Felix Salmon

Getting enthused about Aspen

Felix Salmon
Jun 28, 2011 06:42 UTC

On the strength of one opening afternoon at the Aspen Ideas Festival, I think I like it a lot. And that’s a surprise to me: I was expecting that Alpine gabfests would tend to have more similarities than differences. But this is a world away from Davos, and not just in terms of longitude or season. At Davos, everybody is self-importantly “committed to improving the state of the world”; in Aspen, the stakes are much lower, and the emphasis is on what you’re saying rather than who you are.

The economics of conferences dictate, of course, that there be a smattering of bold-faced names who will do their bit in attracting the paying public and large corporate sponsors. But it’s surprisingly easy to avoid the politicians and the blowhards, and to find sessions on subjects about which you know very little and therefore can learn a lot.

There’s something about Aspen in general, and the layout of the Aspen Institute in particular, which engenders a friendly informality. The setting, of course, is stunning — and it’s also wide open, with lots of space to enjoy the beautiful grounds or wander off to nowhere in particular. Davos doesn’t lend itself to long, discursive conversations: it’s too cramped, too intense, too busy, too urgent. Aspen is relaxed, and informal, and — wonderfully — open to the (well-heeled) public. Security here is almost invisible; there are no heads of state, no metal detectors, and not even much sign of corporate meetings and dealmaking.

The opening session was a rapid-fire salvo of quick three-minute Big Ideas, ranging from the striking to the silly. I had favorites, of course. Salman Khan, of the Khan Academy, talked about how it might be possible to set up a credentialing system so that if you’ve become as knowledgeable and adept as a Harvard graduate, Harvard or some institution like it could certify you as such — even if you didn’t go to an expensive formal college. It’s one of the few ideas which could really make a dent in academic cost inflation, and maybe even drive it down.

The Atlantic’s Ta-Nehisi Coates had a fantastic little talk about the increasing respectability of professional athletes, to the point at which Americans tend to side with them, now, rather than sports team owners, when there’s a dispute. And that’s partly because, he said, “we have a less racist country”. In the 1980s, he said, there was a feeling that African-American athletes “didn’t deserve the salaries that they were getting”, while now we have “a situation where players command much more respect”, with much less in the way of racial undertones, even as team owners get less respect than they used to. It’s one of the very few areas of America where power has shifted away from capital and towards labor over the past couple of decades.

And David Leonhardt recapitulated his great column about the sad fate awaiting mothers in the workforce. Companies have to realize, he said, that there’s an enormous pool of untapped and underutilized talent out there — and any economy or sector which manages to get the most out of mothers is going to have huge potential.

Then, after dinner, I got the opportunity to see a Larry Lessig slideshow in the flesh — something I can highly recommend. In this case, it was an expanded and signficantly tweaked version of this talk, on the way that US institutions in general, and Congress in particular, have become corrupted by corporate money.

The talk is quite a tour de force at this point, and was followed by a fascinating Q&A period in which smart questions were asked and Lessig actually answered them. Paul Romer got the final question, asking whether some of the problem could be fixed by moving powers away from the legislature and into the executive. That question elicited a quite astonishing five-minute response, which I’ll try to transcribe here with only minor elisions. Remember, this is entirely extemporaneous:

We’ve seen that. We have pretty powerfully shifted power to the executive. And what that does is just relocate the place in which the influence is going to have its effect. Now you could have an executive who very strictly regulated the legislature. We might be left with that as a second best solution.

But I think that there’s something weak about democracy that depends upon these extremely powerful executives. And if you look at the American constitution today, relative to the framers’ Constitution, the framers envisioned Congress at the core. That was the jewel of their democracy. And these two necessary evils on each side. An executive, like the president, who they were fearful would become a king; they tried to limit his power so that he couldn’t. And the courts, who were hated at the time, because courts were just tools of the King. So courts and the executive were two sideshows, and Congress was a jewel.

Of course what we’ve done over the past 200 years is everything we can to inflate the power of the courts. People love the courts. Even after Bush v Gore, people still have enormous respect for the Supreme Court. Everybody wants them to fix what the democratic process doesn’t. And we’ve expanded dramatically the power of the president. So the power of the presidency today looks more like King George, and the Queen today looks much like George Washington. We’ve somehow reversed their roles because we’ve pushed to solve this problem of a failed democracy.

When I get this kind of pushback, it feels like a kind of splash of cold water, of the form “none of the changes you’re talking about are ever going to happen, so what’s the second best?” And the reality is you might be right. It might be impossible. And I got that question directly once, in Dartmouth. And I had this thought when she said this. If a doctor came to me and said your son has terminal brain cancer, there’s nothing you can do — would I do nothing? Just look at the doctor and say OK?

When you think about what it is to love, the willingness to act compassionately for something, that kind of emotional need, love for country: there are people who go risk their lives for that kind of love.

All of us have to have this kind of irrational love for country. Which says yes, maybe it’s impossible. But we’re going to act even if it’s impossible. And nothing I’m asking anybody to do is anything like the soldiers who go for love of country and fight our wars. Nobody’s going to die from this fight. It doesn’t take two years away from your family. All it takes is commitment, as citizens, not to let politicians continue to destroy the republic.

There’s no reason not to start that fight. So I flew myself for 24 hours here to Aspen because if that fight starts anywhere, it starts in places like this. With people like you.

Now you can agree or disagree with Lessig’s rhetoric — but his arguments surrounding the jurisprudence of corruption are sophisticated and interesting, and also laced through with real passion and vision. And he’s absolutely right that Aspen is one of the places where such ideas will take root, if they are to have a real effect. What’s more, Aspen is a place where it isn’t embarrassing to have such ideas and ideals.

This isn’t a place where grandees chair a “policy and initiatives coordination board” which will “analyse, assess and coordinate the prioritization, development and impact of multistakeholder initiatives within the global system” in order to “support the global agenda”. Instead, it’s a place where individuals can discuss ideas with passion and sophistication, and learn from literally hundreds of other people doing the exact same thing. Which is a pretty fecund place to be, if it’s done right.

Obviously, there’s a lot more Ideas Festival to come — it’s barely started — and for all I know it could yet get hijacked by politicians and stale debates. But on the evidence of the short first day, I’m optimistic about what might transpire here. Especially since my hotel has a small fleet of Trek Districts which I can use to get to the campus and back. Or maybe it’s just the altitude going to my head, and I’ll be over it in a couple of days.


Some more objective form of credentialing for graduates would be welcome, both to employers and graduates. Harvard (et al.) would never go for it, both because of the downward pressure it would put on its tuition, and because it would quickly become apparent that very, very many of its own graduates wouldn’t qualify.

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Why Silver Lake isn’t harmed by being evil

Felix Salmon
Jun 27, 2011 14:48 UTC

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.


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.

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Why insider dealing is so attractive to hedge funds

Felix Salmon
Jun 27, 2011 13:57 UTC

Danny Black, in a series of comments on my post about Raj Rajaratnam and insider trading, points out how small Raj’s insider profits were, compared to his net worth and the size of his fund:

One of the interesting things is just how [relatively] tiny the sums the insider trader makes. Rajaratnam was worth 1.8bn USD at one point. The upper end of what he made was 60mn. If I told you I could increase your wealth by 3% over a number of years but you might spend a decade or so in federal jail would you take up the offer?

This I think is doubly wrong. For one thing, $60 million is emphatically not an upper bound for the amount of money that Raj made on insider trading. Raj was not new to this game when his phones started being tapped, and it’s incredibly naive to think that all of his insider dealing was conducted, in one way or another, over the phone. $60 million is the upper bound for trades which the authorities considered prosecutable; it’s nowhere near being an upper bound even for what he made while his phone was tapped, let alone what he made over the course of his career.

But even that understates the value of insider trading to a hedge fund manager. Raj made his billions by collecting 2 and 20 from outside investors in Galleon: the path to hedge-fund riches is, always, to maximize assets under management. And if there’s one thing that hedge-fund investors are looking for, it’s alpha — that small edge which the best managers are believed to have over the market as a whole.

To a hedge-fund manager, then, $60 million in excess profits can be worth vastly more than $60 million. If it persuades outside investors that you can generate more alpha than anybody else, and those investors end up giving you an extra few billion dollars to invest as a result, and you take 2-and-20 on those extra few billion dollars, then at that point you’re making real money.

Running a hedge fund, in this sense, is a way of leveraging any insider trades you find many times over. They don’t just make money in and of themselves: they also help you attract all-important AUM. Given that calculus, it’s easy to see why Raj found insider dealing so attractive. Without it, he might never have become a billionaire in the first place.


The only insider trade I am aware of that made serious coin was when the government let Ivan Boesky liquidate his holdings before announcing he was going to prison.

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Basel: the Sifi surcharge arrives

Felix Salmon
Jun 27, 2011 11:31 UTC

Basel has spoken, and the Sifi surcharge — the amount of extra capital that will have to be held by systemically important financial institutions — will range from 1% to 3.5%, with no bank in the first instance being subject to a surcharge of more than 2.5%.

This is more or less in line with expectations, and in fact is maybe a little bit tougher than was expected by some of the pessimists. It’s not the size of the surcharge which is particularly impressive, but more its nature: it’s made up only of the highest-quality capital — no CoCos allowed. And the fact that it’s based on a sliding scale means that it has the important feature of both dissuading the biggest banks from getting bigger and indeed giving them an incentive, at the margin, to get smaller.

The surcharge doesn’t end too big to fail, of course. Bethany McLean is absolutely right that capital requirements aren’t some kind of panacea, and that in and of themselves they don’t prevent crises. But they’re still a crucial part — along with liquidity and leverage constraints, and a crackdown on off-balance-sheet vehicles — of making the global banking system more robust, less pro-cyclical, and less prone to catastrophic failure.

And while the Sifi surcharge won’t stop banks growing to the point at which they have to be bailed out in extremis, it might make such growth significantly less profitable than it was in the past.

One of the peculiarities of the global financial crisis was the behavior of Citigroup’s deposits — here was a huge and insolvent bank, most of whose depositors were not insured. (Citi has many more deposits outside the US than it has domestically.) I was very worried about this: if those depositors moved their money out of an insolvent bank and into something safer, the consequences for Citi could have been disastrous. But the bank run never happened, and in fact over the course of the crisis Citi’s deposit base went up. That’s known as the moral-hazard play: depositors the world over trusted the US government to bail out Citi, as in fact it did, and knew that as a result their money was safe, backstopped by an implicit US government guarantee. Which you certainly can’t say about money held in a foreign branch of a mid-sized community bank.

That’s just one of many advantages to being huge, and as a result it’s great that Basel is forcing the likes of Citi to hold more capital than their smaller counterparts. It might be a relatively small victory, but every win counts.


My impression is that, de facto, the capital requirement drops during recessions and financial shocks; the Fed doesn’t want to require immediate compliance or shut down banks when they’re hardest hit, and insofar as this is a rainy-day cushion, it makes sense to allow it to drop a bit when it rains. It would be nice to formalize this, though that may be very difficult to do for a number of different reasons. The rules need to be (presumably are?) coupled with an explanation of how a bank that is out of compliant is to be forced to come into compliance, e.g. over what time frame and subject to what penalties. Perhaps the Fed can just lend “equity” to any bank that is short at a 24% interest rate; a bank whose cost of equity is expected to exceed 24% for a sustained period of time should just be shut down, if at all possible, but other banks would find this a strong incentive to liquidate illiquid assets and reduce the loan portfolio subject to a rule that 95 cents on the dollar now is better than 96 cents on the dollar next month, but not than 97 (assuming a cost of equity somewhat below 12%). Well, maybe 36% would be better. But I think something of this qualitative nature would make sense.

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Felix Salmon
Jun 27, 2011 04:53 UTC

Central bankers agree on bank capital surcharge plan — Reuters

The president’s trademark approach to leadership: “the fierce urgency of sometime later” — HuffPo

James Murdoch sounding more and more like the CEO of News Corp — FT

Teams, & how John Paulson didn’t see China for the Sino Forest trees — Bronte

Atop TV Sets, a Power Drain Runs Nonstop — NYT

Ex-media mogul Conrad Black sent back to prison — Reuters


Regarding that TV set story, I have been poking TiVo for YEARS about the fact that I as a user would like the option to tell my TiVo box to spin down its drive when not either playing or recording stuff I told it I want. It keeps a 30 minute buffer of whatever channel it happens to be tuned to, at all times. WTF? I program it to record the stuff I want. It NEVER needs a buffer of live TV. It’s really annoying. I’ve submitted this as a feature request on their site two or three times, and mentioned it to tech support types every time I’ve talked with them…

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Skype’s evil ways, cont.

Felix Salmon
Jun 27, 2011 04:46 UTC

The Skype/Silver Lake story is refusing to die, with Yee Lee’s revelations bringing out the same anonymous investor-group sources defending Skype’s actions. But if the defenders are comfortable in their anonymity, it seems only fair for me to share an anonymous email I got this morning from “Skype Insider”.

Remember the history of what happened here. First it was alleged that Skype was firing senior executives just before the Microsoft deal closed, thereby ensuring they don’t get their full payout. Then Lee came along and said that employees who left voluntarily were denied their vested equity in the company — which, as Graef Crystal has noted, does grievous harm to the plain-English meaning of the word “vested”. Dan Primack explains how Skype pulled this stunt by changing its options agreement after it was acquired by Silver Lake:

A source familiar with the situation says that many former eBay employees who remained with Skype have options that more resemble typical Silicon Valley (i.e., vested=yours). Moreover, the majority of Skype employees are in Europe, where the structure also is different.

But for U.S.-based employees who joined after Silver Lake and crew took over, you had to “be in it to win it.” In other words, these particular Skype employees wouldn’t get paid until the private equity firms also got paid.

We’ll get to the attempted defenses of Skype’s actions in a minute. But up until now we’ve been dealing with two classes of screwed-over employees: executives who got most but not all of their payout because they were fired just before the deal closed; and people who were hired after Silver Lake bought the company and who found that their vested options were worthless.

But according to my source, it’s actually worse than that. There’s a third class of employees, who were treated particularly badly: executives who were fired for cause, “based upon various trumped up justifications”, in the words of my tipster, thereby losing all their vested equity.

This is a particularly nasty move for Skype to pull, because such executives are naturally going to be reluctant to go public with their story. Any journalist would immediately ask Skype for comment, and the company would quickly start explaining, either on or off the record, just how bad the executive in question was. And no one wants to be the subject of that kind of public debate.

Importantly, if you were a Skype employee fired for cause, your options could be clawed back even if you had the old-school options contract. Former eBay employees who had had vested equity for years could suddenly find themselves with nothing.

Do I know for a fact that Skype did this? No — but I’d certainly be interested in hearing from anybody this happened to, in strictest confidence. And it’s consistent not only with the Skype-is-evil meme, but also with the message that Skype’s defenders are pushing. Here’s Henry Blodget:

Private equity firms have a different view of option compensation than VC firms, the Skype investor said. Specifically, private-equity firms recruit executives with a very specific mission: To fix the company and then sell it, a process that often takes several years. In private-equity’s view, executives only deserve a piece of the equity pie if they see that mission through.

Essentially, only one group of employees matters in PE-backed deals, and that’s the ones still standing when the exit arrives. You’ve “got to be in it to win it”, which means that anybody who’s not “in it” is, by definition, a loser, to whom the company owes nothing.

And the investors are quick to blame the losers here. See for instance Sarah Lacy:

As standard as getting to keep vested options if you quit before an investment is closed is in the venture capital world, it’s equally as common that you have to stay through the close of acquisition to keep them in the private equity world. Indeed, our source says the Skype contract is a boilerplate agreement for all the companies Silver Lake invests in. And all of this was in the paperwork the employee signed. He just didn’t read it carefully, at his own admission, because he assumed it was like other option contracts of venture-backed companies. That’s not really Silver Lake’s fault.

Actually, as Mike Arrington and Dan Primack and I have all tried our best to point out, the notorious clawback was not something which Yun Lee or anybody else could find by reading paperwork carefully: it’s impossible to read the clause in question and understand what it’s saying, since it references “the repurchase and other provisions in the Management Partnership agreement” — a completely separate document which Lee might not even have been given access to. (Arrington reckons he probably wasn’t.)

As for this suddenly-important distinction between venture capital and private equity, has Lacy forgotten that the public face of the Skype acquisition was not anybody from Silver Lake at all, but rather Marc Andreessen, a venture capitalist? Indeed, Arrington’s coverage of the deal had Andreesen Horowitz leading it, with Silver Lake a mere tagalong participant. And Silver Lake is hardly KKR or TPG: if you pop along to the CrunchBase profile page for the firm, you’ll see its headquarters are on Sand Hill Road, the boulevard synonymous with venture capital. Yes, Silver Lake is technically private equity rather than VC — but it does its best to hang out with VCs, co-invest with VCs, and generally inveigle itself into the VC world as much as it possibly can. Lacy’s sources might be very keen right now on the idea that they have “a different mentality and a different culture” to VCs. But the average Silicon Valley employee can easily be forgiven for failing to grok this distinction.

And this just doesn’t withstand scrutiny at all:

If the amount is so small, why not just give him the vested shares? Because this is their standard contract, Silver Lake can’t without opening themselves up to lawsuits from all the other buyout deals where employees have to live by the same agreed-upon contract.

Er, no. Silver Lake had no obligation, under the terms of the contract, to claw back Lee’s shares. Remember the letter sent to Lee? It’s very explicit on this front:

Pursuant to Section 8.01 of the Partnership Agreement, Skype has the right (the “Call Right”), which it intends to exercise, to repurchase up to all vested shares underlying your Options at a per share price equal to the exercise price applicable to the shares being repurchased.

Skype had a right to claw back the options. It made a positive decision to exercise that right. It had no obligation whatsoever to exercise its Call Right, and everybody’s actions would have been perfectly consistent with the signed documents if Lee had held on to his vested equity.

The fact is that there’s no good reason at all for Skype to be behaving this way — and there’s also every reason to believe that Skype’s decision to turn evil was entirely a function of Silver Lake’s corporate culture.

In any case, all of Silicon Valley is now to understand that the relationship between Silver Lake and the employees of its portfolio companies is a fundamentally adversarial one, where incentives are actually opposed rather than aligned, and everybody needs to lawyer up before doing anything. That kind of attitude goes down badly everywhere, but especially in Northern California. And that’s the fundamental reason why this story is refusing to die.

Oh, and one last thing, from my tipster:

Employees did not actually receive stock options at all, but rather shares in a Cayman Limited Partnership, Skype Management Partnership, LP. This complex partnership arrangement was concocted solely to avoid the possible application of employee-favorable laws in California and Luxembourg.

You fancy a lawsuit against Skype and/or Silver Lake? You’ll have to show that California courts have jurisdiction first. Since Skype isn’t even an American company, and the shares were in the Caymans, that’s not going to be easy.



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How Philanthrocapitalism coddles CEOs

Felix Salmon
Jun 24, 2011 21:51 UTC

A quick reply to Matthew Bishop and Michael Green, which with luck will bring this exchange to an end: I’m not saying that they make the case for the status quo. But when Davos Young Global Leaders, like Bishop, intone importantly about how “there is an urgent need to tackle fundamental flaws in the economic system” and how CEOs need to concentrate on long-term enlightened self-interest rather than “short-termist behavior”, the very corporate chieftains they’re trying to reach are going to nod in serious agreement and claim in all sincerity to be part of the solution rather than part of the problem.

Never in the history of Davos has a CEO got up on stage and said “I’m trying to make as much money as I can before the board finds me out and fires me”. Which is precisely why CEOs don’t think that Bishop and Green are talking to them. And on top of that, the Philanthrocapitalists are happy reducing the pressure on any individual CEO even further with rhetoric like this:

A capitalism that is more responsible is not going to come from a few enlightened CEOs choosing to do good – it will only come from an overhaul of the way business is run.

That’s not a call to action, it’s a call to sermonize. And it will achieve nothing beyond getting Bishop and Green a few more speaking fees from companies which like to pat themselves on the back for being socially conscious. Which is why I say that Philanthrocapitalism is ultimately friendly to the status quo.

Bishop and Green don’t explicitly say that the status quo is a good thing: in fact, they explicitly say that it is profoundly broken. But they say that in an extremely CEO-friendly way, designed to allow leaders who think of themselves as long-term visionaries to also consider themselves to be downright philanthropic simply by dint of their enlightened strategic thought. It’s always other CEOs who are the problem. Or it’s not even CEOs at all: it’s the whole system.

The message of Philanthrocapitalism, then, is one which allows leaders to wriggle all too easily out of having to do anything. Which is why it’s not going to make the slightest bit of difference to the way the world is run, no matter how many important people read it.


@CurtD59: I can’t tell if you’ve read Felix’s earlier posts on this topic, but if you havn’t they are important to the discussion.

Felix’s point is that Bishop & Green have, in Davos-speak, argued that the best philanthropic or societally-good efforts are to pursue capitalistic profits, and that CEOs who pursue “corporate social responsibility” should stop, and accept the glorious fact that they should merely pursue capitalistic profits which are, a priori, better for society than mere philanthropic efforts.

Thus taking a great weight off the shoulders of CEOs to think anything other than short-to-medium-term accounting profits.

Felix is rebutting the flawed argument that IBM as a capitalistic enterprise has been more philanthropic than then Carnegie Endowment over the past 100 years, by dint of IBM’s profits and technological impact on the world (but ignoring the thousands of failed non-philanthropic capitalist efforts and cherry-picking IBM). That argument is then used to say that capitalistic pursuits are necessarily better from a philanthropic perspective than mere philanthropy.

That is what Felix is discussing. Not really CEO pay.

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Greece’s messy muddle-through continues

Felix Salmon
Jun 24, 2011 16:22 UTC

The one thing you can be sure of, when it comes to the latest episode in the ongoing saga of the Greek bailout, is that it’s a mess. The WSJ is reporting that the bailout is secure, while Reuters is a bit more cautious, just saying that a deal is “closer”. Everybody knows what needs to happen — but a crucial vote in the Greek parliament still hasn’t happened, and the role of private-sector banks going forwards is also extremely vague:

European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.

The proposal foresees a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status, the sources told Reuters on Friday.

“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” said one senior banker.

Your guess is as good as mine when it comes to the meaning of “completely different composition”, but it sounds a bit like some kind of latter-day Brady bond, with principal guarantees or a rolling interest guarantee or some kind of participation from the EU, perhaps provided by the European Financial Stability Facility. Banks would happily swap Greek debt for bonds partially guaranteed by the EFSF, because such bonds would be more creditworthy; meanwhile, the swap wouldn’t be considered a default, since the exchange would be entirely voluntary.

But we’re not there yet, and in any case such a deal would only be a waystation on the road to a restructuring. Crucially, markets would look very hard at any collective action clauses written into the new debt, to see whether French and German banks, their arms twisted by their governments, could essentially cram a significant haircut onto other bondholders not subject to the same degree of moral suasion.

At some point, inevitably, a Greek restructuring is going to get ugly and fractious. But for the time being, it’s just messy. And we can stay in this muddle-through zone for a long time, while market participants position themselves for the inevitable dénouement. Let’s just hope that technocrats in Greece and the EU are getting their ducks in a row as well.


“completely different composition” — instead of being backed by the full faith and credit of the Greek government (it not being valued very highly at the moment), the bonds will be backed with Greek government real estate holdings. That’s right, you too can own a partial claim to The Acropolis! Of course, most of the property backing the paper will do so at wildly inflated prices due to fraudulent appraisals. Thus will the Greek debt crisis come to mirror the US financial meltdown in all the particulars (rather than just some of them, in a general way).

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Upgrading Skype and Silver Lake to Evil

Felix Salmon
Jun 24, 2011 15:05 UTC

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.


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.


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

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