Skype mess: How far will this go?

31 Comments

Wow…. the ugliness around Skype keeps getting bigger and bigger. The Internet telephony company which is in the process of being sold to Microsoft for $8.5 billion is fast becoming a poster child of investor greed and corporate mistreatment of it employees.

Earlier this month, Skype cut many key executives, a move that is said to have been inspired by investors who were looking to extract the maximum value from the deal. Investors in Skype include Silver Lake Partners, Andreessen Horowitz and the Canadian Pension Board.

A company spokesperson absolved the investors of any misdoing and said that the executive cuts were part of a long drawn-out decision-making process under the aegis of CEO Tony Bates. An investor in the company argued that the money saved would be negligible and not worth the trouble.

Well, that doesn’t appear to be the case and this morning Business Week reported that things are not as sanguine as the company makes it seem.

Normally options give employees the right to buy shares at the price on the grant date, once they have worked at the company for a time. After a month of back-and-forth with Skype’s human resources department, [former Skype employee Yee] 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.

Today, Yee Lee, a former employee shared his side of the story on his personal blog, giving more details on his predicament.

The most important lesson I learned from Skype was that compensation and stock policies in PE-owned firms can be very heavily tilted in the owners’ favor and against the employees. Skype employees have 5-year vesting of stock options, for example, not the usual 4 year schedule that most Valley firms have. Even worse, Skype’s stock option agreement had special clauses that the Board had slipped in that gives them the right to “repurchase” any vested shares for anyone who leaves the company voluntarily or is terminated with cause — effectively taking “vested” shares and making them worthless.  Here’s a nice letter I got from the Associate General Counsel of Skype that points out exactly how my stock options have “no financial value.”

Skype obviously feels otherwise. Fortune’s Dan Primack points out

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. It’s kind of like a stock appreciation agreement in option form. Skype and Silver Lake clearly see this as an alignment of interest issue, and two corporate lawyers I spoke with said that such structures are not uncommon in PE-backed employee contracts.

So the problem here is not that Lee was treated differently than other employees at private equity-backed companies. It’s that such treatment exists at all. But it looks to me as if he was almost intentionally tricked. Just read over that contract language again. Skype must know the commonly-understood meaning of option vesting in Silicon Valley, so it should have explicitly said that its arrangement was different. As I said before, Lee had experience leaving companies. His shock indicates just how opaque this particular agreement was.

Lee’s allegations and a prior Bloomberg story points to what might have been a systematic issue. The key thing here is that Microsoft is going to be the company that is left holding the bag. Scott Rafer, a veteran entrepreneur with deep roots in Silicon Valley had this to say on his blog, which kind of makes Microsoft responsible.

It’s hearsay (though very intimate hearsay), but the executive cuts were definitely made in order to save on bonuses and put incrementally more cash in the PE investors’ pockets. However, it’s going to backfire.

In all these transactions, there’s an allowance for a ‘basket’ of liabilities in which the Seller (i.e. Skype shareholders) take economic responsibility for unknown liabilities that come up after the deal closes. It is FREE for Microsoft to pay out the amount of money in the basket to whoever sues them on a Skype-specific issue. If the people who were fired have a decent attorney, they’ll sue the successor entity to Skype (i.e. Microsoft) after the deal closes. Microsoft’s attorneys won’t care about whether they win or lose up to the amount of the basket.

The drumbeat of bad news around the deal masks a bigger problem. At the time that Skype was spun out of eBay (s eBAY), I pointed out that with nearly 15 board members — all of them with strong personalities — it would become a problem. Well that is precisely what has been happening. Lee blames Silver Lake for many of the issues.

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 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…

Nevertheless, the question here is — if Silver Lake was acting a certain way, what was rest of the board doing? Some former employees I spoke to said that there has been a wholesale interference from the board members, each one having some issue with some employee or the other. From hiring decisions to product directions and platform support, the pressure from the board was described as unusual and sometimes without rationale.

Don’t be surprised to see more details leak out.

31 Comments

Bob Timmins

Without sounding like a unionist, this bad behaviour by the management, silver lake or whoever, can easily be pulled into line if all the employees just “down tools” until the matter is resolved. Once Skype service quality goes down the gurgler faster than the round brown one you did this morning, Silver lake’s investment will start heading in the same direction..

Godaddy

If I were an employee of Godaddy, which is about to be bought by Silver Lake, I would look at my stock option agreements *very carefully.*

Rube Suckerman

I am normally not a fan of litigation, but this is a case where I hope the employees who got shafted sue the shit out of the company. It seems clear to me that Skype intentionally misled employees about the nature and value of their non-salary compensation. Considering the amounts of money involved, some people are probably deserving of jail time on this one.

I hope the people who were wronged in this deal sue the crap out of Skype, and through the discovery process, drag the bad actors out in public view so the rest of us can avoid these people. Life is too short to work with/for people who have no integrity.

Skype Insider

The Skype stock option situation is even worse than conveyed –

Prior to the recent terminations of these 6 executives; who comprised most of the executive team, there were also selective dismissals of employees based upon various trumped-up justifications. These dismissals enabled Silver Lake/Skype to reclaim “vested” options from employees who had contributed valuable services to build Skype but whose talents were not needed down the home stretch. As you note, the reclaiming of vested options is massively inconsistent with Skype’s use of the legally operative term “vested”. Let’s just say Microsoft should insist on an equally massive amount of seller’s indemnification ….Lots of litigation will be coming!

As was correctly conveyed above, the details of the Skype stock option plan were willfully obscure and not well-communicated to rank and file employees. What the story missed is that 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 by SLP solely to avoid the possible application of California and Luxembourg employments laws. I suggest that anyone currently working at a Silver Lake invested company to reflect on this arrangement and consider their own situation.

The “comings and goings” chart is correct in noting that the CEO, CFO, etc., were all fired at Skype during SLP’s period of oversight. However, it omitted the following….

– A COO was fired
– Two different CTOs (not one) were fired
– The General Counsel was fired.

I am not going to point fingers at any one specific at SLP, but I will say that among the remaining execs at Skype are a few of the most integrity-challenged people I have encountered in my long professional career.

Enough said…

Frank

There’s been quite a bit said about SLP. What about Andreessen Horowitz in this mess? I’ve always viewed them as good guys and entrepreneur friendly. Has anyone from A16Z come out with anything on their role and position?

Diogenes

One thing managers and employees have to realize is that an investor is *never* on your side. You may be lulled into believing such when they pitch your company or even when you’re one of the lucky ones to cash out, but they are *never* on your side. Not anything evil; it’s just against their interests.

Although private equity firms like to position themselves as growth capital versus buyout capital, they are by and large buyout capital. What does this mean? A bit of history for Silicon Valley private equity virgins: Buyouts started in the ’60s with mainly smokestack companies as investees. The game was never to grow the company or help it operate better. The goal was to leverage it up, retain as much of the equity as possible for investors (through leveraging, i.e. debt), and to *quickly* sell it off. This is a financial engineering exercise and not growth, operational improvement or creating a new business (venture capital). Ah, but you say, they reduced expenses. Doesn’t this mean operational improvement? Not really. This is a temporary ploy to make something look better than it is. And note what NOT growing the pie means: A zero sum game between managers, employees and investors. Guess who wins?

During the smokestack buyout days, investors routinely fired workers, rescinded their vesting and their pensions, put in new managers, sold off lagging divisions or assets. Trouble is there aren’t that many “smokestack” companies left to buyout so there’s now the tech buyout. That’s why there’s Silver Lake and Andressen and that is how they make money.

A buyout means there’s a new owner and that is more equivalent to a venture down round: A lot of people get fired; their stock gets diluted to nothing versus outright voiding of vesting in a buyout. Think of a buyout as having no pretensions of foreplay.

Anon

Why does Silverlake receive all the investor vitriol? Media darling Andreesen Horowitz is just as guilty here. Surely they (or their counsel) read all of the docs before they wired the money on this one.

Question for valley workers: why would one ever work for a Silverlake or Andreesen Horowitz portfolio company if this is how they treat people? Move on. There are many other interesting start ups backed by investors that treat their portfolio company employees more fairly. If you do work for one of the investors’ portfolio co’s, time to check our own option plan.

Max Schireson

Apart from the morality of it, I think this is a dumb way to try to retain employees. You really don’t wan’t employees who’d rather be fired than quit. More of my thoughts on this topic on my blog post here http://wp.me/p1uNWr-36

— Max

Len Feldman

The “you have to be in it to win it” line from Skype’s spokesperson is one of the most disingenuous (or stupid) things I’ve heard in a long time. Skype fired most of its top executives in order to avoid paying them bonuses. They didn’t choose to resign before Microsoft took over, as Yee Lee did.

On the other hand, I don’t see how Microsoft is responsible for actions of the current investors, given that Microsoft doesn’t yet own Skype. Silver Lake and its partner investors are solely responsible for the decision to fire the executives, as well as the decision to slide in the clause into the options agreement allowing the company to buy back options at the issuance price.

Jake Banners

I agree about the statement. What “in it to win in” says to me is the investors are former dumb jocks who are gleeful and giddy with having had the smarts to get their attorneys to pull over another scam on the geeks that create the company value.

Dan

ok, well, in mother’s Earth best business would be for you to be dead, since we are overpopulated.

monal

do ppl really consider Skype an inferior product in the VOIP/video conferencing arena??

Indus Khaitan

Om, any comments from a16z? marca’s team is pro-entrepreneur in their dealings. Ain’t it? How come they overlooked this?

Stefano Moretti

Yes, Marc is pro-entrepreneur. But he’s even more pro-money.

Pete Smyth

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.

don

B-bye!

Mismanagement of a company has resulted in inferior products and services, and this usually means the death of the company.

R

is it thank goodness there are lawyers to protect Lee and co, or it is a case of fetching lawyers 30% of the proceeds for avoidable litigation from unnecessary greedy behavior?

Peter Antypas

Not to take sides, but those who invested in Skype’s re-incarnation took a huge risk, so I would expect nothing short of a harsh term sheet. On the upside, they saved the company from Death by Meg. It remains to be seen whether Skype will save itself from Death by Steve (Ballmer).

Jib

why? they were looking out for their best interests. if you disagreed, move on. not exactly hard for a skype employee of 2009 to find another job these days.

Mark

That’s not the point…The point is that the company is treating it’s employees like scum. Do you think a company that does that is going to foster loyal employees? Good luck with thinking that Skype can be successful by treating their employees like s***.

Jon

Isn’t that the point of this article? That if you actually did decide to quit and move on, your options, which you had previously thought had been at least partially vested, will be taken away from you. Try reading the contract language in Dan Primack’s article – it is impossible to understand.

Anon

There is one more thing that is being missed. When Silverlake and the other investors took over, all options issue to employees became null and void. Seniority and time was not recognized when they issued the new shares 3 years ago. So if you started 8 years ago, you got the same amount of stock as someone who just walked in the door.

Dave_ML

It is not an excellent point, it was wrong. That isn’t shafting anyone, that is the nature of a spin-out. Presumably the eBay options the employees had were cashed out if they were in the money. Unvested options presumably terminated but new options at Skype were granted

No one had “Skype” options pre-spinout. Why would new owners grant options to cover a prior period and a predecessor company? The new owners granted equity commensurate with value/perceived value of the employee, position or a combination. Tenure may be a factor in that value, but it doesn’t drive how many options someone gets.

Prof. Peabody

“.. equity commensurate with value/perceived value of the employee …”

This is just another way of saying the new managers/owners decided who got what based on their own opinions. You make it sound like it’s some kind of fact-based business assessment when in fact it’s completely subjective. The new managers basically just decided who got screwed.

mjw149

Based on this article and your comments, there’s a good case to be made that stock options and for similar reasons, pensions, should be outlawed. There’s clearly too many complications that result in cheating and lying of this type. It’s only a fair labor market if compensation is clearly explained and subsequently made. That was not done. Same with pensions, too often companies are not faithful to their commitments and responsibilities and the greedy bastards that made money on stocks and bonuses instead of paying into pension funds don’t go to jail due to corporate law. Companies go bankrupt and then leave the gov’t to pick up the pieces. It’s a suboptimal non-capitalist outcome. Our economy is breaking down due to lack of visibility and controls, not just due to digital media.

Skype is clearly not to be trusted, and since MS is mostly buying a brand name, the value of their acquisition is plummeting. Software companies are only as valuable as their brand and their developers, and they’re going to lose both.

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