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Joining a young startup that goes on to become big is the stereotypical Silicon Valley 'dream.' And for employees lucky enough to have joined companies like Google, YouTube, Facebook and Groupon early on, dreams do come true.

Thank the Silicon Valley-originated practice of granting equity to employees for that. To attract the best and brightest, most technology startups have little choice but to give their employees an ownership stake in the companies they're helping build.

It's the Silicon Valley tradition that has become a standard, and for the employees who join startups that go on to do great things, equity can be the basis for fortunes large and small.

While the number of stock option millionaires is nowhere near as great as it was during the first .com boom, thanks to secondary markets and an IPO market that's heating up, there are more than a few of them being minted today.

Some of those stock option millionaires work for social gaming firm Zynga, which is one of the fastest-growing companies in history. It's planning to go public before the end of the year, and with its billion dollar top line revenue, the company is expected to be valued at somewhere approaching $20bn by the public markets.

But according to the Wall Street Journal and its sources, some of Zynga's soon-to-be-minted millionaires are being targeted by the company and its CEO, Mark Pincus:

Early last year, as Mr. Pincus began preparing to take Zynga public, he and several other executives decided the company had doled out too many stock rights to certain people in its early days, say people familiar with the matter. The executives chose an unusual solution: They began demanding that certain employees surrender some shares or be fired.

Part of the reported action stems from the fact that the employees being targeted are thought to be missing in action or underperforming by Zynga management. "Why should someone make potentially tens of millions of dollars if they're not creating that type of value for the company?" they're apparently asking.

Even if asking such a question and taking action to answer it satisfactorily may not technically be illegal, the news has created an uproar in the startup world, where equity is sacred.

Pincus, of course, is no stranger to controversy. He gained infamy in startup circles for the comments he made about Zynga's early history, which included, "I did every horrible thing in the book too, 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." Those comments came back to haunt him when observers called into question some of the 'scammy' offers Zynga and others were caught pushing to social gamers.

To Zynga's detractors, the report that Zynga is trying to strong arm employees into giving up their unvested stock options is just further evidence that the company is morally bankrupt.

Pincus, not surprisingly, sees things differently. In an email he sent to company employees, he neither confirms nor denies the claims published by the Wall Street Journal, but he does make his position clear:

Being a meritocracy is one of our core values and it's on our walls. We believe that every employee deserves the same opportunity to lead. Its not about where or when you enter zynga its how far you can grow. This is what our culture of leveling up is all about and its one of our coolest features.

Assuming the Wall Street Journal's report is mostly accurate, Pincus' 'meritocracy' reference seems somewhat misplaced. If Pincus believes that some of his early employees are no longer carrying their weight, he should simply give them the opportunity to improve or send them on their way regardless of how much unvested stock they hold. That's how things would work in a true meritocracy.

If, on the other hand, Zynga's top brass are targeting certain employees simply because they regret how much equity Pincus gave them knowing what that equity is worth today, it would clearly be money, not merit, driving Zynga's actions.

The irony in all this is that Zynga apparently wants to use the stock it's allegedly trying to claw back to attract and compensate new talent. $10m in unvested equity from a single early employee, for instance, might support option grants to dozens of new employees.

There's an obvious problem, however: if Zynga treats its early employees like mince meat, firing them if they don't give in to its demands, the company might have a much harder time recruiting the kind of talented, loyal new ones it would want to take their places. For obvious reasons.

This is not to say that Zynga won't be able to hire, or that unaffected employees will immediately flee. But Zynga shouldn't delude itself into believing that using the threat of termination to persuade early employees into giving up some of their unvested equity will serve the company well going forward.

For other companies, this latest Zynga 'scandal' is a strong reminder: trading equity for cash and/or services is far more expensive than it seems when you need cash and/or services. While some companies might be able to successfully 'renegotiate' these trades well after the fact, the better approach is not to make trades you're not 100% sure you can live with.

Patricio Robles

Published 11 November, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (3)

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Zylun

Top management in any company needs to realize that the perception of what they do is just as important as what they do. I don't think any company that is "morally bankrupt" will survive in the long run without a significant culture change.

over 4 years ago

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Fluto

Though significant, this change could be good for them and move them in the right direction and also ensure they can deliver their services even better than ever. I'll be watching Zynga with a great deal of interest.

over 4 years ago

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Typical

Lack of ethical conduct from Zynga? Wow, I am just shocked. Shocked I tell you.

over 4 years ago

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