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Report: Zynga redistributing stock ahead of IPO

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A report in the Wall Street Journal Thursday indicated that Zynga chief executive Mark Pincus is asking some employees to give back some of their stock ahead of its initial public offering. The report said that a few early employees who received stock in the company are being asked to renegotiate the terms of their holdings based on performance.

Zynga declined to comment on the report.

Dan Primack at Fortune pointed out in his analysis of the article that the company’s actions may not be as sinister as they seem. Employees who underperform are often fired, especially in the fast-moving world of Silicon Valley, he wrote. But in Zynga’s case, he wrote, it seems that the company prefers to find those employees different positions in the company, though perhaps “lower down in the corporate totem pole” in the name of retaining talent.

“What Zynga did may sound bad on newspaper, but is little more than morally-acceptable business as usual,” Primack wrote.

Andrew J. Bernstein, a partner at Mintz Levin who specializes in labor and employment, offered a similar interpretation, though he said this sort of action is very unusual. “I think it’s probably a desire to distribute out on a retroactive basis in a way that management thinks represent the various contributions people made,” he said. “That speaks to their culture.” He added that retroactive action like this can create some issues between Zynga and its employees, but that it may also indicate that the company is one that makes a point of rewarding good performance.

The social gaming company has sold itself as a meritocracy in job postings and encourages its employees to “be the CEO” of their own areas. It’s also described itself as a very fast-moving company.

“It is contrary to the culture of what we’ve seen coming out of Silicon Valley in the last twenty years,” he said. “It will be interesting to see to what extent if any other Silicon Valley companies mimic” what’s happened at Zynga.

Bernstein said that there is a possibility that employees asked to give up stock may be able to say the company violated a covenant of good faith and fair dealing, but added that it’s likely Zynga has taken pains to make sure that doesn’t happen. Silicon Valley companies often ask their employees to stay with a company on the gamble that they’ll make it big.

“It’s a tradeoff. Start-ups are often short on cash and long on equity.” he said. “Here you have a circumstance where people took that bet and now the company has decided to redistribute.”

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