Thursday, July 14, 2011

"Top talent" not reading their own comp agreements

The controversial stock option arrangements at Skype have been receiving a great deal of attention in connection with the company's sale to Microsoft.

Detailed pieces have been written at TechCrunch, Bloomberg, CNN and Reuters.

The central twist of the Skype stock option arrangement is simple.  The company had the right to repurchase VESTED stock options from departing employees at the same price that the employees paid.  This means that departing employees, even if in the money on vested stock options, could walk away with nothing.

These provisions are unusual for most groups of employees.  There were other elements around the acquisition that were controversial, including several involuntary terminations.  The stock option treatment has been called everything from evil to likely fraudulent.  Whether one believes that these kinds of provisions are fair, there is little doubt that most prospective employees would look much less favorably at joining a company where such an arrangement exists.  It could be made up with higher salaries, but there should be a market penalty.

But, what is most interesting to me in the conversation is that most of the commentary acknowledges that the Skype arrangement was disclosed ahead of time.  The problem was that apparently the "top talent" at Skype didn't carefully read the legalese or consult a lawyer.  That's unfortunate.

"Employees had no idea what they were signing," according to TechCrunch.  According to Bloomberg, a product management employee at Skype whose blog entry triggered much of the attention "never bothered to read" a critical document relating to the stock option arrangement.

This is a remarkably clumsy habit that still seems to affect tech veterans in Silicon Valley.  How can these smart, accomplished business people simply ignore the specific elements of their own compensation arrangements?  How can they be counted on to serve their employers' interests in building the next great category winner if they aren't diligent enough to even protect their own interests?  

Sure enough, that product management employee at least is now singing a simple tune.  In his blog he advises, "LAWYER UP  it'll be worth your while to get an attorney to carefully review all employment documents so that you know what you're really getting into."


Isaac H. Winer, Esq. said...

Excellent blog post, Lonnie. As you hint in your post, one interesting question in the Skype case is whether there was any fraud involved in the offering of the incentive stock compensation. One would need to ascertain whether there were any extrinsic statements made prior to the execution of the pertinent agreements -- even oral comments -- as may constitute fraud in the inducement. I believe that extrinsic evidence is admissible where fraud is alleged even if the subject agreement is integrated (contains an integration clause). So there could be claims for actual fraud or potentially even negligent representation -- the latter based on a variety of factors such as whether Skype reasonably should have known that the employees would have understood the equity to be fully vested without any strings attached. Not having checked, I suspect that employees who have already been "tagged" by these self-serving repurchase terms have by now finally "lawyered-up" and that their lawyers are probably asserting such claims for actual and negligent misrepresentation. In a Valley where the more common stock incentives are not mined with "gotcha" terms, a jury of the employees' peers will probably have no problem finding against Skype / Microsoft. So I predict MSFT will settle these claims. The employees should have read the fine print, but society -- particularly Silicon Valley society -- will not let Skype / MSFT get away with it, at least if a good litigator has anything to say about it.

Isaac H. Winer, Esq.

Lonnie Goldman said...

Thanks Isaac for your thoughtful comments.

One of the many interesting points you raise is that there is indeed a notion of "standard" option provisions. It's a little ironic given that the typical arrangement involves several documents at thousands of words each, but that's probably another blog post!