As the online-games company Zynga approaches its initial public offering, it has garnered attention for reasons far removed from the innocent fun of FarmVille and Mafia Wars 2. When the headline Zynga Leans On Some Workers To Surrender Pre-IPO Shares appeared in The Wall Street Journal on Nov. 10, observers across the worlds of compensation and pre-IPO business sat up and took notice. Allegedly, Zynga is demanding that certain unproductive employees with large early-stage stock grants give back some of their unvested grants. If they don't return these grants, they will be fired.
The WSJ article does not make it clear why the company is taking this hard-line approach. Its share pool for grants may need replenishment to make new grants to more skilled employees. However, the article seems to imply another reason: the company may find it unfair that certain employees should greatly profit from the upcoming IPO merely because they started working there before better-performing employees were hired.
Avoiding the temptation to criticize Zynga's move, some observers have proposed the consoling idea that through the giveback Zynga is actually making an effort to keep some employees it otherwise might have fired. This was the view put forth by Dan Primack of CNN Money on Nov. 10. He finds it reasonable that Zynga is willing to give these employees another chance, perhaps in another position, as long as they give back some of their unvested stock.
However, much of the reaction to Zynga's move has been grumpy. The reasons become clear when you read some of the internet comment forums frequented by tech employees with experience in the startup arena. See, for example, the remarks at HackerNews in response to the WSJ report. As one commenter points out, "getting a chance of a huge upside is one of the reasons employees take lower salaries and work longer hours at startups in the first place. A company that abused its bargaining position like this should not expect to be able to hire good employees in the future."
Zynga's move underscores the risks that many employees joining startup companies may not consider or fully understand, whether they receive stock options, restricted stock, or outright grants of pre-IPO shares. The risk of company failure at a startup is obvious enough. Less well understood, however, may be the problems of share dilution and the demands of cash investors (preferred shareholders) who want most of the sale proceeds in an acquisition. A recent informal employee survey that we found at another blog indicates some of these issues in pre-IPO companies, and shows that employees often don't know enough about them.
In the Pre-IPO section of myStockOptions.com, articles and FAQs cover some of the risks with suggestions on how to handle them. The steps employees can take with their equity grants depend on their leverage and what the company is willing to negotiate. Whatever the case, they should set foot in the pre-IPO employment world with a realistic understanding of the risks as well as the potential upside.
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