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Thursday, November 10, 2011

Zynga CEO Mark Pincus, after generously giving shares to top talent in the company, last year began demanding that certain employees surrender some shares or be fired. Shayndi Raice has the story on Digits.

SAN FRANCISCO—Zynga Inc. Chief Executive Mark Pincus often gave shares rather than high salaries to his top talent as he built his online-game start-up.

But as Zynga grew into a multibillion-dollar company with hot games like "FarmVille" and "Mafia Wars," Mr. Pincus appears to have developed giver's remorse.

Zynga CEO Mark Pincus, at a company event last month, asked certain employees to surrender some restricted shares or face dismissal.

Early last year, as Mr. Pincus began preparing to take Zynga public, he and several other executives decided the company had doled out too many stock rights to certain people in its early days, say people familiar with the matter. The executives chose an unusual solution: They began demanding that certain employees surrender some shares or be fired.

Those shares matter as Zynga approaches an initial public offering, expected this year, that could value it at close to $20 billion and make holders of large blocks of stock wealthy.

Zynga's demand for the return of shares could expose the company to employment litigation—and, were the practice to catch on and spread, would erode a central pillar of Silicon Valley culture, in which start-ups with limited cash and a risk of failure dangle the possibility of stock riches in order to lure talent.

Built into that arrangement is the chance that founders will later wish they hadn't given away so much stock, and also that some very early employees will end up with bigger windfalls than latecomers who contribute more to the company. Many in Silicon Valley cite an early-hired Google Inc. cook whose stock was worth $20 million after the firm's 2004 IPO.

Zynga attempted to avoid such pitfalls. In meetings last year, Zynga executives said they didn't want a "Google chef" situation, said a person with knowledge of the discussions.

The result was a list compiled by top Zynga executives of employees whose job performance might not justify their large grants of restricted shares, which are shares that are doled out free but don't immediately "vest" and become saleable. Some employees Zynga reviewed had total grants worth tens of millions of dollars. Demands to return stock, however, applied only to portions of not-yet-vested share grants.

One list that Mr. Pincus kept, said people familiar with it, was known as his MIA list, for executives who did so little he considered them "missing in action."

Zynga declined to make Mr. Pincus available for an interview.

Andrew Trader, one of the first people Mr. Pincus brought in when he decided to found Zynga in 2007, eventually ended up on a broader list of people the CEO felt might have too much restricted stock, according to a person with knowledge of the list.

Mr. Trader—whose early duties, paradoxically, had included handing out shares to employees—left in March 2010, leaving behind some unvested shares but receiving a settlement, said people familiar with his situation. Mr. Trader didn't respond to requests for comment.

A person knowledgeable about another early hire's case said that during the first half of 2010, Mr. Pincus told this employee he had too many unvested shares and had to return a portion of them or Mr. Pincus would fire him. If so, he would lose all of the unvested stock.

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