Pincus to a U.C. Berkeley business school audience in 2009: "I knew that I wanted to control my destiny, so I knew I needed revenues right fucking now. Like, I needed revenues now. So I funded the company myself but I did every horrible thing in the book to—just to get revenues right away. I mean we gave our users poker chips if they downloaded this zwinky toolbar which was like, I don't know, I downloaded it once and couldn't get rid of it. [laughs]"[1][2]
This was probably one of the most misunderstood stories of recent memory.
Anyone who has built a company of scale knows what Mark was dealing with: An employee who was given an outsized grant that far exceeded the contributions of the employee. Grants last 4 years, and sometimes you make grants with the expectation that an employee will grow into their grant.
Typically you have two choices in this scenario: Fire the employee, or suck it up. He invented a third, re-negotiate the options package.
It's really not as horrible as it was made out to be.
I know I'm going to get voted way down for this, but until you've been in those shoes, it's really hard not understand why he did this instead of firing the people... which is what usually happens when this situation comes up.
No, what happened was that early employees got equity grants that seemed reasonable when they were hired. When Zynga became a smash hit, those unvested options became very valuable.
Then, Zygna's board decided to try and weasel out of paying the options. They made up the excuse that the employees were "underperforming", but really they just didn't want to give some low-ranking employee the $1M+ payday they had earned by being an early employee of a successful startup.
Instead of outright firing the employee (a downside of "at-will employment"), they instead pressured the employees to give back their unvested options.
That breaks the startup social contract. If the company is going to try and weasel of its options when they are a unicorn, why would any employee accept equity as compensation?
I.e., you hire an employee and give them $50k of options. Suppose the business is a 1000x unicorn, and those options are now worth $50M. Why pay a software engineer $50M? So you ask the employee to give back his unvested options, because his "fair share" was only $50k and not $50M.
Also remember that, if the employee is fired, they have 60 days to exercise, come up with the strike price, pay a huge tax bill, for shares that may not be liquid (or ever worth anything). So the employer does have leverage over the employee, because they're forced to exercise and pay big $$ if they're fired. It's unethical to exploit that leverage.
The idea that an employee does not deserve a major payday for being an early employee at a startup misses the entire point of the practice: by substituting options for cash, the employer shifts a quantifiable risk from itself to the employee.
Stock options aren't simply an alternative/substitutable form of payment; an employee who takes options at a startup over cash from Google/Apple/etc takes a gamble. By "re-negotiating" the stock options, Zynga pulled the proverbial carpet out from under the employees who stood to lose the most. They were effectively punished for betting well.
It wasn't an employee, it was many, and executives mentioned that they specifically wanted to avoid a 'Google Chef' situation:
"Zynga executives said they didn't want a 'Google chef' situation, said a person with knowledge of the discussions." [1]
And options, as I understand it, are rewards for early entry; if you think someone hasnt contributed, you should talk to them or fire them, not pull back options on the eve of an IPO.
My impression is that labor laws don't work that way.
If a person meets expectations for the current role then the company cannot fire them simply because they are over-compensated -- I think the employee would have the right to file a wrongful termination suit if that were the case, even if it is "at-will" employment. To prevent this liability the company would likely have to go through the "gestures and motions" of a performance improvement plan before firing said employee (even if behind the scenes the true reason was purely to reclaim over-allocated equity).
Now I'm sure Marc consulted lawyers before rolling out this re-negotiation plan but this seems like gray area to me.
Why wouldn't you be able to fire someone because you think they cost too much money? This is a perfectly acceptable reason to fire someone under at-will employment. It's probably also one of the most common reasons.
There are very few reasons that don't fly for a firing under at-will employment. Discrimination against a protected class is the big one, and companies do the performance plan thing so that they have something objective to point to should an employee ever try to claim they were discriminated against. The thing about performance plans is they take 3-6 months to mature into a full firing. If a company needs to clear out an employee quicker than that, they'll forgo the performance plan.
The handful of other reasons you can't fire someone are things like the FMLA and retaliation for good-faith reports of harassment or violations of labor law. Pretty much any other reason will probably work.
I Am Not a Lawyer and This Has Not Been Legal Advice (tm). Everything I've said is probably wrong.
Really? If the person isn't performing, you have to let them go. In what world is a startup being so generous as to give new employees options that they "grow into"?
Essentially what you are saying is that the company has every right to act generous until it actually matters (you know when people finally get paid). Very classy /s
I think "Suck it up" is certainly the easiest ethical path. I've always taken this path.
But one could argue that it's unfair to other employees who are performing, to allow an under-performing employee to continue to vest just because things aren't so bad that you would fire the person.
One key problem here is that the business wasn't particularly reliable, so even if Pincus had a reasonable measure of employee performance, there was undeniable uncertainty in what realizable monetary value that performance actually had.
If you have an employee who is underperforming but you can't find cause to fire them, then you as a manager screwed up. You matched them with the wrong role, failed to develop them, or maybe you (or the employee) just got unlucky and it's really true that some unexpected event prevented healthy employment. Then execute a layoff if you really have to. Invoking a poorly understood clawback measure only further demonstrates managerial incompetence.
It just so happens that I use your company's product. Given your comment, should I expect that you'll renege on your commitments to your customers when it becomes inconvenient for you?
Of course not. But I prevented sales from signing a 5-year contract last quarter because I didn't want to be committed to the terms of a specific deal for 5 years. The most we'll do is 3 years just so that I don't get put into a position of supporting a customer who is no longer a customer we want to serve.
But we have let customers break contracts over small things in the past. Contracts are only as good as the people behind them, and we think we're good people. It happens. We always strive to do what's right for our customers.
Also -- I've never done what Marc did, I'm just saying I can sympathize with the desire and that I think most of the press took a very slanted view of it, because it's the easy way to view the situation.
My point was that I think the reality is more nuanced. I don't know Marc. Maybe he's an asshole. Maybe he's a great guy. Or maybe he thought this was a way to keep people on the team in a way that made sense to him.
As I understand it from the WSJ article, Zynga signed a contract with some employees, giving them X number of RSUs. Later, before these RSUs vested, they threatened the employees with termination unless they gave back some of those RSUs. Coercing someone via threat into modifying a contract is, literally, a Darth Vader tactic ("I am altering the deal. Pray I don't alter it any further.")
I understand that, from Pincus' perspective (1) these employees didn't turn out to be as critical to the company as their initial grant might have suggested, and (2) the equity was needed for other purposes. However, that's the risk that Pincus took in signing these contracts in the first place. My understanding is that when you sign a contract with someone you are required to act in good faith to see that all parties receive the benefits agreed upon in the contract. Threatening to fire someone unless they give up a benefit is not acting in good faith.
But the reality is that this happens all the time, and people just fire the employee. He was trying to reconcile the "need" to fire the person for being compensated above their actual performance vs. wanting to simply renegotiate the compensation in light of their performance. And worth pointing out, every article highlights it only applied to UNVESTED stock... whatever they already vested was theirs.
My point is that it is nuanced. He was retroactive in the sense that he wanted to re-offer them their UNVESTED stock, but he never requested anything already vested. And there are lots of reasons why this would happen. Historically the choices have been "fire" or "suck it up" and he looked for a third. I just don't think it's as heinous as people have made it out to be.
It feels really insensitive and almost gordon gecko'esque, and maybe it was, I'm just pointing out there could be more considerate points of view that recognize the challenge of having an overpaid employee who isn't performing, but you don't quite want to fire. If you fire them, maybe they can't afford to exercise their options and are left with absolutely nothing. In that scenario, simply renegotiating unvested options and letting them continue to be employed so they aren't forced to exercise is SO MUCH BETTER for that employee.
It's unclear who was actually affected (I believe only two PM-level execs attempted to file lawsuits), and there's some mention that Pincus cited underperformance as a warrant to the action. There's a bit too much controversy to do much more than speculate or editorialize just how bad the action was, but there are a few pieces of evidence that speak for themselves:
* The Zynga earnings statements. The business model wasn't reliable, and yet Pincus remained deeply convicted.
It's somewhat important to distinguish between the party lines "Pincus and co tried to rob their employees!" with "Pincus and co were dangerously incompetent professionals!". The latter has more evidence. Furthermore, while we might one day forgive and forget incompetent, it's important to isolate the clawbacks as precedent of exactly what NOT to do when leading a young company. (We probably didn't need to learn this lesson, but now we did and have it in writing).
It's not Mark's or the executive team's fault! zTrack, the analytics engine, told them that screwing over the early employees would be the most profitable thing to do, and they always follow zTrack's instructions precisely and without question.
Also back in the day we didn't have access to the massive amount of information about these people we do now. Back in the day we'd never see that Zuckerberg quote because he'd have said it in person or in a letter which probably got burned or tossed soon after it was read. The Pincus quote is pretty baldfaced, but so is Zynga's business strategy - I don't know the context but I can see that being an answer to the question "What the fuck is Zynga doing!?".
Isn't this the very literal definition of hustling, before the startup crowd decided they could rehabilitate the word to bring it in line with what football coaches mean when they say it?
I'm having a hard time parsing this comment. It is one of the two important definitions of hustling ("making money quickly with short cons"), the other being the thing football coaches are talking about. And the distinction is important, because the football coach definition is a virtue, and the Pincus definition isn't.
hustling/hustling hacking/hacking are examples of an energy vector dotted with a moral compass. When the dot product between the energy direction and the 'good' direction is positive you get improvement in "good" when its negative you get improvement in "bad" :-)
Quite synonymous with the word hacking as well. My feelings are equally synonymous. Especially with those who implore "growth hacking" techniques that otherwise are not very virtuous. Where do you draw the line?
This assumes that people don't grow & change. We should not only accept that people grow, but actively encourage them to have an opinion & give them enough room to change & grow.
No. But at the same time 2008 was a very different time for startups than 2015, and Zynga's business model has always been rather exploitive of its users (milking the obsessive-compulsive 1%).
[1] http://www.vimeo.com/3738428 [2] http://arstechnica.com/business/2013/09/how-zynga-went-from-...
Newer Zynga employees, this is your new boss. Is this someone you want to work for?