Last week, Skype took heat for firing three executives just weeks before the company's $8.5 billion acquisition by Microsoft (MSFT) is expected to close. That was bad, albeit more optical than unethical. What we learned today, however, might have crossed that line.
Yee Lee, a former Skype employee, charged the company and its private equity investors with effectively cheating him out of vested options. Not in court papers, but via his blog.
Lee says that he joined Skype in March 2010, shortly after the company was carved out of eBay (EBAY) by Silver Lake Partners, Andreessen Horowitz and the Canada Pension Plan Investment Board. His job was to help make the Skype app more "web-oriented," and also to help shorten product development life-cycles (the latter of which has been cited by Skype investors as a key achievement during their tenure).
His compensation included options for 750 million ordinary shares, which would vest after five years. When Lee voluntarily resigned on year later to join a startup called Katango, he assumed that he was entitled to the 20% of shares that had already vested. Skype, however, say it differently.
In a letter, the company argued that his vested shares were effectively worthless, because he had voluntarily resigned before the five years were up (or, in this particular case, before Microsoft had completed its acquisition). Skype tacitly acknowledged that some of Lee's shares had already vested, but said that such vesting was irrelevant.
For evidence, Skype directed Lee back to his original stock option grant agreement. On the third of eleven pages is the following passage:
If, in connection with the termination of a Participant's Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.
Don't bother reading it again for clarity. It is intentionally incomprehensible. It also was not something that applied to stock grants for all Skype employees. A source familiar with the situation says that many former eBay employees who remained with Skype have options that more resemble typical Silicon Valley (i.e., vested=yours). Moreover, the majority of Skype employees are in Europe, where the structure also is different.
But for U.S.-based employees who joined after Silver Lake and crew took over, you had to "be in it to win it." In other words, these particular Skype employees wouldn't get paid until the private equity firms also got paid. It's kind of like a stock appreciation agreement in option form.
Skype and Silver Lake clearly see this as an alignment of interest issue, and two corporate lawyers I spoke with said that such structures are not uncommon in PE-backed employee contracts. The only peculiarities - although vesting periods usually last for just four years instead of five, and only apply to C-level executives. In fact, some structures put specific investment performance hurdles on executive pay. For example, options won't vest unless the private equity sponsor generates a certain return multiple.
So the problem here is not that Lee was treated differently than other employees at private equity-backed companies. It's that such treatment exists at all.
First, golden handcuffs are generally counterproductive. Sure it might keep some folks around a bit longer, but they'll be bitter and such practices can dissuade. Moreover, why allow incremental vesting at all if what's vested after one or two years has no tangible value? Couldn't Skype have just used cliff vesting, given the company's apparent "all or nothing" mission?
To be sure, Lee should have had a lawyer read over his contract before quitting. It's not as if this is his first place of employment (he's had nine since 1999, according to his LinkedIn profile).
But it looks to me as if he was almost intentionally tricked. Just read over that contract language again. Skype must know the commonly-understood meaning of option vesting in Silicon Valley, so it should have explicitly said that its arrangement was different. As I said before, Lee had experience leaving companies. His shock indicates just how opaque this particular agreement was.
In fact, it reads like punishment for someone who chose to leave -- particularly given that Skype could have awarded value to the vested options, had it chosen to do so. Instead, it viewed Lee as disloyal, even though he was looking out for himself just like Skype was looking out itself in firing those three executives.
Lee may have been careless and perhaps a bit greedy. But Skype and Silver Lake were petty and vindictive, with far more to lose from such behavior in the long run.
Is it possible to cut government spending without sending the economy into another tailspin?
Now hardly seems like the time to find out – though try telling that to the tightening-minded Republicans in the House, led by the likes of Eric Cantor of Virginia (pictured at right).
Singing the wrong tune
Already a weak recovery appears to be on the verge of collapse. U.S. output limped ahead at a 1.9% clip in the first quarter. The MORE
Colin Barr - Jun 24, 2011 1:57 PM ET
We're living with slowing growth, high unemployment, and accelerating inflation. Oh, and a Federal Reserve that consistently makes inaccurate projections.
By Daryl G. Jones, Hedgeye
The Federal Reserve provided further support this week to our dovish thesis, which postulates that interest rate policy will stay at, or below, current levels well into 2012. In addition, the door for a third round of quantitative easing was opened ever so slightly based on our read.
The MORE
Jun 24, 2011 12:32 PM ET
Chinese search giant Baidu (BIDU) is making a major push into the travel market, today agreeing to acquire a majority stake in privately-held Qunar for $306 million. So I spent some time on the phone this morning with venture capitalist Richard Lim, a Qunar board member and managing director of GSR Ventures. What follows is an edited transcript:
Fortune: What is your firm's history with Qunar?
Lim: We were the first investor, MORE
Dan Primack - Jun 24, 2011 10:06 AM ET
Do we have a credit-card robosigning scandal on our hands?
A report Friday suggests that the banks' contemptible failure to maintain proper records– exposed during the foreclosure scandals of the past year – hasn't been limited to their boom-and-bust mortgage businesses.
Hear it ticking?
JPMorgan Chase (JPM) has dropped more than a thousand debt-collection suits aimed at people who defaulted on their credit cards, the Wall Street Journal reports. The decision to drop some MORE
Colin Barr - Jun 24, 2011 9:59 AM ET
* Sound the alarm: Securitas Direct sold for $3.4 billion
* Duncan Watts: Why it's so hard to predict bubbles
* Jim Finkle: Las Vegas welcomes the kiddie hacker convention
* Platinum parachute: For Southern Union execs, $470 million reasons to sell out
* Morning Call: U.S. futures point higher on Greek aid package, London rises early, European shares fall to 3-month low and the Nikkei climbs.
* Sign up now: Get Term Sheet's morning email
* John Quelch: 5 myths MORE
Dan Primack - Jun 24, 2011 7:18 AM ET
Greece and its patrons took a half-step forward Thursday, leaving just a few hundred billion more to go.
Greek leaders reached an agreement with the European Union and the International Monetary Fund on another round of tax hikes and spending cuts, Reuters reported.
A soaring moment
The deal was taken as a positive on a day otherwise dominated by the sinking prospects for U.S. growth and policymakers' latest act of desperation, the MORE
Colin Barr - Jun 23, 2011 4:50 PM ET
Private equity funds might not have to register with the SEC after all.
The SEC yesterday approved a new definition of "venture capital" funds, to legally distinguish such vehicles from private equity or hedge funds. Those qualifying as "venture capital" would be exempt from new registration requirements established by the Dodd-Frank financial reform bill. Everyone else would have to file.
Or would they?
Just as the SEC was announcing its rules, the House Financial MORE
Dan Primack - Jun 23, 2011 2:12 PM ET
In the echoes-of-2008 department, the World Bank just hired a former Lehman Brothers risk manager to run its finances.
The bank, which lends money to developing countries in a bid to curb poverty, said Madelyn Antoncic will "be responsible for maintaining the World Bank's high standing in financial markets."
So worldly!
It is tempting here to make a joke about Antoncic's qualifications for that task. After all, you could hardly have a lower MORE
Colin Barr - Jun 23, 2011 1:26 PM ET
If you think our employment problem is bad now, consider this: the U.S. economy is on course for both a job shortage and a worker shortage.
So says McKinsey, the consultancy that just released a report on projected American job creation over the next decade. As you might expect, the outlook is not all that rosy.
Not a pretty story
A return to full employment, defined as 5% joblessness, "will occur in only the most MORE
Colin Barr - Jun 23, 2011 11:50 AM ET| Company | Price | Change | % Change |
|---|---|---|---|
| Bank of America Corp... | 10.52 | -0.19 | -1.77% |
| Micron Technology In... | 7.21 | -1.22 | -14.47% |
| Cisco Systems Inc | 14.93 | -0.54 | -3.49% |
| Ford Motor Co | 13.24 | -0.23 | -1.71% |
| Oracle Corp | 31.14 | -1.32 | -4.06% |
| Index | Last | Change | % Change |
|---|---|---|---|
| Dow | 11,934.58 | -115.42 | -0.96% |
| Nasdaq | 2,652.89 | -33.86 | -1.26% |
| S&P 500 | 1,268.45 | -15.05 | -1.17% |
| Treasuries | 2.87 | -0.04 | -1.31% |
| Ron Paul worries Fort Knox gold is gone | ||
| Dow slides for seventh week out of eight | ||
| My degree isn't worth the debt! | ||
| The new American dream home: Prices in 11 cities | ||
| Obama's desperate SPR oil play |
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