Upgrading Skype and Silver Lake to Evil

By Felix Salmon
June 24, 2011
Joseph Galante published a story claiming that Skype investors in general, and Silver Lake in particular, were firing senior executives just before the company is sold to Microsoft, so that they don't get their full share of the proceeds from the sale.

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Last week, Bloomberg’s Joseph Galante published a story claiming that Skype investors in general, and Silver Lake in particular, were firing senior executives just before the company is sold to Microsoft, so that they don’t get their full share of the proceeds from the sale. This seemed pretty evil to me, but it wasn’t long before anonymous Skype investors started showing up on various blogs (SAI, TechCrunch, GigaOm) pouring cold water on the allegations, saying that the firings were all the doing of Skype’s CEO, Tony Bates, and had nothing to do with Silver Lake at all.

The stories were very consistent with each other, and all of them seemed to be based on anonymous sources (except for GigaOm’s, which was based on the word of an unnamed “company spokesman”). Because of this, it’s impossible to tell whether there are multiple investors all credibly saying the same thing, or just one investor doing the rounds of the blogs and trying to push back against Galante’s story.

But now Galante is back, with the story of Yee Lee, who left Skype after a significant chunk of his options had already vested — and still didn’t get any money from them.

After a month of back-and-forth with Skype’s human resources department, Lee learned that even his “vested” options were worthless. It turns out the investor group, led by private equity firm Silver Lake Partners that bought Skype from EBay (EBAY) in 2009, had secured a so-called repurchase right that gave them authority to buy back the shares at the grant price. “I’ve never heard of a company taking away vested options,” says compensation expert and Bloomberg News consultant Graef Crystal. “It invalidates the meaning of the word ‘vested.’ “

There are many more details in this blog post from Lee, which includes the letter he was sent by Ricardo Velez, Skype’s associate general counsel. I’m reasonably good at hacking my way through legalese, but this is downright incomprehensible — and clearly designed to be so.

bollocks.tiff

Lee provides a copy of his 11-page stock option grant agreement, which is equally opaque. Here’s the relevant bit, buried halfway down page 3, at the end of a long clause which seems mainly interested in what happens when there’s an IPO.

If, in connection with the termination of a Participant’s Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.

That one sentence, which is borderline unreadable and which makes no sense outside a deep understanding of the Managing Partnership agreement, an entirely separate document, was enough to render Lee’s vested options worthless.

Why on earth would Skype behave in such an evil way? Back to Galante:

Silver Lake declined to comment. When asked about Lee’s situation, Skype spokesman Brian O’Shaughnessy said, “You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave, therefore he doesn’t get that benefit.”

O’Shaughnessy seems to have been the source for the GigaOm blog post, and with this on-the-record quote he’s rendered himself utterly unreliable. Silicon Valley companies attract employees by giving them options which vest over time. Skype — uniquely, I think, although anybody else owned by Silver Lake should be taking a long cold look at their option grants right now — decided to more or less invalidate that vesting schedule with a highly opaque clause which was clearly designed to be incomprehensible to anybody without extremely good lawyers. The statement that the clause was designed “to retain the best and the brightest people” is clearly a lie, since Skype’s best and brightest had no idea it even existed, and Skype made no attempt to call their attention to it.

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. Here’s Lee again:

Working with Silver Lake was my first opportunity to witness up-close-and-personal how a PE firm does its business of restructuring a company that they’ve just taken over. And it was breath-taking. The firm inserted itself into every level of the company. At one point in my tenure at Skype, Silver Lake had representatives or consultants on the Board, in C-level executive roles, in technical leadership and operating roles, and all the way on thru the organization to the person actually running our software deployment schedule… So Silver Lake put its fingers really deeply into Skype’s pie and they started rearranging things.

You can agree or disagree with the practice of re-organization, but I personally had never been part of a restructuring that ran so deep in a company. During the year I was at Skype, the company:

lost a CEO

hired and fired a CTO

hired and fired a CFO

gained a CEO, CMO, CIO, and CDO

created an entirely new product development org structure

eliminated every Project Manager role

fired, re-interviewed, and re-hired Product Managers

created a two new business units

combined two business units into one

dissolved one business unit

opened a new office and hired several hundred people

the list goes on…

All of this makes any Skype investor saying “it’s not us, it’s the CEO” sound naive at best and, more likely, downright disingenuous. Unless and until such an investor wants to go on the record defending Silver Lake here, I’m going to believe Lee, and assume that it’s Silver Lake who’s largely to blame for the utter breakdown of employer-employee relations at Skype. 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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Comments
24 comments so far

“You’ve got to be in it to win it. ”

I think that quote says it all. I used to think this was meant to criticize people who wished they’d won the big lotto prize while jealously looking on, though never actually buying lotto tickets.

Now, competitive, greed-driven people use it to morally justify their actions. Nice world we live in.

Posted by GRRR | Report as abusive

Hopefully buying Skype will help MS get their head back together? HAHAHAHAHAHAHAHHAHAHAHAHAHAHA!

Posted by Woltmann | Report as abusive

It’s not just the private equity firm, but Skype’s management that are also low-life scum. They (Zennstrom and Friis) had a hand in this, and are just as responsible as Silver Lake. Those are the same guys that were able to sell Skype originally to eBay genius Meg Whitman without giving them the rights to the underlying software. These boys are the tech world’s equivalent of Goldman Sachs – if you are on the other side of the table from them, be prepared to get fleeced.

Posted by KenG_CA | Report as abusive

The quoted paragraph seems straightforward to me. They have the right to repurchase the shares underlying the option at the exercise price. The last sentence says in plain English that this provision means you may not get any value from the shares underlying the options. Option agreement language doesn’t get much clearer.

Skype and Silverlake may be scum, but this is yet another reason why people should read stuff.

Posted by 3oosion | Report as abusive

If MS wasn’t somewhat complicit in raping Nanking, they should be screaming MAC right about now ..

Posted by Woltmann | Report as abusive

@3oosion: You must be a lawyer if you thought that language was clear. Well, if you are, then I suggest you take a refresher course in contracts because this “agreement” could be struck down in court as a contract of adhesion. The obfuscation contributes to the argument that the employer intended to include unreasonable terms that could not be fully comprehended by even a diligent employee. And anyway, this is regardless of whether or not the employee “should read” it.

It’s not a slam dunk lawsuit but Yee Lee ought to pursue it. It’s really his money, ethically for sure and perhaps legally too.

The world is a worse place for having firms like Silver Lake (and their legal counsel) in it. This is arrogant antagonizing behavior toward employees, it’s dishonorable and disgusting no matter how much their idiot flack tries to triple-talk us. I would never work with such greedy, treacherous, predatory people. I wouldn’t even eat at the same table, not even for a complimentary dinner at Luger’s.

Posted by BrianVan | Report as abusive

@3oosion: Read again. That’s not the agreement, it’s a letter written after the fact.

Posted by eds44 | Report as abusive

not sure that to any one but a lawyer that this isn’t greek. and i am sure thats intentional

Posted by willid3 | Report as abusive

This is not the first time stuff like this has happend. Many people (including myself) who worked their fingers raw for over a year in the run up to the ebay aquisition on the promise of options, were only granted them after the deal was done. Many people of the best people at Skype left after that

Posted by anon123456 | Report as abusive

The only news here is that this is news to folks like Felix.

Raw deals for people who worked like the devil and weren’t around for a change of control is more the rule than the exception.

Posted by JPDoc | Report as abusive

…contract done in bad faith? they should try to sue, and perhaps in class-action.

Posted by chaqke | Report as abusive

Wow, how can anybody defend this kind of behavior?

So the agreement had a vesting schedule, but the contract slipped in a way to basically unvest vested options for terminated employees? And the investors defend this by saying “you have to be in it to win it?” Wow.

This is fraud, plain and simple. A judge will, in a second, rule that the cultural expectation in Silicon Valley is that vested options can’t be unvested, and throw such an opaque clause out of the contract. And if there is records of Silver Lake and Skype misrepresenting the agreement, there could be criminal charges as well. I certainly hope such behavior faces criminal action, or at least ends with a terrible reputational and legal cost for Silver Lake. I know that I at least will never do business these scumbags.

Posted by mwwaters | Report as abusive

This is one of those incidents which is going to make everybody think twice when a new startup drops into town and starts offering stock options as a way to land some good talent.

Sad to say, but Skype just killed the romance of working for a startup and becoming wealthy when the company goes public or gets bought.

A lot of people are going to be saying, “Thanks, but no thanks.”

Posted by D.Murphy | Report as abusive

Was just reading today about the possible acquisition of GoDaddy by Silver Lake, and as a long time customer of GoDaddy, this story makes me very nervous about its future. I can only imagine how the GoDaddy employees are going to feel about being acquired by such greed hogs.

Posted by JohnHumphrey | Report as abusive

Poor corporate governance or poor equity establishments…alliances, packs, agreements, a hedge, a guarantee. I

Posted by jspada257 | Report as abusive

Regarding the GoDaddy acquisition, I believe Bob Parsons will still be in the CEO role. He’s seems to be a stand-up guy who takes care of his folks. Hence, I strongly doubt he would ever per his employees to get screwed.

It would be interesting though if Silver Lake tries to boot him out. But again Parsons doesn’t seem like a guy who lets other knock him around.

Also, in the Skype situation, the service has improved since they were acquired from eBay. Not the other way around. So it sucked for employees, but it was decent for customers.

Posted by JasonMercado | Report as abusive

Outrageous behaviour. The CEO and CFO have been with the company for less than 12 months and under they’re watch we’ve witnessed 3 serious outages since the end of Dec last year. Why do they deserve such large payouts when they’ve mismanaged the company so badly and achieved nothing but downtime. It’s no wonder Skype breaks down so much if this is how they treat their teams and it’s no wonder so many of them want to leave.

One thing is for sure, I don’t see Skype being able to compete with Google in the future as no one is going to want to work for these people. Even under Microsoft ownership, these 2 ungrateful thieves will still be in charge.

Posted by petesmyth | Report as abusive

Skype should be a screaming platform for MS but anybody who owns MS didn’t bargain getting Silver Lake scum all over them when they bought MS. I sure don’t want ANYTHING to do with Silver Lake or KKR for that matter. It’s all about perception-space. Now, I wish MS would MAC out of the Skype deal, pick up Skype’s throw-aways and startup something less sleeze-ridden managerially. MS has dropped 15.8% since 12/10 and is heading lower thanks to getting involved w Silver Lake.

Posted by Woltmann | Report as abusive

I’m amazed that not a single employee read the option agreement thoroughly, or sent it off to a lawyer. The language is not *that* opaque, and I would get alarmed at any buyback provision outside a right-to-first-refusal even if I didn’t understand the provision exactly.

Or maybe the employees knew what they were signing, and trusted management not to exercise the buyback clause? Or the ones that read it didn’t take a job at Skype?

Then again, I find it astounding that companies can hire people using option packages w/o telling the people how many total shares there are in the company. This happens all the time (I have no idea if it happened at Skype), so I guess I shouldn’t be surprised at the Skype mess.

Posted by AngryInCali | Report as abusive

Just as interesting to me as the evil of what appears to be the deception is the stupidity of some very smart people in thinking a) this wouldn’t hurt their recruiting and b) that a bunch of employees who would rather be fired than quit is a good thing. More of my thoughts on the topic here http://wp.me/p1uNWr-36

– Max

Posted by mschireson | Report as abusive

@AngryInCali

It should not be uncommon for private companies to have buyback clauses. After all, they don’t want their shares traded widely. However, it is clear that the strike price language isn’t in the Option Agreement but rather in the Partnership Agreement. Knowing how evil HR can be, there is one copy of this document in the bottom of a locked filing cabinet that nobody has ever read. When shown an Option Agreement to sign, I bet HR laughed anyone off who asked to see the partnership agreement and told them they were being paranoid and it was all full of legal mumbo jumbo.

Posted by TurtleBay | Report as abusive

I’m not a lawyer, but I understood pretty easily that if you resign, you are hosed on your options. It quite clearly says that you will not own your vested options directly, but rather indirectly thru a limited partnership and the partnership has an option to purchase them at a price that is determined according to the partnership agreement. And then the last sentence clearly says, consequently you will receive no value in respect of any of the shares underlying the options. How can you miss the gist of that?

The only thing I figure these people thought was, “gee, it can’t mean that, that would be a such shitty way to treat your employees that everyone would be talking about it if it meant that.”

Posted by TimC | Report as abusive

@BrianVan, contract of adhesion has little meaning these days. See credit card agreements these days. Judges have upheld fine print provisions which contradict heavily advertised headline provisions. The adhesion claim isn’t helped now that we hear the provisions are standard in private equity.

@TurtleBay, above it says he had to become a limited partner in the partnership, which would seem to require him signing the partnership agreement.

Posted by 3oosion | Report as abusive

BTW, if he didn’t have access to the partnership agreement, then he would have a much better case. It would be helpful to have facts

Posted by 3oosion | Report as abusive
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