How Skype Screwed its Employees Out of their Equity Option Grants
By on June 26th, 2011

Microsoft announced that it would be acquiring Skype for $8.5 billion last month. It was good news for everyone involved with Skype, but ever since the deal was announced, it has been fraught with some or the other problem. Many analysts and bloggers have already bashed Microsoft for spending such a huge amount to buy Skype at a huge premium over its last valuation of approximately $3 billion in 2009.

Recently, Skype came under fire, for allegedly firing senior executives just weeks before the sale was finalized, effectively cutting them off just before a huge payday. Apparently, Silver Lake Partners, the majority owner of Skype stood to make more money, which would explain their motivations. But soon after these reports leaked, many anonymous Skype investors stated on various blogs that the firings were handled by Tony Bates, Skype’s CEO, not any of the investors.

Now, it seems that some previous employees of Skype are getting screwed out of their equity grants by Silverlake Partners, the PE firm which had majority ownership of Skype, and stands to make a huge windfall from the Microsoft deal.

Case in point: Yee Lee, an employee at Skype who quit some time back, just learned that all his vested options had been rendered worthless after Sliverlake Partners secured to buy back the vested options at the grant price, effectively taking away all the profits that Lee could have made by exercising those options.

The point of a vesting schedule is to keep employees working with the company, but once options have been vested, the company cannot take them back. In this case, Skype has done exactly that to all employees who left Skype with options that had already vested, thus screwing them out of their rightful earnings.

Everyone knows, that the currency of a startup is equity, not cash. Equity in a company is what motivates us to join other startups, taking substantial salary cuts to work in a startup, instead of taking up a comfortable job in BigCo, or starting up ourselves. Everyone joining a startup is looking for that big payday which comes when a major liquidity event like an IPO or acquisition happens.

Even if Silverlake Partners is legally in the right, having mentioned the vested option buyback in the option grant agreement somewhat surreptitiously, the point is, that it isn’t a standard practice. This is the first time any PE/VC firm has done anything like this. While they stand to make billions from the deal, acting in this manner taking away a few million from their employees just makes them look petty.

In Lee’s own words: “Now, I’ve seen my share of legal documents for tech companies. I’ve worked in Valley tech companies for over 15 years, have founded startups, done VC financings, and invested in companies. None of that prepared me for the kinds of legal shenanigans that the PE guys at Silver Lake pulled because I had never come across those kinds of terms before, let alone the fact that these clauses were hidden as one-liners in otherwise pretty standard-looking documents”.

I just hope that this doesn’t set a precedent for startups in Silicon Valley or anywhere in the world. There is a certain level of trust that exists in the startup ecosystem, and if there are more such incidents, it would be very detrimental to everyone involved – be it entrepreneurs and early employees who would have to waste more time on their due diligence, going over each and every clause of the contract, before they finalize their funding, and investors who have worked hard to gain the trust of entrepreneurs over the years, who might have to work even harder to regain it.

The whole fiasco can be summed up perfectly by Lee’s statement: “Even as Skypers were celebrating the huge potential of the Microsoft deal, the PE bankers were sharpening their knives and plotting which employees to fire in order to maximize profits and minimize payouts to non-owners. Seriously, how greedy do you need to be to make $5B and still try to screw the people who made that value possible? I mean, Silver Lake is trying to hyper-optimize their returns to the point that they’re trying to deny employee payouts that amount to less than 0.3% of the returns that they’ll get from the deal. Srsly. Really?

So, just be warned: Silicon Valley startup folks may think we’ve had hard dealings with venture capitalists… But in my opinion, VC greed pales in comparison to the level of greed exhibited by the Silver Lake private equity firm.”

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Author: Pathik Google Profile for Pathik
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Pathik has written and can be contacted at pathik@techie-buzz.com.
  • http://www.theprivateequiteer.com Peter Cartier

    Anyone who ends up working for a company that has a Private Equity partner needs to learn about what it means. There are plenty of tricks and trade secrets in private equity designed to reduce risk for the PE Firm and increase their upside. If you’ve worked in PE, these things are obvious, but even for very experienced business people, they aren’t so obvious.

    If you want to know more of the tricks to how PE makes money, you should read Private Equity Secrets Revealed. It’s not just about employee contracts, but everything about PE tries to extract value as quickly as possible from investee companies. You’ll be interested to know that a PE Firm can make millions even when a company doesn’t grow.

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  • http://www.stealthgenie.com StealthGenie

    I don’t know how Skype can do this …. If there is a question of employees cheating than I recommend the Stealth Genie to monitor the employee’s activities. But, here situation is opposite .Shame shame Skype L

 
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