The overwhelming majority of employees at startups sign documentation acknowledging that their employment is at will and can be terminated at any time by either party for any reason, with or without cause. In relatively rare cases involving founders or high-placed executives, the company will sign contracts stating that, though the employment is at-will (i.e., can be terminated at any time for any reason without liability), the employee will get accelerated vesting of one sort or another in the event of a termination "without cause" or a resignation for "good reason." "Cause" is usually defined as willful failure or refusal to perform duties that continues after notice and an opportunity to cure, misappropriation or misuse of company trade secrets, commission of a felony or other action involving moral turpitude, etc. and "good reason" is typically defined as material reduction in compensation or duties, relocation to a remote area, etc. If you have an employment agreement that provides for such acceleration, then you are clearly protected against the Zynga-style threats described in this piece. If you do not, then you generally are not on firm legal footing but still may have some fighting chances.

What are those? If you can argue that an otherwise permissible at-will firing becomes impermissible because it is animated by discriminatory animus (race, sex, age, etc.), and you belong to a protected class, you could argue that the threatened firing is illegal and would subject the company to damages (which, of course, would include the value of the unvested stock that would otherwise have vested had the company not acted illegally to terminate your employment).

If you can argue that the ground of termination violates public policy, this might be a separate basis for claiming that the firing is illegal, notwithstanding that the employment relationship is at-will.

If you can argue that the company has given you implied promises that your employment would be for a certain duration, this also might take it out of the at-will category and give you fighting chances.

If you can argue that you were induced by fraudulent misrepresentations, e.g., to leave an existing employment based on the promise of equity compensation, or if the at-will language in your agreement is defectively implemented, or if any other ground might exist by which you can legally claim you got cheated or had some promise made to you breached, all this too can take this out of the pure at-will category as well and give you a basis for leverage.

To sum up, "cause" is not usually needed by an employer to terminate employment and recapture unvested equity. But you also by no means automatically lose just because your employment is at will. This is a complex area. With a lot at stake, it pays to get good legal advice to see if you can find a good angle by which to protect yourself.

A good legal case depends on legal rules that support it and, even more important, on good facts that motivate judges, juries, and anyone else looking at the case to want to go in a certain direction. Here, Zynga is providing all the good facts an employee needs to motivate people to want to slap them upside the head. That by itself is not enough. But if you find even one legal hook that gives you a sound basis upon which to attack what they are doing, then you can stand and fight. It is not easy, but sometimes you have no choice.

http://www.bls.gov/opub/mlr/2001/01/art1full.pdf

Specifically of interest is the "Covenant-of-good-faith exception"(only in 11 states, CA being one of them) which I first saw referred to also by someone else here on HN.

At trial, the jury found that Kmart terminated Ponsock to avoid having to pay him retirement benefits. As part of his case, he claimed that Kmart’s discharge was in “bad faith” and that, even without a contract, such a termination gave rise to tort liability. The court agreed, citing the employer-employee relationship as one of the “rare and exceptional cases that the duty [of law] is of such a nature as to give rise to tort liability.”

If I was a Zynga employee I'd definitely be talking to a Labor/Employment lawyer. "Give us back your unvested stock or be fired" sounds pretty "bad faith" to me. Zynga should have just fired the people, but I think they don't want to lose the talent, they'd rather negotiate lower compensation instead of having to find new talent which will most certainly know of Zynga's upcoming IPO & demand proper compensation.

When a company decides to terminate an early engineer because the 5% they agreed at the start is deemed too high for an engineer, usually the reason given is 'non-performance'. Even though the engineer is performing his engineering duties.

Does a company need to prove that the engineer failed to perform and document it? or is it usually the company's word against the engineer's? What stands up in the court of law as 'failure to perform duties'?

The Zynga cases are different, however, because the employees being squeezed in those cases are almost certainly pure at-will employees who have no contractual protection against being terminated without cause. Without the contractual protection, such employees can be terminated for pretty much any reason in the normal case and, if "non-performance" is cited as the reason, the company does not need to prove anything to back this up. "Non-performance" in such cases is often nothing more than a label used to rationalize a decision made on who knows what ground (e.g., on the ground that the company just wants to get someone's potentially valuable stock back before it vests).

> [...] Kmart’s discharge was in 'bad faith' and that, even without a contract, such a termination gave rise to tort liability. The court agreed [...]

FTA two people already retained council, settled and still got to keep a portion of their stock.

What Zynga is worried about is that if they're going to be publicly valued at $1 billion, the guy who owns 5% of stock because he was there from day one is going to land $50 million and walk.

I imagine that the biggest problem with IPO's for companies like Zynga (especially if they're acting douche to their employees) is that they risk losing a lot of employees. Either selling up stock to get the cash, or simply retiring to live off dividends and slow-stock sale tactics.

(First time I have heard the phrase "slap them upside the head" used in an informed legal opinion.)

It would be interesting to know the facts from someone in this situation but I also expect that such folks should not be blabbing to folks other than their lawyer.

My interpretation of the story was that they were asking for folks who had stock that was not vested which is to say part of some future vesting pool, to give that up their right to that stock. So if you gave someone 100K shares over 4 years, and they had been there 2 years, 50K was vested and 50k yet to vest, they are asking that you give back the 50k that have yet to vest.

This would be different than Skype's 'clawback' clause, and it would be slightly less onerous than canceling vested but not yet exercised options.

The article also suggests that choices were made based on some measure of value (and implied performance). I have seen folks who are doing ok work, but its not at the level that they are being compensated, that puts you in a tight spot. Few, if any, folks are open to a restructuring of their compensation package in a downward way (which is what Zynga is proposing it would seem). In California at least you simply ask them to leave (and the article suggested that the choice was 'accept this new lower compensation package, or leave, your choice.')

Frankly I think it would be less painful on the company oversall if they just laid off the folks they felt they had made the compensation error on. I don't see anything good coming out of this approach for the company, and I recognize they may think they are being compassionate by not firing people who, except for the size of their option grant, are doing ok.

Google's innovation here is something they call a 'Google Stock Unit' (GSU) (which is not an 'option' it is more like restricted stock) where the ratio of GSU to actual stock is fixed at the time it vests by a perfomance multiplier. That way they can offer a hot shot person 2500 shares of 'restricted' stock (market value of 1.25M$) which vests in four chunks of 625 'units' a year, and if you didn't meet your goal that year your multiplier could be less than 1.0 even 0. So they wouldn't actually have to give it to you if you weren't a hot shot inside of Google. To be fair the multiplier could, in theory, be greater than 1.0 too. The cleverness of that scheme is that the company could 'tune' the compensation of someone dynamically.

I'm guessing Zynga might be wishing they could do something similar for ISO type options.

From my perspective, this sort of thing scares me away from companies, because they might do it again in the future.

There's no way that this actually turns out to be a net positive for the Company. It's going to make it significantly harder to hire actual talent, it's going to cause morale decay and revolt from within the company, and it erodes Zynga's brand. Literally the only benefit here is that the execs end up with more stock when the IPO happens.

This is EXACTLY what is happening - anyone who thinks otherwise is deluded or plain stupid.

When Lockheed bought Savi technology, the RFID company, there were massive stock bonuses given out to the the Savi execs just prior to the sale.

Then they told all the employees who had been there less than 18 months they would get NOTHING for the shares they were hired on with as incentive.

All the other employees were given 15% of what the company had been claiming the street price of the options were.

PLUS they held some significant % of the stock value in an escrow account for some number of months should there be a legal backlash and Lockheed were sues - they were to use the escrow share money on that case...

Pincus is a very very VERY shady character.

Yet another IPO that I would never touch purely on principal alone.

Who wants to be Goldman will be taking this IPO?

Any examples of this? Not that I don't believe you, but just curious

Tells his team to steal game ideas, makes millions in the process then shafts the people who made it happen for him.

Would love to hear from someone who can paint him in a better light than the horrible individual I have in mind at the moment.

Someone is here only for the money multiplication factor. Sales, advertising, marketing and your usual MBA subjects are all about that. That is, not to care about what you are selling, but to create an illusion which gives an opportunity to amplify that seed investment. That is the time to cash on and move on.

Sorry about that. I am, however, still passionate that the actions of Pincus and other executives like him are deplorable and in no way should they be seen as OK - even if "everyone else is doing it".

You fucking suck.

I am not clear if youare advocating these actions or not - but let me make it very clear to you; if you are a proponent of such behavior - lets make sure we never cross paths.

This is NOT OK.

People like this are CANCER.

Sure - many instances of CEOs end up in the position of a Pincus - but it DOES NOT make it ok.

Pincus is a detriment not a person to be idolized.

And it's perfectly fine to tell people with questionable moral values to go and fuck themselves. Even though it's not always the most strategically sound way to make sure they get what they got coming in a world that is indeed not a very nice place at all.

Replying "you fucking suck" to someone taking the position that it's actually OK to go and do a job without having passion and unicorns and rainbows flow out of your ass all day is not the opposite of "taking it like a cabbage", it's the opposite of civilized discourse.

You guys are behaving disgracefully.

Now whether someone who has that specific goal in mind is better at generating profit than someone who's not soulless is a separate question. But at the end of the day it's hard to blame an individual when it's a systematic problem.

Seems likely. Zynga is an obvious build-to-flip. Now is the time to cash it in at peak. The original push in social gaming was based on scaling, but people are starting to demand quality and that's where Zynga is going to die.

Precisely why "trust" should never be a part of an equity negotiation. When millions are on the table people will do whatever they can get away with. Zynga doesn't want another "google chef", but they took full advantage of the "google chef" when promising equity to early employees.

No, but they probably will be promising employees something - and now, everyone knows that unless that promise is in writing, in an iron-clad contract peered over by Hell's best lawyers, it's worthless at best.

Moreover, Zynga execs' move was likely intended to increase the total worth of their shares; if they manage to claw 20% more shares, but destroy 30% of each share's value, they've hurt themselves even in the short term (figures made up for illustration, obviously).

Actually, Groupon's execs are widely perceived as crooks.

Their sales teams are apparently very aggressive but that doesn't make them crooks.

They are basically in for cashing on pre-IPO gold rush.

For me this is more than sufficient to be cautious before working at any start up again.

I think this is probably a bit extreme (I realize you may be employing hyperbole for effect but still) Zynga is a considered a "hot" IPO candidate and as such you will find folks who recognize that not everyone is a super star. Some talent might be more attracted to Zynga because they 'deal with the dead wood' in a proactive way. And pre-IPO options are better than post-IPO options.

It will certainly be interesting to see if it affects their ability to recruit and retain talent. I can only hope that some of the HR people escape and can share the results with others. Too often there isn't any really definitive data post event if it was a net positive or loss for the company. This is why I think there is a lot of hand waving in the HR space, hard to get real numbers.

Would you really classify this as "dealing with the dead wood?" If they were "dealing with the dead wood", I'd expect they would just fire them for being dead wood in the first place and get their unvested options back as a side-effect.

Trying to keep the dead wood employed, but scaring them into effectively renegotiating their contracts isn't the sort of "dealing with" that very many people are going to look upon favorably.

Yes some but I don't think much, IT employment is very much based on trends, in the 70-80's the hot place to work was Bell Labs or DEC, in the 90-00's it was Google. If you ruin your name you loose the A-Listers interest and everyone in tech fashions themselves A-Listers. So when this happens you have to rely on finding talent that has not proven itself yet or settling for the "it's just a job crowd". The biggest draw to pre-IPO is stock and the possibility of fortunes. To me and probably quite a few others, this is a shot across the bow that they will limit the participation in the fortunes part, which kills the primary reason people join pre-IPO start-ups. I would not underestimate the gravity of this action especially in this hot of a market.

Not if they decide to take yours back so they can get more money. pre-IPO options with Zynga are worth nothing.

Usually the employee only wins because the company messed up the paperwork.

It's about an employment contract which involved compensation while an employee was working, where the employer backed out of that later and terminated the employee to keep from paying what are effectively back wages.

I am against suing to get one's job back, esp. here. However, suing to keep the unvested stock they took when dismissing you is a bigger deal.

Here's the thing:

1) Employee is promised stock for efforts

2) Company doesn't want to pay as promised

3) Employee is fired

4) Stock not paid as promised.

I don't think the fact that this occurs in an at will state has any major impact on the analysis.

You can't leave and then expect to get unvested options = otherwise people would simply sign up for every startup, stay a month and move on - then come back years later when the company is a success and ask for their million dollars.

It's abused when companies deliberately fire people before the options vest - this is relatively rare, since any sane company knows that getting rid of all your talent is a rather short term option.

This is what Oracle did when they took over Sun - they fired almost all of the VPs before the deal so they would have no share. In their case it was more justified, these people hadn't contributed to Suns future (it didn't have one) and weren't the reason for the Oracle takeover - there was no reason why they should gain from Oracle being in charge when the music stopped.

With Sun and Oracle, at least the case could be made that the VP's would have been redundant during the reorganization process. But it's different from saying "Hey, give up the stock options or you are fired."

I think it's that point where you have arguable contract claims.

Coming from Australia where you can't fire anybody without good reason (even demoting people can be considered unfair dismissal) this just sounds insane.

http://en.m.wikipedia.org/wiki/At-will_employment

Pretty much the only significant reason you can't get terminated in the US is as a direct result of being in a protected class (so you can't fire someone for being black but you can fire a black person for any other reason including no reason at all)

Corporate personhood is a funny artifact of English Common Law, and its present state in the US is almost unique. Much of the world views corporations rather differently than our (I'm assuming you're American) legal system does.

When you start from the premise that a corporation is an artificial construct that exists at the whim of, for the purposes intended by, and for the general good of, society as expressed through laws, including a corporation in words like "everyone", and speaking of its "freedom", becomes nonsensical.

If an employee can give 2 weeks notice to say they are quiting at any time for any reason, why shouldn't an employer be allowed to do the same.

However, losing your job as an employee is devastating. It's financially difficult and job hunting (particularly in this economic climate) is difficult. I suppose that Australian employment laws are an attempt to make things more equal and force employers to really think before hiring/firing – it makes employees people again rather than just entries in a payroll system.

Ah, this is a very good point!

This stricter regulation does make starting businesses very difficult, and a definite advantage the US has over Europe.

I think the answer is combination of the two where there is some kind of threshold where new/small companies have more freedom to dismiss, but forces larger businesses to treat their employees fairly.

Requiring cause to fire someone is business-hostile at best. Business can not improve efficiency, pivot, or generally adapt to changing markets if they are not free to hire and fire at will.

The one major point most "liberals" (in the American sense) miss regarding employment security is that employers are far less likely to take risks on hiring - whether in quantity, salary, or experience - when they can not fire at-will. This leads to less employment overall, not more.

The arguments are similar to other well intentioned, but seriously deleterious policies, such as rent control and Calfornia's "Prop 13."

That said, ethics and treating people well are very important. I find Zynga's actions unethical and think there is a good chance they should be held civilly liable.

Generally, in countries which require reasons for dismissal, there is a distinction between a redundancy and a dismissal. A redundancy means that the position someone is working in is declared not to exist (and so no one will be hired to replace the redundant employee), while a dismissal means the position continues but the employment of the employee filling that position is ended by the company.

Changing the size of a workforce to "improve efficiency, pivot, or generally adapt to changing markets" is done through redundancies, not through dismissals, and redundancies can generally happen on whatever terms are agreed to in the employment agreement.

If an employee genuinely isn't working out in a no-fire-at-will country, the employee generally has to be treated fairly and given an opportunity to correct the problems, but they can still be dismissed if they are unable to rectify the problems.

The cost of a dismissal might be slightly higher in a non-fire-at-will company, due to the time period when the employee is given a chance to correct the problems, but not significantly, and businesses can still adapt to changing conditions through redundancies. Non-fire-at-will is therefore not a significant barrier to business.

However, it protects employees against abusive practices like those of Zynga in this instance - employees who do not have anything like the same bargaining power as the companies they are working for.

If you can sue. At my last job, they made me sign a binding arbitration agreement as a condition of being employed. I needed the job, so I couldn't play hardball and refuse.

Curious which companies do that. Are you talking about 83(b) election, or were you really able to convince companies to instantly vest upon termination?

So basicly I write it to secure what a good company wants, A pair of handcuffs chaining me to a position, but I ensure that once I have completed my time, they can't deprive me of that rightfully earned compensation, I do this by adding a clause that all awards vest on termination, nothing complex not a bunch of legalize just all options vest and the clause overrides any and all other verbiage related to the matter in any other section of the contract.

Once again, curious to hear the name of the companies. I glanced at this http://www.linkedin.com/in/kentonsmeltzer from your HN profile, and didn't find any Silicon Valley names, but I'm assuming you might not disclose everything there.

So true. Expensive lesson for these folks.

I had the exact same thought about the "fraudster holding the Occupy Boston d/b/a certificate hostage" story. Especially in that kind of ground-up, loosely-couples collective action scenario, how does overt bad acting not result in a Code Red at the food tent?

However the problem with your math (and most others in this thread) is this: lets say Zynga values me at 4 shares, and I get 1 vested per year. However after two years, and a few splits, I have 128 shares.

The company hired me to work as a 4 share employee, then it grew like crazy and I became a 128 share employee. This is normal in tech nowadays, most people take it for granted that you just get lucky and accept your windfall. But the fact is that you are a 4 share employee being paid 3000% of what you were hired at.

You're not a "4 shares employee" you're a "% of the company employee". The 4 shares are worth some percentage of the company and after all those splits they're still worth that same percentage. Splits usually happen to get the cost of the overalls hares down but a $1m holding in some stock is still worth $1m after the split.

>But the fact is that you are a 4 share employee being paid 3000% of what you were hired at.

So what! This is the point of accepting stock as compensation. They worked below what they were worth for the hope that they would win the lottery. They did win the lottery and now the company wants a redo.

Zynga shouldn't be able to come back, with 20/20 hindsight, and say "turns out we did better than we thought we would so we're taking your stock back".

If they failed they certainly wouldn't be giving employees other compensation to make up for their stock being worthless.

IANAL, but if the termination is motivated by the success of the equity gamble the employee took up front, that looks more like breach of contract. Don't want to keep them? That's fine, but pay what you promised you'd pay.

Whether it is moral or whether it will hurt them in the future are different questions.

Definiton of extortion (from wikipedia):

  Extortion (also called shakedown, outwresting, and
  exaction) is a criminal offence which occurs when a
  person unlawfully obtains either money, property or
  services from a person(s), entity, or institution, through coercion.

You are acting as if they are being asked to give away something that they own; they are being asked to give up future compensation.

I put this in another comment: "However the problem with your math (and most others in this thread) is this: lets say Zynga values me at 4 shares, and I get 1 vested per year. However after two years, and a few splits, I have 128 shares.

The company hired me to work as a 4 share employee, then it grew like crazy and I became a 128 share employee. This is normal in tech nowadays, most people take it for granted that you just get lucky and accept your windfall. But the fact is that you are a 4 share employee being paid 3000% of what you were hired at."

I know this goes against the way it's always been in the tech industry, but it is not extortion.

I am simply trying to explain why this is a moral issue and not a legal issue.

This is the equivalent of saying: 'your gonna have to take a pay cut or were gonna have to let you go'. It is morally repugnant and goes against everything we believe in the startup community, but it is not illegal, nor should it be.

Now the company says "give us back 2014 and 2015 or you're fired". What would you say?

The larger issue though here is that of a contract. The company has in essence said "we want you to stick around and so we are giving you an incentive of stock options which vest on such and such a schedule."

Later they are saying "give up what we gave you or leave so we can take them back." It's this choice here which says clearly "we are going back on our contracts with you."

A close example might be this "We are giving you a raise and will pay you retro pay next month when this goes through but you have to work fewer hours at your hourly wage" and then the next month saying "sorry, no retro pay for you."

I think this would be a fun case. And now that class action cases have taken a few serious setbacks in the courts, it seems to me that Zynga really should be getting sued by lots and lots of employees in individual lawsuits..... One piranha may be good for dinner, but don't wade into a swarm of them.

It's not at all clear-cut. See sections 5-6 of this article: http://www.bernabeipllc.com/pdfs/stockoptions.pdf

It is the equivalent of saying 'you need to take a cut in pay or you will be laid off'.

In most other kinds of contingent pay that's tortious: if you promise a building contractor contingency bonuses upon meeting certain deadlines, and then you purposely interfere to make them miss the deadlines so you can get the work cheaper (and admit doing so!), you're probably acting illegally. Heck, even basketball players have sued over instances where a team kept them out of a few games solely to cause them to miss performance targets.

Not only is it shady it is a legal term and that term is called bad faith, if you can prove the party acted in bad faith, which if what is being reported about, return it or get fired, then that one is pretty locked up, then they are in violation of the spirit of contract. Faith is one of the foundations of contract law. If you are found to have not honored the faith portion of the contract then more times than not, you will be on the loosing end of a contract dispute.

I think the fact that it continuously vests after a cliff, that it's clear in basically every options grant that you don't receive unvested options upon termination, and because employment contracts repeatedly emphasize that employment is completely at-will makes it pretty clear that you shouldn't count your unvested option chickens before they hatch, and hard to prove that you could reasonably expect to vest all options. The employees that have been there for multiple years will have already vested a big percentage of their stock regardless of what happens.

I think Zynga is repulsive, and will hopefully get punished hard on many fronts for this, but I'm not convinced that what they're doing is strictly illegal. I'm convinced they'll get sued, though.

The exception is M&A earn out or vesting for key hires, which is often yearly, and sometimes even crazier; 1/2/3/4 where it's 10% the first year, 20% the second, 30% the third, and 40% the fourth.

That latter vesting is pretty crazy - with each year, each point is usually getting nonlinearly more valuable as well.

If I'm a small company just getting started, what do I have to attract top talent? Maybe I can't afford to pay as well as the established companies, or maybe my benefits are going to be worse (or nonexistent). But I do have stock options. If I'm a fledgling corporation, stock options can get me more talent than I could otherwise command, and if I'm a skilled engineer, I feel like I can directly affect the fortunes of this company and thus my own net worth if I am compensated heavily in stock options which, in the unlikely chance that all goes better than expected, could make me wildly rich.

Your hypothetical four-share employee certainly didn't sign on just on the strength of those four shares alone. And, quite possibly, the employer played up the possibility of those four shares becoming many more shares down the road if things go well.

They are. They own those stock options, with the provision that they stay out the life of the vesting period. They are now being prevented from holding up their side of the contract. They would gladly stay through the vesting period if allowed to.

What they are doing is like hiring a salesman on low salary + commission and then firing them the day before the commission is paid.