Opinion

Felix Salmon

Why Silver Lake isn’t harmed by being evil

By Felix Salmon
June 27, 2011

How much harm is being done to Silver Lake by the relentless bad press about the way it’s treating its Skype employees? TED reckons that there will be ” real long-term effects on its viability as an investor in Silicon Valley” — but I’m not so sure. Look at what happened to Goldman Sachs after details of the Abacus deal came out — its reputation was damaged, but somehow its business, which is largely a function of its reputation, continued mostly unscathed.

Certainly it’s hard to see how the Skype deal — the biggest home run in Silver Lake’s history — is going to make current or potential LPs stay away from the firm. Like hedge-fund managers, private-equity honchos are in the business of maximizing AUM, and the Skype deal is fantastic from that perspective.

The main reputational problem facing Silver Lake, then, is that it might now find it harder to attract talent. Fred Wilson is good on the history of the kind of clauses that Silver Lake is so keen to include in its contracts:

I’ve seen option plans that have repurchase rights in them. They used to be more common twenty five years ago when I entered the venture capital business. The theory was that employees would have to stay until the exit if they wanted to keep their equity (be in it to win it). But in practice, once employees realized that was the deal, they were actually incented to leave because they didn’t trust that the equity they were vesting would ever produce a payday for them. So they went elsewhere and created value for an employer with a better deal.

But this is one area where the difference between venture capital and private equity becomes huge. Most venture-backed companies go to zero: equity in such companies is a lottery ticket at the best of times, and if you start adding in-it-to-win-it clauses to lottery tickets, no on is going to value that equity at anything above zero.

Private equity companies like Silver Lake, by contrast, buy established companies which already have real value. Their failure rate is much lower than that of venture capitalists, and as such equity in their companies is much less of a lottery ticket. On top of that, because the companies are already established and have real cashflows, they can pay substantial base salaries for top talent in a way that startups generally can’t.

Dan Primack says that the bad press will have immediate negative repercussions for Silver Lake’s portfolio companies:

Right now, Silver Lake is getting pounded for this situation – and it will reverberate when it looks to hire for other portfolio companies (GoDaddy HR execs cannot be happy right now).

This might be true. But the fact is that GoDaddy’s HR executives were always going to find it difficult to attract talent by means of stock options at the best of times. And one thing we know from Yun Lee is that Silver Lake is not shy about inserting its own people at all levels of its portfolio companies: if it can’t find someone else to do the job, it’ll probably just parachute in a few of its own hotshots.

With the amount of money that Silver Lake has, and the savings it’s likely to realize by firing lots of people, it will always be able to attract the talent it wants. Some people will buy in to the in-it-to-win-it philosophy; others will simply be happy with a large paycheck. In the wake of the publicity surrounding the Skype deal, Silver Lake won’t be able to pull the same stunt of making employees think that they own their vested equity when they don’t. But in terms of Silver Lake’s future success or failure, I don’t think this episode will really make much difference either way.

Update: TED responds in the comments.

Investment bankers like me will remind clients of this incident (if they need reminding), because we are always interested–other things being equal–in getting good investment partners for the companies we sell. We keep track of PE firms’ bad behavior and reputations very closely, because it matters.

Often, a PE firm with a good reputation as a partner will win an auction against one with a bad one, even if the bad one offers more money. Sure, Silver Lake has lots of money, but so does everyone else in PE land. Silver Lake’s money is no greener than anyone else’s, and there is no shortage of potential PE buyers for any company.

I really do think this public tarring will hurt Silver Lake’s business at the margin for some time going forward. Will they fold, or fail completely? Of course not, if only because some sellers–often the ones who don’t plan to stick around after the buyout anyway–couldn’t care less whether their new majority owner is a bunch of a**holes. But many do.

Comments
9 comments so far | RSS Comments RSS

….or they can change their name like Blackwater did.

Posted by GRRR | Report as abusive
 

I’m not so sure, Felix. Think about it: the publicity will make entrepreneurs and managers more wary of signing up with Silver Lake, and their employment attorneys more careful to protect their clients’ interests. Investment bankers like me will remind clients of this incident (if they need reminding), because we are always interested–other things being equal–in getting good investment partners for the companies we sell. We keep track of PE firms’ bad behavior and reputations very closely, because it matters.

Often, a PE firm with a good reputation as a partner will win an auction against one with a bad one, even if the bad one offers more money. Sure, Silver Lake has lots of money, but so does everyone else in PE land. Silver Lake’s money is no greener than anyone else’s, and there is no shortage of potential PE buyers for any company.

I really do think this public tarring will hurt Silver Lake’s business at the margin for some time going forward. Will they fold, or fail completely? Of course not, if only because some sellers–often the ones who don’t plan to stick around after the buyout anyway–couldn’t care less whether their new majority owner is a bunch of a**holes. But many do.

Time, as they say, will tell. But I guarantee the chief guys at Silver Lake are worried.

Posted by EpicureanDeal | Report as abusive
 

Abacus didn’t hurt GS because everyone with more than two brain cells knew the case had no real basis.

Posted by Danny_Black | Report as abusive
 

One only has to look at Paulson’s bet on SinoForest to see how omniscient he really is.

Posted by Danny_Black | Report as abusive
 

Also, isn’t it possible that employees of companies bought by Silver Lake might be tempted to leave, and that it might be hard to attract future employees based on their reputation? Are there enough high-quality executives and scientists looking for work that Silver Lake can afford to have an anti-employee reputation? These people aren’t cogs.

Posted by RobertWBoyd | Report as abusive
 

hasn’t this whole story already been debunked and been shown that it was the Skype CEO who made the call to fire his people rather than SL? In any case i think the story is ridiculous, not because i don’t think SL could be that evil/greedy, but because they are not that stupid and the sums involved were not consequential.

Posted by tiger4 | Report as abusive
 

I disagree. I think their reputation will be damaged in a big way — by the way of Talent. I disagree because they need the half of Talent that are A-Players and brilliant pioneers.

The A-Players who are pioneers are critical for these companies, or they wouldn’t give them stock options at all. A private equity firm that takes over a chain of retirement homes doesn’t pay stock options because they don’t need A-Player pioneers. They need them in great tech companies.

A-Player pioneers will abandon Silver Lake companies (and other evil PE companies) because:
1. A-Players know their YEARS of hard work will result in nothing because…
2. Employees can be fired at any time. (At will) and would lose their stock options
3. Great employees often must leave because of politics. People don’t want years of stock flushed away because of politics.
4. It is easy for employers to “trump up” reasons to fire employees “for cause”.
5. Life events may mandate an employee leave (need to relocate for a spouse, etc.)

The worst part is that companies will often tell employees “Yes we can take back your options. BUT we never have yet. BUT I don’t think we ever would”. Lawyers would say managers should never say this, but it happens often because that is managers answer when employees ask “Why in the world do I work hard for years and lose my options”. This construct creates a chasm of confusion, which is only good when an employer wants to trick employees into working hard and then losing their options.

Posted by BryanStarbuck | Report as abusive
 

Nice detailed article, thank you.

Setting all other things aside, I will say as someone that manages PR crises, Skype’s and Silver Lake’s handling of this isn’t well done from a communications point of view. I’ve got more details here: http://bit.ly/iFywzw

Posted by ChristopherBudd | Report as abusive
 

If you believe in Superstars (op cit. Rosen, 1981, et seq.), then the question becomes whether the people who stayed are being credited excessively or the ones who left are being debited too little.

As Charlie Stross sadly points out, money in a VC/Built-to-Flip situation doesn’t follow to the technologists.

TED is correct on a reputation basis, of course, but the significance will depend in part upon who SL tends to dump and how key they are viewed as being to the company internally at the upper levels. I doubt it will have a major impact on SL’s business, though I would hope to be wrong.

Posted by klhoughton | Report as abusive
 

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