If you’ve used Facebook at any point in the last few years, you’ve probably noticed your news feed getting clogged up with messages like “Bob just harvested 12 bushels of kumquats in FarmTown” or something similar. These simple, addictive games have proven to be a cash cow for a few companies. And the undisputed king of so-called “social gaming” is a company called Zynga. They make games like Mafia Wars and Farmville.
The people who founded the company, as well as its top executives, are now fabulously wealthy. However, like just about every successful tech company, Zynga was once a plucky startup with limited funding, and its future prospects were far from certain.
Cash-strapped startups, in a bid to attract the best possible talent, often offer new hires stock options, to supplement below-market salaries. Presumably, this is also meant to encourage these new hires to work hard to help the company succeed, and to attract employees who honestly believe in the company’s long-term success, by essentially forcing them to bet on it.
This has led to some relatively low-level employees (like secretaries and cooks) who got into a startup on the ground floor who end up with multimillion dollar windfalls when the company goes public. One famous example is a chef who was hired in Google’s early days ending up with $20 million when the company went public in 2004. Zynga, apparently, wants to avoid situations like this.
Basically, in anticipation of an initial public offering, Zynga appears to be looking at employees whose contributions to the company they don’t believe warrant a potentially-huge financial windfall. The company is telling them to give back their stock, or lose their jobs.
The company claims that they gave out too much stock to employees in the early days, and now they don’t have enough unvested shares to give out to attract top talent.
I honestly am not knowledgeable enough on the subject to say if this is legal or not. But, it seems like these employees are getting an incredibly raw deal. The whole reason that stock options are a good way to attract top talent in a company’s early days is that they offer the promise of a huge financial windfall a few years down the line, if the company is successful. It seems incredibly shortsighted for a company like Zynga to go back on this deal now that it’s inconvenient.
After all, stock options won’t be nearly as effective in attracting new employees if they have reason to suspect that they’ll be asked to give their shares back, or be fired, as soon as it’s convenient to the top executives in the company. Furthermore, actions like this will serve as a disincentive for employees at startups to put in the long hours and personal sacrifice that are usually required to turn a startup into a successful business. After all, how hard would you work to make a company successful if you know that your bosses might take away your major reward for doing so (your now-valuable stock options).
Of course, this maybe could have been avoided if the employees had pushed for a contract stating that the employer would not be able to pull this kind of move. Now that Zynga has set this precedent, prospective employees at other startups might start pushing for terms in employment contracts stating that they cannot be forced to give up their stock options as a condition of continued employment.
In this economy, it may seem that prospective employees aren’t in much of a position to be making demands of their employers, but with startups, the situation is a little different. Unless they’re flush with venture capital funding, tech startups often operate on a shoestring budget. Their need to attract talent, and the limited incentives they have to offer, give talented employees a good deal more leverage over their employers than the average worker has.
Employment is generally “at-will,” meaning that employees can be terminated for any reason, or no reason at all (presumably including failing to give back their stock options). However, this is the default arrangement, and it can be modified by contract. Of course, both parties have to agree to the terms of a contract for it to be valid, which is why employment contracts are relatively rare in non-unionized workplaces: the employer has little to gain by signing an employment contract which will almost certainly limit their rights to fire employees bound by the agreement.
But as I said, the situation with startups is different. Their employees have leverage. Hopefully, they’ll take this case as an object lesson in flexing their leverage, so situations like this don’t happen in the future.