Zynga, Equity & Tough Decisions

A couple of days ago, a story broke in the Wall Street Journal about Zynga “leaning” on some early employees to surrender portions of their equity.  Not surprisingly, this blew up a bit in the press, leading to a wide number of articles talking about the potential threats to the Silicon Valley equity culture, employment litigation, and a number of fairly serious issues.

As Zynga has indicated that their IPO is imminent, no doubt a lot of this is fueled by the fact that Zynga is a hot company right now.  But some of the issues raised are very real, and I thought it might be interesting to lend a different perspective to the story as a opportunity to think more deeply about the challenges leaders face in hyper growth companies, even ones as successful as Zynga.

Executives are expensive

Marc Andreesen wrote a great blog post on some of the very real issues around hiring, managing and firing executives in hypergrowth technology start-ups.  It’s too long to capture everything here, but I do recommend reading it. Marc calls it the “executive firing paradox”:

It takes time to gather data to evaluate an executive’s performance. You can’t evaluate an executive based on her own output, like a normal employee — you have to evaluate her based on the output of her organization. It takes time for her to build and manage her organization to generate output. Therefore, it takes longer to evaluate the performance of an executive than a normal employee.

But, an executive can cause far more damage than a normal employee. A normal employee doesn’t work out, fine, replace him. An executive doesn’t work out, it can — worst case — permanently cripple her function and sometimes the entire company.Therefore, it is far more important to fire a bad executive as fast as possible, versus a normal employee.

Now, the facts of the Zynga story are a bit blurry in the press, but for the purposes of this blog post, I’m assuming the following:

• This issue affected a relatively small number of people at Zynga, specifically executive-level hires
• These people were identified, over time, as underperformers at the original role they filled
• These people still had not vested their equity

Obviously, the above distinctions above matter greatly in terms of the tricky balance of issues around making a decision like this.

It’s worth noting, however, that executives are expensive hires.  If an executive is vesting 250K shares per year, and hiring a new engineer or designer costs 10K shares per year, then that person really has to deliver an incredible amount of value to justify their compensation.  After all, you could use the money to hire 25 additional engineers.  A great leader can easily justify that value (and more) in terms of their power to create long term value for the company, but it’s definitely a high bar to clear.

The Reason for Vesting

Not to be pedantic, but there is a very good reason why employees at tech companies are given equity.  Fundamentally, the best corporate cultures in Silicon Valley are based on people working together not to just build technology or products, but actively working to build a great company.  Stock ownership is an important part of that culture – when people have meaningful equity in a company, it cements the idea that everyone is a part-owner of the business.

Four years may not seem like a long time, but in truth, hypergrowth tech companies grow and change at rates that seem theoretically impossible.  Zynga had 150 employees in 2008.  LinkedIn had fewer than 400.  As a result, the responsibilities and requirements of almost any position at the company radically change in a year, let alone four years.  This is one of the great opportunities that high tech companies afford employees who take advantage of growth to stretch and grow quickly into new responsibilities and experiences.  But it’s extremely challenging, and fairly unforgiving as hypergrowth means that every person’s efforts potentially impact dozens of employees going forward and millions of users.

Vesting exists as an important reminder, however, that your share of the company is earned over time, not at signing.  You earn your share of the company – every day, every month, every year.  For most people, this isn’t an issue, because it is amazing how dedicated people are in Silicon Valley.  People are passionate about what they do and the teams they work with, and that passion translates into world-class dedication and effort.

Real Equity, Real Money, Really Tough Decisions

Back to Zynga.  Let’s assume, for a second, that you have the situation described in the Wall Street Journal.  You’ve identified a small number of relatively high level employees who, for whatever reason, you decide are underperforming their original roles.  Normally, there are a couple of options:

1. Tolerate the under-performance, or compensate for it with additional hires, but let them “vest out” their stock grants despite the fact that they aren’t filling the role that the equity was predicated on.
2. Fire them.

As per Marc Andreesen’s post, option (1) is toxic.  The equity, while material, isn’t the dominant issue.  The impact to the company culture can be devastating, and if a repeated pattern, permanently damaging to the ability of the company to attract and retain the best talent and have them do their best work.

Let’s not forget also that we ask our company leaders to be thoughtful of their responsibilities to shareholders as well, particularly in public companies.  Executives are expensive hires, and equity allocated to them could always be allocated to hiring other great people.  Human beings tend to suffer from “sunk cost fallacy”, and they hate to admit mistakes and take on difficult confrontation.  Option (1) swims in all of those issues.

But option (2) doesn’t always feel right in a hyper-growth company either.  What if the employee has a number of positive attributes and skills?  What if you would gladly hire them today, just in a different role?

From the press, it looks like Zynga tried to find a third way.  Rather than fire the employee, offer them the ability to stay at the company in a role that better suits their performance, with compensation to match.

You may not agree with that approach, and I think Semil Shah does a good job in TechCrunch talking about the cultural issues that this type of approach can cause.  But it would be foolish not to see that this is really a tough decision, and shouldn’t be trivialized or sensationalized.

Talking vs. Doing

There has never been a shortage of armchair quarterbacks and theorists debating the merits and demerits of different leadership actions and company cultures.  It’s part of an ecosystem that rewards thinking and learning.

It’s relatively simple to have a knee-jerk, emotional reaction to a piece like the one in the Wall Street Journal.  Let’s face it, that’s part of the reason they published it.  Companies like Zynga are amazing, and more importantly, they matter.  How they grow, navigate, succeed and fail is part of how we all learn to build better high tech companies.

It’s fairly easy, in fact, to demonize actions that you don’t agree with.  However, it’s often a much more productive intellectual path to ask yourself, “Why would good, smart, ethical people do this?”  Whether you agree or disagree with the actions taken by Zynga here, these are very hard decisions, and there is a lot for aspiring technology leaders to think about and learn from.

As Tom Hanks said in “A League of Their Own”:

If it wasn’t hard everyone would do it. The hard is what makes it great.