Skype Stock Options Flap

July 9, 2011

Interesting column earlier this week by Steven Davidoff in the NY Times’ DealBook column on the seeming differences between venture capital firms and private equity groups.  It seems that just before its sale to Microsoft, Skype, which was then controlled by the private equity firm Silver Lake, gave notice to Yee Lee, a former employee, of its intent to exercise its right to repurchase at their exercise price shares of stock that might be acquired by Lee upon his exercise of vested stock option awards.  The situation received widespread attention in Silicon Valley following Lee’s rant on his FrameThink blog about how the practice was contrary to start-up company norms, at least by Silicon Valley standards, and the rant was subsequently picked up on by a writer at Fortune magazine.  Davidoff concluded that Silver Lake’s emphasis on maximizing every dollar even at the expense of its reputation for fairness being pilloried provided a key contrast with the focus by VCs on entrepreneurial creative and relationship economics.  Skimming the reader comments propmpted by the former employee’s blog post and the DealBook post, makes clear that such distinctions may be more in the eyes of the beholder than real. 

The same is true with whether the practice engaged in by Skype with its stock options repurchase program is typical.  From my own experience, it appears atypical and counter to the goal of employee retention, at least if the way the options agreement clauses work in practice was not made clear to subject employees.  Had they been aware of the potentially aggressive approach to repurchase employees may have chosen to stay longer (or, of course, possibly not have joined Skype in the first place).  You have to read the letter — Lee has handily posted the letter — that Skype sent to Lee to appreciate the almost comical nature of the situation.  Davidoff makes the point that sympathy is difficult where the employee did not ay close enough attention to the specifics of the underlying contract.  That may be partially true, but when one doesn’t read the contract and finds out that things were not really as one expected, that is sometimes as much about the abnormality of a situation as it is about making carefree assumptions.