a situation of how many lead software engineers can you buy for $50m. If Zynga had had $50m to begin with they wouldn't have given out options. What they offered, instead, was a 0.5% shot at $50m.

It's a fundamental concept of contract law that the damages for breaching a contract are what are necessary to put the aggrieved party in the same position he would've been but for the breach. The rule exists precisely for this sort of scenario: when people bargain up front about highly uncertain things like this, they come to an understanding about risk/reward, potential cost and potential upside. In retrospect one party or the other is almost certainly going to get more or less than he or she expected. If courts didn't hold people to their promises, one party would nearly always have an incentive to back out, and nobody would ever enter into uncertain transactions.

What Zynga is doing is at best unethical. The rub here is that we're dealing with unvested options. If it were trying to force employees to give up vested options it wouldn't be just unethical, it would be straight-up illegal. An options contract is a property interest, and can be readily valued in this circumstance.

Even dealing with unvested options Zynga might've opened themselves up to liability. "At will employment" doesn't mean "anything goes." Also, the contract the employees had re: the options could be a second source of liability.

einhverfr3• 15 years ago

The way I look at it, it isn't about employment so at will is largely irrelevant save the 'but we could have' arguments which I don't think fly here.

Instead it is about compensation for said employment. If lawyers get involved, I bet this is where it will go. Also understand the last thing Zynga should want is for lawyers to get involved in this for two reasons:

1) It's distracting to management and

2) From what the WSJ says about it, this sort of thing hasn't gone much before the courts so there is a lot of uncertainty as to what the law allows and Zynga could lose big.

If the affected employees are smart they will use these factors to their advantages and get lawyers involved right now, forcing Zynga to back off or fight.

feralchimp• 15 years ago

If you're not willing to actually grant equity, then don't pretend to grant equity.

Grant "up to $5M of go-public bonus cash" or something. If they had capped the upside up front, this wouldn't be a story.

cheald2• 15 years ago

Bingo. It sounds like what they did is just hand out stock options way too liberally in the early days in order to attract talent (probably when they planned to flip the company on a timeframe before those shares could vest), and now that those shares turn out to be worth something, they want that talent, the product that talent has created, plus the compensation that they promised to pay returned to them.

If you can't stomach the idea of a hire getting a big payday out of an IPO if your company goes big, you shouldn't be giving them equity. Using it as hiring bait and then switching it out from underneath them is deplorable.

muzz• 15 years ago

If only unvested shares are being asked for... someone who has been there since the "early days" would have already vested most of them, assuming a standard 4-year vesting schedule

eavc• 15 years ago

"Up to" language can be every bit as sleazy as this move to take stuff back. It usually means, "nowhere near."

wyclif• 15 years ago

This. And yet, every week here we're regaled with pitiful cries from founders that "we can't recruit and hire enough talent!"

Once faith in the offering of early shares against under-market salaries erodes, good luck in hiring those "rock star" engineers you'll need to put your company over the hump for less than market rates.

jjm• 15 years ago

Reminds me of what PG wrote in his 2004 essay: (snippet)

---- FROM: http://www.paulgraham.com/bubble.html

"What makes the nerds rich, usually, is stock options. Now there are moves afoot to make it harder for companies to grant options. To the extent there's some genuine accounting abuse going on, by all means correct it. But don't kill the golden goose. Equity is the fuel that drives technical innovation.

Options are a good idea because (a) they're fair, and (b) they work. Someone who goes to work for a company is (one hopes) adding to its value, and it's only fair to give them a share of it. And as a purely practical measure, people work a lot harder when they have options. I've seen that first hand."

The rest of the section is fantastic, go read it.

----

tatsuke95• 15 years ago

Whether or not you think this is ethical or legal (I'm not sure it's either), the most amazing thing about this is the timing. I mean, with all the anti-corporate sentiment in the wind, how on earth did they think this would fly? I can see them getting crushed, not in the legal sense, but in the PR sense.

Can people possibly dislike Zynga, as a company, more then they already do? Between this and Groupon, I'm getting fat from plowing popcorn.

tzs• 15 years ago

Occupy FarmVille?

einhverfr3• 15 years ago

Oh, and Occupy Cityville

outside1234• 15 years ago

I never thought I'd see a dumber set of PR moves than the ones that Netflix made a month ago.

I was wrong.

drumdance• 15 years ago

I don't think this is as bad. I doubt people will stop playing Farmville because of this.

bostonvaulter2• 15 years ago

I'm sure people thinking about applying to Zynga will consider this.

svdad• 15 years ago

The problem is Pincus wants to pretend that options-based compensation is in any way related to performance. If they wanted a performance-based comp structure, they should have set one up in the beginning. Options are pure seniority-based compensation and everyone in the industry knows (or should know) that, whether or not they want to admit it.

Gaussian• 15 years ago

Pincus is attempting to make it sound as if he wants to claw back equity from employees who don't do their jobs. But if they aren't doing their jobs, why not fire them?

No, it seems to me that Pincus is looking at some people, perhaps they're middle-level employees, and saying, "you know, that guy might be doing his job, but he isn't worth $50 million."

Yeah, no shit he's not worth $50M. Few people are. But that's how the fucking game works. The fact that a Google chef got $20M -- why is that bad? It's not bad; it's cool. How many Microsoft stories are there about secretaries that made off with $10 million? Those aren't bad stories; those are good stories.

I'm sorry that Pincus fails to see things that way. And I'm sorry that he's decided to shit on a paradigm that's helped build Silicon Valley.

noonespecial3• 15 years ago

The truth is that that middle manager really isn't worth that $50mil. Its not about what he's actually worth. Its the back side of the fact that when he came to work at Zynga, it wasn't worth working for.

Its like the gas station attendant who sold you your lottery ticket showing up on your front lawn demanding it back once it turned out that it was a winner.

happywolf• 15 years ago

Bad metaphor. Joining a young start-up involves risk that company will fold fast, and also taking home less income than joining a more established company. A gas station attendant selling lottery ticket has no such risk.

dhruval• 15 years ago

What this is getting at is that start-up world is run on 'winner takes all economics' (look it up).

Companies that win rarely have products and marketing that are 1000x better than those that fail. But the difference in the payouts can easily be in that range. Incidentally this is why it is worth it for people in a startup environment to work seemingly crazy hours.

The founders and equity owning employees of the winning team are getting an incredibly high payout for being slightly better, or slightly more lucky.

We as a society accept this trade-off as being a necessity for innovation and overall economic growth.

In short: If the chef on the winning pirate ship doesn't deserve his share of the loot then neither does the captain.

yzhengyu• 15 years ago

You can say hypothetical middle manager got lucky, but it isn't. We will never know whether Zynga would have succeeded without hypothetical middle manager or the other 'undeserving employees'.

This is just dickish behavior from Pincus. Given his past record, no one should be surprised. What you are saying here is just part of the process known as 'rationalization' and then 'accepting' this behaviour. You can stop - wildly successful entrepreneurs are not saints. I think Steve Jobs is an even clearer example of this.

And I am glad to see the employees affected taking legal action. There's no point in reinforcing dickish behavior by quietly accepting it.

gaius• 15 years ago

It's more like being a member of a lottery syndicate, and paying your share, then when some numbers come up (and no-one knows who originally picked them) the syndicate organizer deciding she wants the whole lot for herself.

jeromeparadis• 15 years ago

I'm on the fence on this one. Other startups that went this route simply fired these employees to get back unvested shares or options. To Pincus' credit, he at least gives them the opportunity to renegociate. On the other hand, I agree the fact he may want to keep them instead of firing them sounds fishy.

pessimist• 15 years ago

In all honesty, I'm surprised people are surprised by these actions. Its routine that when companies like Google acquire smallcompanies, tons of people in the smaller company are fired. I know for a fact that this happened in the Admob acquisition, for example. This is really no different.

The valley is sleazy and management treats engineers like expendable resources. Get over it. The only consolation is that engineering is the worst possible job except for all the others.

vidarh• 15 years ago

Thy're shooting themselves in the foot: I know I will never go work for Zynga without the base being high enough that I can value options or RSU's received at 0. And neither would I consider joining another startup started by these people in the future without similarly pricing the value of any equity at 0.

They're driving up their cost of hiring.

einhverfr3• 15 years ago

Another reason if I was an employer I'd have lawyers involved right now:

No company wants to be going into an IPO with SEC paperwork that says "we are being sued by our employees over compensation." There is very little doubt in my mind Zynga would back off rather than fight.

waldr2• 15 years ago

If I worked for Zynga and I saw co-workers who were under performing heavily rewarded I'd find that pretty de-motivating. It seems to me this has been misreported, if your not performing in your role and you get fired you'd lose the unvested stock anyway so by offering a new position and cutting your stock you are given a second chance.

Without knowing how the performance is being judged and what the communication with the staff is like its impossible to really pass comment, do we really think that employees are given no prior warning and suddenly they are re-housed and their stock cut? Seems a little far fetched to me, especially before an IPO where the press are going to be hot for you anyway.

danssig• 15 years ago

You must not be aware of Pincus' history. Then again, people working for him must not have been either.

waldr2• 15 years ago

This is true, I accept that its very hard to comment without knowing a little more. It seems as thought there is a very quick judgement passed before we really know exactly how its being played out.

Way to build employee morale, Zynga

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