Are You Pulling the Wool Over The Eyes of Your Employees?

Fair warning, this will be a bit of a rant.  There was a story that emerged late last week about how Skype had provisions in their employee stock option agreements that basically rendered stock options worthless for employees.  It spawned a lot of discussion in the media and among bloggers over the weekend, but there were two articles I ran across that gave competing views into the situation:  An employee-centric view and a company “why they did it” view.  Take a moment to get educated.

I’m not going to get mired into the detail of specific employee incidents discussed in these articles.  Rather, I’m focusing on the philosophy of implementing an egregious stock option agreement that provides little to no compensation and ownership value to employees.  And more specifically, doing so when the tech industry norms are vastly different.

In a nutshell, here’s the situation.  Skype’s employee option agreement has a very unusual clause that enables the company to buy back an employee’s options if the employee leaves the company voluntarily or involuntarily.  The buying back of unvested shares upon termination is a standard option agreement clause for most tech companies.  What makes this clause unusual, and reprehensible in my view, is that it just doesn’t cover unvested options, but also vested options.  And here’s the evil kicker – the company has the right to buy back vested shares at the original grant price, not the fair market value that employees presumably contributed to achieving.

There are two problems with this type of agreement that I cannot be convinced are fair and equitable components of tech industry compensation:  1) The company has a right to buy back vested shares upon termination and 2) the Company can buy back vested shares at the original grant price.  This second point is the one that I believe essentially tells employees “Here’s an option grant but if you don’t stay with the company until it sells, regardless of how much value you create, we can terminate the grant.  Oh, and we can fire you before the company sells to ensure the grant is worthless.”

Now, there have been several arguments, although sparse compared to the criticism, in defense of Skype’s treatment of options in their agreement:

1. Employees should read any agreement before they sign it.  This is a load of crap.  Employees other than the most senior leadership have ZERO ability to negotiate terms in a “standard” company agreement and thus the vast majority of employees have likely never had a lawyer review employment related agreements (confidentiality, non-solicitation, etc.).   The fundamental issue here is not whether an employee should negotiate a better agreement, but rather philosophically how does the company want to incentivize and reward employees, particularly when the industry standard is so different creating a misleading view of how a standard option agreement behaves.  In a world where there is such a deviation from the norm, the company has an obligation to ensure employees fully understand how deviating agreements work.
2. Skype’s investors are Private Equity and not Venture Capital.  Huh?  What does this have to do with the fundamental notion that employees, not investors, are the primary asset that creates value in ANY company, regardless of who the investors are.  Early stage, later stage, turnaround, it doesn’t matter.  This point does not negate the company’s responsibility to provide clarity to employees about how compensation-related agreements work.
3. If an employee voluntarily leaves, then they don’t deserve to keep any options.  Again, this is just not the right thing to do.  By way of example, let’s say I joined my company and was granted 40,000 shares vesting over a 4 year period and at a grant or strike price of $0.10, representing the Fair Market Value of the shares at that time.  After two years, the company has made progress and raises capital at a per share price of $0.50.  So, there’s been $.40 of value created during my time at the company.  Now I decide to leave.  Since I worked for two years, I will have vested in 20,000 shares and presumably I’ve contributed in creating that value – if I haven’t, then the company should have fired me a long time ago.  But they didn’t.  The value of my 20,000 vested shares is now $8,000 (20,000 x $0.40 per share).  Under the Skype option plan, the company essentially has the right to terminate all options, so I leave with no stock, despite the fact that I’ve vested in half my position.  Poof, no options!  My belief, and the belief of most companies, is that the employee should have the right to purchase vested options at the original grant price upon leaving the company.  So I pay the company $2,000 and they issue me a stock certificate for 20,000 shares that I take with me.   Again, this is a philosophical debate – I believe in making all employees owners and rewarding people for contributing to increasing corporate value.  Just because someone decides to leave for personal, professional, health or any other reason doesn’t mean they don’t deserve to capture the value increase.

What’s the bottom line?  As a leader in your organization, what value do you place on people, transparency and sharing value creation with those most responsible for creating that value?  Companies have a responsibility for transparency and integrity towards employees.  Create and enforce whatever agreements you like, but be overtly educational about it, particularly in instances where your policies deviate substantially from standard industry practice.  This is where Skype failed in my view.