"It turns out the investor group...had secured a so-called repurchase right that gave them authority to buy back the shares at the grant price."
If this is true, it sounds like somebody didn't properly perform their due diligence before signing their options agreement. Although it's never right for a company or investor to exercise this buy back when it comes to an honest, hard-working employee, the onus really falls on the employee ensuring that this clause never sees the light of day in their contract in the first place. Perhaps in the event of "cause", one could make a case, but certainly under no other condition.
EDIT: It's an unethical clause to begin with - absolutely agree with the comments. Just saying that you can't count on anyone besides yourself to act on behalf of your own best interests.
In theory, everybody is responsible for reading everything they sign, regardless of who they are and who they are doing business with. In practice, certain clauses in certain contracts have been deemed unenforceable because it's "unreasonable" for one of the parties to have performed enough due diligence to give informed consent when they signed the agreement. (And often it's thought that the other party knew this. This comes into play when the party drafting the agreement is the powerful one with the lawyers.)
If this type of agreement has been standard in the Valley for decades, it would be unreasonable for Lee to expect anything else. If it's a new kind of screw-job, we may have to see how courts handle the inevitable disputes. They might tell him "tough luck." Then again, they might decide that it is unreasonable for him to expect the repurchase of his options, and that the company knew it was unreasonable--or even went out of their way to make it difficult for him to appreciate the consequences of the contract he signed.
I have no idea how it will work out for him, but I do want to point out that when there's a massive imbalance of power and access to legal advice, the amount of due diligence expected of the weaker party is sometimes relaxed.
Basically, Skype's claim is that the point of this clause is to retain employees -- you don't get cash in your vested stock unless you still work for the company. But as Salmon points out, none of the employees actually realized this -- the clauses are bafflingly worded, and refer to external documents, to the extent that you'd need a lawyer to figure them out -- so it doesn't make any kind of sense as a retention tool. Add in the fact that this policy is pretty radically different from standard tech industry practice, where if you're vested you're vested, and it really seems like it's just a way to screw employees.
Clearly nonsense. When I worked for KL Group, a unique incentive program was put into place to allow employees to participate in any "liquidity event" that might take place.
It was explained to everyone, clearly, that you only benefitted if you were an employee at the time, and that when you leave the company for any reason, the founders would buy you out according to a specific, written formula.
There was absolutely no ambiguity about the mechanism.
There's nothing wrong with such an agreement (as you describe KL), and though this type of explicit inventive plan is not so common in Silicon Valley, it is surely valid, ethical, and and useful wherever it arises. (To be more complete, in Silicon Valley there is usually such an incentive plan concerning liquidity events, but it's tacit and is anyway orthogonal to stock/option grants.)
But you say it explained to everyone at KL "clearly" what was going on. Don't you see that this is one complaint here is that not only wasn't this done, but perhaps the very opposite?
And were you given detailed instructions on how (and how quickly) you must exercise vested options if you quit,
even though this had no meaning at all whatsoever?
If the answer is no, please imagine it was yes. Would you have still been totally confident that you understood the mechanism (wouldn't you have wondered: why are they explaining something that is in practice irrelevant?)
When I said, "nonsense," I meant that it's nonsense to call it a retention plan if you don't actually tell people they have an incentive to stay after their options so-called "vest."
That's just not true, and I wonder if you can cite some statistics or qualifications to back that up. In the Valley vested/exercised shares are equity, common stock, a true ownership stake in the company (see next paragraph, I'm not utopian about that means). Here, he lost his right to the stock after he vested and exercised. _No_ stock! That is profoundly at odds with industry practice that I just don't know where you are coming from in suggesting it's normal.
Standard tech industry practice does, true, allow insiders (at the time of the liquidity event) to play a variety of games to screw common shareholders. Generally, though, the bigger the event in $ terms (and this is big) the less legal room you have to play these games. For instance, as others have pointed out, you can low-ball the offer price but offer "retention bonuses" to current staff. And VCs always have their preferences. But if you keep these things on the safe side of the law, they are less and less impactful as deal size increases. I'd love to hear of a commonly employed mechanism that washes common to zero in a multi-billion dollar deal. I doubt frankly that it exists.
I agree that losing the right to exercised options in a highly public, billion dollar deal is odd. However, the end result is that guy has no stock or money. This is the same result of the "variety of games to screw common shareholders" which you seem to agree is standard tech practice. I guess there's a difference in the mechanism, but the result is the same for the guy getting screwed. Unfortunately, I cannot cite "real" statistics so feel free to write this off as internet hearsay. I should qualify that I made the mistake of spending too much time working in Boston where everyone secretly wants to be Thurston Howell III, not Steve Jobs or Larry Page. Thus, my experience is not really "the Valley" but then again neither was Skype's.
That's all well and good, but there are nontrivial costs to creating a system where you need to have a lawyer vet every line of every contract you sign.
There's been a general consensus about what a "market" employee agreement contains, which lets people make decisions in a relatively uniform way between offers. If it becomes known that any company associated with a certain firm has wacko contracts and that you'll need to pay 20k in legal time to even evaluate their offer compared to others, it becomes an easy no all around.
> There's been a general consensus about what a "market" employee agreement contains, which lets people make decisions in a relatively uniform way between offers.
Is there? What counts as general consensus?
That's meant to be a serious comment. I've seen contracts that have vested stock grants expire after 2 years and some where vested grants stock never expire.
it seems to me that there isn't really any such thing as a general consensus when it comes to stock options.
It's not a question of them expiring. It's that the company issuing them had an opportunity to rebuy them at cost. I.e. your vesting schedule is completely meaningless. It's one of those situations where someone uses a word that has a specific set of associations (i.e. "I vest 25%, that means I get them right?") and then attaches terms that make it mean something else entirely ("yes, you get them, but I can take them away at my option without compensating you").
I'm torn between agreeing that employees should carefully read their options agreement and believing that there are some things in life that are wrong with no grey area and stealing shares people have earned is wrong.
The two are not mutually exclusive. Leaving your car unlocked in a bad neighborhood is irresponsible, but someone stealing it in the night is still unquestionably wrong.
Clarification: it's an unethical clause to begin with - absolutely agree. Just saying that you can't count on anyone besides yourself to act on behalf of your own best interests.
Well, you probably can't count on employers who stand to profit by your loss.
But you could, for instance, join together with other employees whose interests are more aligned with yours and join a union.
That is if there were any unions in the IT field.. and if they weren't nearly universally despised due to the omnipresent anti-union propaganda in the US.
If this is true, it sounds like somebody didn't properly perform their due diligence before signing their options agreement. Although it's never right for a company or investor to exercise this buy back when it comes to an honest, hard-working employee, the onus really falls on the employee ensuring that this clause never sees the light of day in their contract in the first place. Perhaps in the event of "cause", one could make a case, but certainly under no other condition.
EDIT: It's an unethical clause to begin with - absolutely agree with the comments. Just saying that you can't count on anyone besides yourself to act on behalf of your own best interests.