Zynga Wants Employees To Give Back Stock

Give us our stock back! That's essentially what Zynga is telling some of its employees as it prepares to take its brand to the public markets.

Zynga issued shares in the company as a substitute for higher salaries as it sought to attract young developer talent -- and it worked. The social gaming company is now an online phenomenon with popular games like Mafia Wars, CityVille and FarmVille.

Given a report in The Wall Street Journal, however, it seems Zynga's founders are looking to renege on their stock offer now that the company is worth billions and planning to to do an initial public offering of its shares. With Groupon's wild success in the public markets, Zynga CEO Mark Pincus may be giving second thoughts to those stock distributions.

Cough It Up

"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 Journal reported. "The executives chose an unusual solution: They began demanding that certain employees surrender some shares or be fired."

Some analysts are putting a $20 billion value on Zynga. Early employees who labored to make the company a success and hold significant shares could become rich overnight in an IPO. Zynga moved last year to compile a list of Zynga employees whose "performance might not justify their large grants of restricted shares," according to the Journal. Zynga could not immediately be reached for comment, and the Journal reports Zynga would not make Pincus available to comment.

Charles King, principal analyst at Pund-IT, called the move culturally distasteful from the standpoint of Silicon Valley. He points to the common start-up practice of provisioning company shares to early-stage workers as a bonus or incentive to ensure talented individuals will work their hardest without plenty of overtime and no complaints.

Recruiting Woes

"Giving those shares is a tried and true practice that has worked very well for organizations and their employees over time," King said. "To issue stock and then tell employees that management wants it back is deeply insensitive and probably legally actionable."

As King sees it, Zynga has breached the trust of its employees -- and it takes a long time to rebuild a reputation. He said he can't imagine what was going through the minds of Zynga's executives when they made this decision and suspects the downside is going to far outweigh the upside of "glomming" on to shares it already distributed.

"I have a feeling that Zynga's management probably just burned any bridge that they might have to attracting high-quality talent in the future as well," King said.

"It's one thing to screw the employees that have been with you from the beginning, but behavior like this is not going to lead many sensible people to investigate job opportunities with Zynga. In fact, if they tried to recruit me I think I would run in the other direction."