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Does it pay to be bad? Silver Lake's Skype sale fine print

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We knew there had to be something evil when Microsoft was involved but in this story of the purchase of Skype it isn't actually the Evil Empire of Redmond, at least not according to Reuters journo Felix Salmon.

He's branded Silver Lake, the seller, as being evil, rather than Ballmer's Ball Boys*.

It's an issue of semantics. The argument is – in an echo of the Bill Clinton/Monica Lewinsky controversy over what the meaning of "is" was – over the meaning of the word "vested". The question is: at what time is an option that is vested actually vested?

For those who haven't had the joy of working for a venture capital firm or private-equity-backed company (lucky you!), part of the pay will come in share options. These typically vest in stages, so many after x years, another chunk after y and so on. That is, that you actually receive the shares themselves, not just the option to buy them at a predetermined price, that's what "vesting" means. More importantly for our story, if you leave the company, whether you've been fired (for cause or not) or whether you just want to leave, you take your vested shares with you but your options lapse.

Options are there to encourage you to stay with the company and work hard, vested shares are a "reward" for having stayed. You get the next set of options to keep you staying and working hard etc.

The other thing is that when a company changes hands (as with the Skype sale by Silver Lake to Microsoft) then all options usually vest: the argument is that if you've managed to be part of bringing the company to the big payday then you get some of it.

There's been a bit of a kerfluffle over options in this Skype sale. At first there were some rumours that certain management types were being fired between the announcement of the purchase and the deal actually closing (usually the 60 to 90 days it takes for all of the lawyers to agree everything). This would mean that their options grants would lapse and not vest upon completion of the deal. A bit sharp perhaps, not quite in keeping with the "everyone gets gloriously rich" when there's a home run attitude of Silicon Valley.

But it turns out, if Salmon is right, that there's more to it than this. This phrase buried in the contracts:

Pursuant to Section 8.01 of the Partnership Agreement, Skype has the right (the "Call Right"), which it intends to exercise, to repurchase up to all vested shares underlying your Options at a per share price equal to the exercise price applicable to the shares being repurchased.

In other words, not only do options not vest on completion of the deal for those who have been fired, options that have vested – shares that are held by those who have left the firm – are not to be valued at Microsoft's buyout price, but rather at the price at which the shares first vested, ie, the original options prices.

The argument being put forward for this is that Silver Lake is not a venture capital firm, it's a private equity fund. Sure, the VC types might let everyone keep their vested shares and share in the booty, but not the more hard-nosed private equity peeps. "You've got to be in it to win it" ... you've got to still be an employee in good standing at the exit to make anything off your stock, in other words.

Whether this is always true of the private equity as opposed to the VC world is for others to confirm. There's certainly nothing illegal or even slightly dodgy about it: it was in the contract even if it was in legalese. But it might make people pay a little more attention to any contract they sign with Silver Lake though. ®

*Obligatory Wimbledon reference.

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