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Skype's executive compensation conundrum

Recent events at the Internet phone giant have some wondering if certain execs are getting shortchanged or if the ways of Silicon Valley are changing.

Steven Musil Night Editor / News
Steven Musil is the night news editor at CNET News. He's been hooked on tech since learning BASIC in the late '70s. When not cleaning up after his daughter and son, Steven can be found pedaling around the San Francisco Bay Area. Before joining CNET in 2000, Steven spent 10 years at various Bay Area newspapers.
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Steven Musil
2 min read

When word broke last week that Skype was firing senior executives, many assumed it was part of an effort to save payout costs ahead of its merger with Microsoft.

The Internet phone giant, which was recently purchased by Microsoft for $8.5 billion, characterized the firings as "management changes" that were part of "a recent internal shift."

However, Skype's executive compensation issues recaptured Silicon Valley's attention after an ex-Skype employee revealed this week that when he left the company, it terminated not only his unvested stock options, but his vested ones as well. Yee Lee wrote an essay last week describing how, after working at Skype for a little more than a year in product management, he resigned, only to learn that he didn't own the stock options he thought he owned.

Lee said he learned that although Skye was based in Silicon Valley, the company's employment terms are very different from other companies in the tech industry. Yee, who says he worked in Silicon Valley for more than 15 years, learned that the company's stock option agreement had a special "clawback" clause that gives the company the right to "repurchase" vested shares from any employee who voluntarily resigns or is terminated for cause --"effectively taking 'vested' shares and making them worthless," he said.

Here's is the clause as it appears in the stock option grant agreement (PDF) Lee signed:

If, in connection with the termination of a Participant's Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.

The clause effectively meant his shares had "no value," as Lee learned in a letter from an associate general counsel at Skype.

Representatives at Silver Lake, the equity partnership that led the group that bought Skype from eBay, did not immediately respond to request for comment.

CNN's Dan Primack called the clause "intentionally incomprehensible." Reuters' Felix Salmon said the clause is " "="" rel="nofollow" class="c-regularLink" target="_blank">downright evil and destroys the balance of trust on which Silicon Valley has been built."

Henry Blodget, meanwhile, says that if Silver Lake didn't reveal the clawback provision to employees, it should have. But he points out "the big difference between Skype and most Silicon Valley venture-backed companies--a difference that is inflaming this scandal--is that Skype is a private-equity deal, not a venture capital deal."

And citing a Skype investor, Blodget concludes, "More broadly...Silicon Valley compensation trends are changing fast, and not just in private equity deals."