Why Some Skypers Are Seeing Red

For decades, people such as Yee Lee have been coming to Silicon Valley for the opportunity to work not just for a salary but for stock options that give employees the right to buy a chunk of the company they work for—and cash in big when it goes public or gets acquired. It's so much a part of the culture that most experienced high-tech hands don't bother hiring a lawyer to read the fine print on a prospective employer's stock option plan, just as they wouldn't hire a benefits expert to check the health plan.

Which is why Lee was so surprised by what happened after he left Skype Technologies, the Internet telephony company, in April. Normally options give employees the right to buy shares at the price on the grant date, once they have worked at the company for a time. After a month of back-and-forth with Skype's human resources department, Lee learned that even his "vested" options were worthless. It turns out the investor group, led by private equity firm Silver Lake Partners that bought Skype from EBay (EBAY) in 2009, had secured a so-called repurchase right that gave them authority to buy back the shares at the grant price. "I've never heard of a company taking away vested options," says compensation expert and Bloomberg News consultant Graef Crystal. "It invalidates the meaning of the word 'vested.' "

The policy may be even more infuriating to some recently departed Skype employees. Just weeks ago, on May 10, they were elated when Microsoft agreed to buy the company for $8.5 billion—more than four times the $2 billion the Silver Lake-led group offered EBay. Given that massive payday, Lee can't understand why Silver Lake would begrudge him the $70,000 or so gain he would have made on the shares he'd earned for his 13 months of work at the company. "If you've already made so much money, why do you have to squeeze every ounce of flesh out of every person?" he asks.

Silver Lake declined to comment. When asked about Lee's situation, Skype spokesman Brian O'Shaughnessy said, "You've got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave, therefore he doesn't get that benefit."

Lee and another former employee say the policy is particularly unfair to top executives such as former chief strategy officer Christopher Dean and advertising chief Don Albert, who are among six senior managers fired in recent weeks. They, after all, were part of the crew that grew Skype to the point that Microsoft (MSFT) was willing to pay such a handsome price. The other ex-Skyper estimates the total payout to these executives would have been less than $20 million. That works out to 0.3 percent of the profits Silver Lake and the other investors will pocket from the Microsoft acquisition (assuming shareholders approve the deal).

Such talk can't help Skype as it tries to attract top talent. Google (GOOG), Apple (AAPL), Facebook, and other companies are throwing rich packages at tech veterans such as Lee, who has held jobs at PayPal, the online payments platform owned by EBay, and Slide, a photo-sharing site.

While Lee concedes the legal documentation exists for the repurchase right, he says nobody at the company mentioned it when he joined Skype in March 2010. "I would have never gone to work there had I known," he says. The 11-page stock option agreement he signed looked to him like boiler plate and suggested a typical "one-year cliff" at which point 25 percent of his four-year option grant would vest. The only mention that the company had the right to buy if he left in less than five years came in a single sentence toward the end of the document that referred him to yet another document, which he never bothered to read.

By early 2011, Lee had tired of a grueling travel schedule and decided to take a job at Silicon Valley startup Katango. When he asked for a form on Apr. 6 so he could exercise his vested shares, an HR staffer promised to send it to him by the end of the week.

She got back to him 11 days later with the bad news: His vested shares were worthless. Worse than worthless, because the company's decision to repurchase would also cause a tax hit to him. After three more weeks of e-mails, on May 25, Lee wrote to Skype CEO Tony Bates, citing "unusual and potentially unethical business practices." He asked Bates, hired the previous September, not to enforce the repurchase clause and let Skype staffers leave with some windfall. "For me personally, the sum of money involved here is not life-changing," Lee wrote. "So I knew that the dollar amounts have even less impact on Skype as an enterprise."

The bottom line: A former Skype employee says the firm's private-equity owners unfairly deprived him of an options windfall.

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