Mark Pincus to Zynga Employees: YOU DON'T DESERVE TO BE RICH - Business Insider - 10 Nov 2011

At this point we don;t have all the facts.  Maybe the company sat down and had to make a decision to either cut headcount, or demand the return of equity to allow for continued hiring on their path to an IPO.

Maybe they truly messed up in their early grants and realized that they couldn't viably have an IPO with pre-set ownership issues.

Maybe they realized that they could get unvested shares back and STILL have their employee make a ton of money in the IPO.

Personally, I cannot ever remember seeing a company do this and I have worked with hundreds of companies during the IPO process.

Have you seen this done in the past?  If so, did it work out well? 

What was the reasoning behind the decision?

The following story provides a bit more information and a different perspective on the Zynga stock options issue.  In short, should the company have fired underperformers or should they have found a way to keep them, but with lesser equity compensation pckages?

http://finance.fortune.cnn.com/2011/11/10/zynga-stock-scandal/

This is disgraceful and a black eye for equity compensation. So if a company grants options that end up out-of-the-money and worthless, the company is happy not to have to dilute their stock but can still say they provided a benefit.  If they are in-the-money, the company can just pull them back at their will. This takes the cake for an example of "Heads I win, tails you lose."

The Zynga story, which started with the Wall Street Journal article, has generated a range of followup articles and blogs. Some have viewed their approach more favorably as a way to keep employees without firing them, if they agree to give up some unvested grants.

What Znyga is doing  highlights the range of risks that most employees joining start-up companies do not consider or fully understand. The risks that the company may fail financially is the obvious one, but the risks of dilution and that cash investors (preferred shareholders) will get most of the sale proceeds in an acquisition are usually not understood.

A recent informal survey of employees I came across on another blog gets at some of these other issues in pre-IPO companies and employees lack of knowledge: http://searchquant.blogspot.com/2011/11/startup-equity-survey-synopsis-you-are.html

Also in the myStockOptions.com Pre-IPO section (see http://bit.ly/gbt3A6 ) there are articles and FAQs that cover some of these risks with suggestions on how to handle them. For employees,  what they can do about their equity grants at-hire depends on their leverage and what the company is willing to negotiate. What's important is to go into the pre-IPO employment world knowing the range of risks and the true upside.

Bruce,

Thanks for the follow-up.  The blog you linked to has some very revealing information.  Probably not a huge surprise to those of us who work with private companies, but having some real data alays helps drive home the point.

People who do not understand their equity (and their company) cannot truly understand the value of that equity.

Your site is very helpful in getting people moving down this path.  Truth be told, we can not ever have enough education and information for participants.

Dan

Hi Bruce, Dan - I wrote the blog post you refer to above, and put the survey together.  I've been in startups since Netscape in 1995, and have been learning what I need to know about startup equity, the hard way as most do. The survey & blog post are one guy's small attempt to help non-founding startup employees make fewer mistakes.

One key problem I see is that there is no one whose business model aligns with helping the non-founding startup employees:

Recruiters just want to place them;

Lawyers are event-based and not education-focused;

Founders certainly aren't in their corner;

VCs & angels make a living of over-selling a startup's value to prospective employees

Bruce, your site's pre-IPO section is interesting & probably valuable, but keep everything behind a pay wall means that only a tiny fraction of those who need education will get it.

Hi Chris,

Welcome to the ECE!

You are partially correct. There are few business models aligned with the employees at non-public companies. Bruce's site is one of the few that regularly offer good information in this space. While that information is not free, neither is the collection and/or creation of it.

The NCEO also has some pretty interesting information, but again, it is mainly for the companies and not for the employees.

Some financial consultants in star-up rich areas like the Silicon Valley, NYC, Southern CA, Boston etc. are also fairly well-versed in this area.

Questions are regularly asked on sites such as Quora, FoundersSpace, On-StartUps etc...

These employees have been willing to invest in their financial future the same way they have invested in their education regarding their professions.  They need to get accurate, unbiased information from experts rather than their peers.

We should brainstorm on what it will take to get them to this next level.