Skype's Employee Stock Option Plan: Worthless Only if You Quit Before 2014?

No question Skype's stock option plan is pretty damn complicated. And the extra grief of having to figure out how the plan relates to a "Management Partnership" which holds the shares issued on exercise of vested options . . .

442px-KolkhozianosIt's no wonder some former Skype employees were confused.

But the news reporting of this I'm reading is missing a nuance that seems important to me: the repurchase-at-cost feature of Skype's scheme seems only to apply to persons who voluntarily quit the company too soon or were fired with "Cause." By "too soon" I mean before November 19, 2014, which is what a key defined term ("Completion Date") ends up meaning.

Here's the bulk of the pricing provision that would apply if you stuck it out or got yourself fired (without cause) early:

"if the Grantee’s Employment is terminated (A) by the Skype Group without Cause, (B) by the Grantee for any reason after the fifth (5th) anniversary of the Completion Date or (C) upon the Grantee’s death or Disability, . . . the Call Price shall be equal to the Fair Market Value of an ordinary share of Skype, determined as of the date as of which the Call Right is exercised pursuant to the relevant Call Notice."

That is to say, serve the company through November 19, 2014 before quitting, or die on the job in the meantime, and the company is going to have to pay you fair market value to buy your vested stock back. And if Skype fires you in the meantime, it will have to have "Cause"; otherwise, fair market value applies.

The "fair market value" definition is as fair or fairer than most, too: 

“'Fair Market Value' shall mean, as of any date (i) prior to an Initial Public Offering, (x) for purposes of the Plan, the value per Ordinary Share as determined by the Board in good faith taking into account the most recent valuation report prepared by an independent third-party appraiser selected by the Company (such report to be prepared taking into account the fair market value of the entire equity of the Company and any relevant factors determinative of value, without, however, giving effect to any discount attributable to the size of any Person’s holdings of Ordinary Shares, any minority interest, any lack of marketability, any control or any voting rights or lack thereof (and without any control premium or change in control premium)) . . ."

You can keep peeling the references back of course -- what is the definition of "Cause," what happens on a sale of the company (as happened), what happens on an IPO (which could have happened), what other nuances or issues arise from the limited partnership vehicle that holds the shares, and more -- and if you had options under this plan, you should have done that peeling.

But at least two key documents appear to be publicly available as part of Skype's S-1 filing from earlier this year. And they yield more insight into Skype's option arrangements than journalists suppose. (One key concept, "Change of Control," is defined in a shareholders agreement that, best I can tell, was not yet published as an exhibit by the time Skype withdrew its registration.)

Image from Wikimedia.

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