Report: Skype and investor Silver Lake screwed employees out of stock options

Skype and Silver Lake, a large investor, recently fired a bunch of senior executives, allegedly to prevent their stock gaining real value in a forthcoming acquisition by Microsoft. Digging into the contracts' legalese reveals an obfuscated clause that decodes to something like "we can buy your stock back at the grant price, even if it has vested, prior to any sale of the company." Felix Salmon at Wired:
I no longer think that what Skype did here is pretty evil: I now think it's downright evil, and destroys the balance of trust on which Silicon Valley has been built. What's more, I simply don't believe that Skype did all of this itself, without detailed input from Silver Lake. ... I don't know where they got these techniques from, but they're very alien to Silicon Valley and indeed the rest of the business world. And they do no good at all for the reputation of private equity companies more generally.

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  1. A large company arranging things contractually so as to cheat employees and profit from it? Say it isn’t so!

  2. Whilst I don’t doubt that what Skype and Silver Lake did was profit-maximising at the expense of ethics (the short word for this is “capitalism”), the real story here is the revelation of why Silicon Valley has been such a staunch supporter of the same capitalism – because the “balance of trust” (whatever the hell that means) has exempted the Valley from what capitalism does routinely to every worker other than the bankers. Why workers in the Valley expected “fair play” when most would surely hold it the executives’ fiduciary duty that Walmart employees get the minimum wage they “deserve” was otherwise a bit of a mystery.

  3. Salmon thinks this behavior is an aberration for private equity firms? Really??? This is part of their standard arsenal of tricks to screw common stockholders. It’s just not well known that private investors do this sort of thing all the time. Carve-outs for senior execs and 10-to-1 reverse splits before liquidity events, separation agreements that trade a little salary for all legal rights, and on and on. Come on, Felix Salmon, don’t tell us you are ignorant of the private equity playbook!

  4. Stock options are such a lame perk anyway. I want to be paid what I’m worth now, I don’t want a single cent of my income to depend on the utter sham that is the world stock markets.

  5. destroys the balance of trust on which Silicon Valley has been built.

    Naiveté, thy name is “Felix Salmon at Wired.”

  6. “Son, do you know what ‘Involuntary Servitude’ means? … How about ‘Unconscionable Contract’?”

    Silver Lake will end up having their assets frozen and liquidated to compensate those execs. And the execs will still get screwed.

  7. So, connecting the dots here, is that why, as a paid Skype customer, the quality of the service suddenly sank? The menus changed, for the worse, updates became problematic (for my mac) and when I surfed over to understand what was the issue, there were lots of people unhappy. I couldn’t understand why anyone was messing up a winning combination.

  8. I can’t see that sort of clause standing up in court. Skype wrote the contract, any ambiguity is decided against them.

    In this case the contract is barely comprehensible. There are two possible explanations, one is that it was badly drafted, the other is that it was intentionally drafted that way to conceal the purpose. That is called fraud and is a criminal matter.

    This sort of thing does seem to follow Andressen round. Like the first release of Mosaic that made no mention whatsoever of the 60% of code contributed by CERN.

    1. I believe you have the wrong Andreessen in mind. Marc Andreessen released Mosaic, Andreessen Horowitz is involved in Skype.

  9. One of the most interesting things I studied was my fellow students in grad level finance, these people may be nice in social settings but the cult of game theory taken to its natural conclusion leads to this. The world of finance has become if possible even more of a game of prisoners dilemma where everyone is racing to turn evidence on their friends, or rather steal before someone can steal from them.
    I wonder if this is what the fall of an empire feels like? Everyone stealing as much figurative copper wire as possible forgetting that their home will be dark and cold as a result.

    1. the end of an era is not quite the same as the fall of an empire. Screwing people with enforceable contracts is as old as… well… contracts.

    2. I wonder if this is what the fall of an empire feels like? Everyone stealing as much figurative copper wire as possible forgetting that their home will be dark and cold as a result.

      Best comment.

  10. I’m kind of in love with the idea of an obfuscated contract. Why not take it to its logical extreme?

    PARTNERSHIP AGREEMENT

    Section 1.

    WHEREAS @P=split//,”.URRUU\c8R”;@d=split//,”\nrekcah xinU / lreP rehtona tsuJ”;sub p{
    @p{“r$p”,”u$p”}=(P,P);pipe”r$p”,”u$p”;++$p;($q*=2)+=$f=!fork;map{$P=$P[$f^ord
    ($p{$_})&6];$p{$_}=/ ^$P/ix?$P:close$_}keys%p}p;p;p;p;p;map{$p{$_}=~/^[P.]/&&
    close$_}%p;wait until$?;map{/^r/&&< $_>}%p;$_=$d[$q];sleep rand(2)if/\S/;print

  11. The internet was built on co-operative ethics. Skype is not, by such standards, an ethical business. I don’t know why anyone is surprised that Skype turns out to be unethical in other ways.

    Croak!

    Skype is your tax and education dollars at work, and somehow I don’t recall that as a line item in any of those budgets. CERN forbids the use of Skype entirely, IT policy statement (PDF). Fermilab restrictions on Skype usage, web page. Brookhaven restrictions on Skype, web page.

  12. wow! first they were able to screw over EBAY by not actually selling them the important part of the code.
    now they screw the employees.
    any body that deals with them should look @ their contract.
    hell, people that use skype should examine their eula. (i don’t use it.)

  13. “destroys the balance of trust on which Silicon Valley has been built.” That’s so cute! Adorably naive!

  14. I was going to say that after this stunt Skype won’t be able to attract top talent anymore, but hey, they were eBay and now are becoming Microsoft, so it would have been the case anyway.

    I do hope the screwed execs sue and get a huge chunk of cash, shouldn’t be too hard; it would be nice if proceedings could also block the MS acquisition as well, so that Silver Lake would also get screwed, but that’s unlikely.

  15. Dear executives,
    Sux to get screwed by people higher-up, doesn’t it?
    Learn this lesson well.
    Best,
    Karma

  16. Caveat emptor.

    I just don’t understand how people can sign contracts detailing large salaries and potential multimillion dollar stock vesting options without first consulting a lawyer.

  17. This is not the first time this has happend and won’t be the last. I have reliable 2nd hand information that aquisitions by Apple, Dell & Oracle have resulted will similar results.

  18. And I am certain each and every one of those executives, if they bothered to ask about that clause, were told, “Oh, that’s standard, and anyway, it’s never enforced.”

  19. Thank god we keep taxes on companies insanely low so they can do their part for the nation by scemes like this. The rest of us suckers would get audited.

  20. This is nothing unusual, in fact this is the case whenever you get “stock options”. Stock options are worthless if you leave the company regardless of vesting. Only real stock has any value.

    I got screwed the same way when ScanSafe sold to Cisco (http://www.theregister.co.uk/2009/10/27/cisco_borgs_scansafe/). I left shortly before the sale, although I actually took care to read through the legalese and was fully aware of the implications.

  21. “Trust” is seldom part of the equation when the equity machine starts to move. Nor is ethics. That said, its hard to have much sympathy for people whose compensation was probably pretty high to begin with. Not that I know what they made, but its a pretty safe bet that it was exponentially more than the average staffer.

    This just seems like the biggest, meanest pigs pushing the other big pigs away from the trough. Cry me a river.

  22. Anon said:

    Caveat emptor.

    I just don’t understand how people can sign contracts detailing large salaries and potential multimillion dollar stock vesting options without first consulting a lawyer.

    Why do you think that 1) you get to alter the contract in any way and b) it makes any difference?

    Spoken from the perspective of someone who was employee <10 in two startups and had a very good lawyer look at my contract both times. Didn't matter. Employees 1-5 got rich, everyone else is still on the salary treadmill. Their lawyers are not necessarily better than yours, but they probably are, and they get paid no matter what. And if you didn't hit the option jackpot already (whether by winning before, or by being born rich), you can't afford to fight that battle.

  23. My, albeit limited, understanding of private equity companies or venture capitalist or whatever term you want to use is that they will suck whatever business they’re involved with for all the money they can possibly get without any moral or ethical compunction and very limited legal protection. I don’t understand why this is particularly surprising in Skype’s case. What is more shocking is that we (US Citizens => U.S. Government) allow such behaviour.

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