Why Silver Lake isn’t harmed by being evil
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.