Business

Zynga tries to take back stock options

Thursday, November 10, 2011

One of the biggest game developers for social networks is playing its own high-stakes game. Zynga is trying to take back lucrative stock options given to some of its employees.

It takes stock options to attract top talent to work for a high-risk start-up.

"That's one of the incentives to go to a start-up versus a big established company," said Sammy Wong, a stock option employee.

As Zynga prepares for its initial public offering, or IPO, there is an effort underway to take back some of those stock options. The Wall Street Journal is reporting. That founder and CEO Mark Pincus is threatening to fire under-performing employees if they don't give back their options.

Steve Diamond is an expert on high tech start-up's at Santa Clara University School of Law. He questions the legality of taking the options back.

"That suggests perhaps the possibility that they're not acting in good faith and enforcing or carrying out the terms of the agreement they made with the employees in the first place," said Diamond.

Diamond poured over Zynga's IPO filing, as did ABC7. Control of the company could be the motivation. Zynga says it plans to have three classes of stock when it goes public: Class A is the common stock the public can buy, Class B and C are preferred stock with enhanced rights -- 7 votes per share for B, 70 votes per share for C. CEO Mark Pincus will hold all Class C stock. The same document seems to indicate early employees were granted Class B options, which give them more control of Zynga.

"It may be that they want to keep governance and control of the corporation within a select group in the executive team and the board, rather than sharing it with new employees," said Diamond.

However, there could be a backlash.

"If the mechanism is seen as unfair by some of the employees, then clearly it's going to come back to bite Zynga," said Rob Enderle, a technology analyst.

We reached out to Zynga for an interview, but they said they could not comment. Valley veterans who have cashed in on options hope what Zynga is attempting to do won't spread.

"I would hope that's not a trend that's going away," said Bill Diamond, a past stock option beneficiary.

An email has surfaced from Zynga's CEO, and while it doesn't confirm or deny there is a stock take-back in process, Pincus did tell employees on Thursday, "Being a meritocracy is one of our core values... Every employee deserves the same opportunity to lead." Pincus went on to say he's proud of the ethical and fair way that Zynga operates.

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zynga, stocks, business, david louie
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