A follow-up on Zynga

So Zynga, the company behind hugely successful Farmville and other games on Facebook, eventually proceeded to its IPO last week. Despite raising 1 billion dollars (the largest tech IPO since Google), the stock value fizzled very rapidly, even on the first day : it was priced at 10 $ and closed at 9.45 $. This is a big disappointment for a company which, a few months prior, had been valued at 14 billions, even 20 billions by some industry analysts.

In Zynga IPO goes Splatville. What went wrong ?, Forbes analyses that one of the reasons may be that investors realised that Zynga is as much in the entertainment industry as it is in the tech industry, making its future more dependent on producing more games in order not to get “forgotten”. The Guardian, in a very balanced article Zynga IPO fails to generate stock market ‘pop’ on disappointing debut, highlights that the company, unlike many tech start-ups, is profitable though, and that this debut is maybe not that bad for the organisation.

I found noteworthy that none of the articles I read mentioned the recent scandal created by the company allegedly threatening to fire employees who did not forego their unvested stock before the company went public. Only one month ago, this generated a lot of negative buzz around Zynga and its CEO, Marc Pincus. As a follow-up of my post on this topic, I found a very interesting article from Robin Ferracone on Forbes, Zynga’s pre-IPO compensation misstep. She analyses the pre-IPO scandal from an Executive Compensation standpoint and makes some very valid observations.

The ones most relevant to any company facing a compensation scandal are related to her description of the possible consequences of the controversy :

First, there is the reputational damage from negative PR.  Then there’s the trust issue that Zynga likely has created.  Third, employee retention may be an issue, at least following the IPO after the big gains are realized (particularly when stock vesting allows employees to cash-out upon the occurrence of a qualifying liquidity event, as in the case of the Zynga IPO).  Fourth, employees may start asking for shorter vesting on future equity grants, or more short-term cash in their pay mix.  Fifth, there are likely to be legal issues.  And lastly, all of these negatives may create a potential drag on the company’s valuation when it goes public.  After all, a company’s value is comprised of both its tangible and intangible assets.

I discussed a number of these points in my post one month ago, and am now interested to see how the stock will move in the coming months, and to see if the negative impact on retention will take place or not. I guess that if the pre-IPO stock has been granted at 14 $, which was the price at which Marc Pincus sold some of his stock a few months ago, all this negative attention could have been avoided as the employee stock would be underwater… and the retention risk diminishes as they are tied to equity that they can’t realise anyway…


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Related post :

One lesson from the Zynga stock scandal

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