Jun 262011

Over at TechCrunch, Michael Arrington is having a fit over a “clawback” provision in Skype’s Option Agreement that required a departing executive to sell back any stock received when he exercised his stock options, at the same price he bought them for. (The executive, Yee Lee, posted about it on his new company’s blog.) Effectively, this denies the executive the entire purpose of having stock options — to gain from the company’s growth. Considering that Microsoft just announced that it was buying Skype, this seems to be a real jerk move.

Clawback provisions are actually fairly common in option agreements, although they’re often much more limited. One popular provision, for example, provides for the clawback if the (ex-)employee’s non-compete agreement is held to be unenforceable. Another allows the company to claw exercised shares back if the employee is terminated for some sort of dishonesty. And, both Sarbanes-Oxley and Dodd-Frank actually require clawbacks in certain cases when a company needs to restate its accounting and financial reports. In general, those sorts of provisions are not terribly controversial. (Of course, anytime you’re taking something away from a departing employee, you should be prepared for some anger and, occasionally, litigation.)

The Private Equity firm that owns Skype, naturally, has a different take, approximately, “We hired him to help get the company sold.  He quit before that happened, so he shouldn’t get the benefit of his options.”

I don’t have an issue with Skype making that bargain with its employees. But, that’s a much different deal than many employees expect. That’s why I try to make sure that clawback provisions in an option grant are obvious. Hiding them only generates ill will among employees and, as Skype has found out, in the press.

[Image courtesy of Meredith Harris, used with permission under a Creative Commons License. Thanks Meredith!]