The way ESOPs usually work in startup companies is by issuing the options with a vesting period, usually four (4) years. Once the shares are vested an optionee may purchase and own the shares. However, Skype followed different conventions. The article explains Skype’s unique ESOP agreement.
If an employee left or was terminated, Skype was able to terminate both non-vested and vested options, and force employees to allow them to buy back shares that they have already paid for, at the original purchase price. The article explains how Skype terminated many employees in advance of the Microsoft Acquisition. There are speculations that Skype fired the employees and terminated the options in order to maintain the value of the shares.
The article suggests that this ESOP may have been fraudulent for two (2) reasons. First, the employees seemed to have no information about the exact details of the ESOP or the effect of the relevant clauses of the plan. Second, it appears to be very suspicious that many employees were suddenly fired ‘for cause’ at the very moment of a looming acquisition.
The article states that such plans may be attractive to companies that either “don’t want to give away too much equity in stock options”, or to companies that “anticipate a long period of being privately held and don’t want to deal with outside shareholders”. Either way, transparency about ESOP terms is essential.
Takeaway:
- Company ESOP’s can provide for the clawback of vested shares, and the termination of options, but the company must provide enough information to the employees so that they can make an informed decision about the financial attractiveness of the ESOP.