How employees get screwed in private equity dealsPosted: June 24, 2011
I learned a hard lesson from working with a
bunch of rat bastards leading private equity firm, Silver Lake. I joined Skype after the company was spun out of eBay by SilverLake in deal valued at $2.7B and was recruited to help accelerate the pace of product development and make the Skype app more web-oriented. I was at the company for just over a year in a product management role and felt like my team accomplished some important things along the way, including reduction of software development cycles from months down to 2-weeks and delivery of a whole new advertising revenue stream to the company. It was a fun and challenging job, involving tons of international travel and I met some amazing people along the way.
Now despite the fact that Skype has a Palo Alto office and kind of seems like it would fit right in with Silicon Valley tech companies, it turns out that the employment terms for a Silver Lake company are *very* different from what most Valley high-tech employees are used to. Here are three important things to watch out for if you’re thinking about joining a company that is being managed by a private equity firm or if your company gets taken over by a PE bank.
1. Lawyer Up
(image credit: http://weheartit.com/entry/5625871)
The most important lesson I learned from Skype was that compensation and stock policies in PE-owned firms can be very heavily tilted in the owners’ favor and against the employees. Skype employees have 5-year vesting of stock options, for example, not the usual 4 year schedule that most Valley firms have. Even worse, Skype’s stock option agreement had special clauses that the Board had slipped in that gives them the right to “repurchase” any vested shares for anyone who leaves the company voluntarily or is terminated with cause — effectively taking “vested” shares and making them worthless. Here’s a nice letter I got from the Associate General Counsel of Skype that points out exactly how my stock options have “no financial value.” (see lee.pdf). Gee, thanks.
Now, I’ve seen my share of legal documents for tech companies. I’ve worked in Valley tech companies for over 15 years, have founded startups, done VC financings, and invested in companies. None of that prepared me for the kinds of legal shenanigans that the PE guys at Silver Lake pulled because I had never come across those kinds of terms before, let alone the fact that these clauses were hidden as one-liners in otherwise pretty standard-looking documents. (see Stock Option Grant Agreement for Kuo-Yee Lee – signed)
So my first point of advice to anyone considering working for a PE-lead firm is to LAWYER UP — it’ll be worth your while to get an attorney to carefully review all employment documents so that you know what you’re really getting into.
2. The Bobs
Working with Silver Lake was my first opportunity to witness up-close-and-personal how a PE firm does its business of restructuring a company that they’ve just taken over. And it was breath-taking. The firm inserted itself into every level of the company. At one point in my tenure at Skype, Silver Lake had representatives or consultants on the Board, in C-level executive roles, in technical leadership and operating roles, and all the way on thru the organization to the person actually running our software deployment schedule… So Silver Lake put its fingers really deeply into Skype’s pie and they started rearranging things.
You can agree or disagree with the practice of re-organization, but I personally had never been part of a restructuring that ran so deep in a company. During the year I was at Skype, the company:
- lost a CEO
- hired and fired a CTO
- hired and fired a CFO
- gained a CEO, CMO, CIO, and CDO
- created an entirely new product development org structure
- eliminated every Project Manager role
- fired, re-interviewed, and re-hired Product Managers
- created a two new business units
- combined two business units into one
- dissolved one business unit
- opened a new office and hired several hundred people
- the list goes on…
3. It Ain’t Over ’til It’s Over
Even if an employee of a PE-owned company has avoided the legal beartraps and weathered the re-org’ing, they’re still not safe. Even as Skypers were celebrating the huge potential of the Microsoft deal, the PE bankers were sharpening their knives and plotting which employees to fire in order to maximize profits and minimize payouts to non-owners. Seriously, how greedy do you need to be to make $5B and still try to screw the people who made that value possible? I mean, Silver Lake is trying to hyper-optimize their returns to the point that they’re trying to deny employee payouts that amount to less than 0.3% of the returns that they’ll get from the deal. Srsly. Really?
So, just be warned: Silicon Valley startup folks may think we’ve had hard dealings with venture capitalists… But in my opinion, VC greed pales in comparison to the level of greed exhibited by the Silver Lake private equity firm.
And there you have it, my top three lessons learned from being raked over the coals by a PE firm.
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