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Zynga sets aside a huge pile of low-priced stock for employees

Zynga is setting aside a huge allotment of stock options for employees in an attempt to keep them around and on target, even as its stock price sinks downward.

It’s part of the casual gaming company’s efforts to remain focused on its long-term objectives as it struggles with weak earnings, lawsuits, and deflated expectations. But the stock option move also illustrates some of the hazards of equity-based compensation, which has long been a key part of Silicon Valley recruiting and retention strategies.

Documents filed with the SEC and published on August 17 confirm Zynga’s new stock option pool, which has a current value of about $122 million. The pool, if issued and subsequently vested, will add about 10 percent to Zynga’s total number of tradeable shares.

Zynga’s stock (ZNGA) has been sliding down since it went public in December 2011 at a valuation of $8.9 billion. Its share price now stands at $3, valuing the company at just about $2.3 billion.

The post-IPO slide is only part of the story. Before the IPO last year, the company was rumored to be worth $15 to $20 billion. Investors who put money into the company in February 2011 invested at $14 per share. Any employee who joined in 2011 had their stock options set at a similar level.

Here’s why the new pool of stock is necessary: Options that cost $14 per share to exercise would be worthless when the stock price is at $3. Even restricted stock grants — in which the employee is given actual stock (with certain limitations) instead of the option to purchase stock — would be worth about one-fifth of their original value. No wonder executives like chief operating officer John Schappert see no point in sticking around. Many rank-and-file employees are no doubt thinking the same thing. (Schappert was also stripped of his major responsibilities, but if the stock was going in a different direction, he might have been happy to hang on for awhile.)

“We frequently give out new stock options or other equity to our employees as a part of our value-driven meritocracy,” a company spokesperson said in a statement to VentureBeat over the weekend. “This filing was to register shares that were automatically added to our equity plan, as disclosed in our prior registration statements, for the company’s use throughout the coming year and after. We will continue to invest in our talent as we drive the development of great social games to enhance the relationships of our players.”

The Wall Street Journal reported on August 9 that chief executive Mark Pincus issued stock options to all employees, speculating that the options would be at a very low price. If true, we now know the price for that pool of options: under $3 per share.

According to Zynga’s form S-8, the company has set aside 43,295,554 shares for its employees, at prices from $2.53 to $2.97 per share. The latter price is based on the company’s stock price on August 14, while the former is 85 percent of that total, giving employees a 15 percent discount.

About two-thirds of the 43 million shares are for the employee stock incentive plan (likely for stock options) and about one-third is for the employee stock purchase plan (likely for restricted stock options).

Compared to the company’s total number of shares outstanding, which is 464 million, that is a substantial chunk. This presents a risk; by putting more shares on the market, Zynga could depress its stock price even further.

However, these grants and options will undoubtedly be restricted in order to prevent employees from exercising them any time soon. Typically, stock option grants have a four-year vesting period, with zero shares vesting during the first 12 months. That means it’ll be at least a year before Zynga has to worry about the additional employee shares hitting the market.

And with luck, these attractively priced shares and options will help encourage people to stick around for the long term in hopes of seeing their value come back up.

Photo: Michael O’Donnell/Zatphoto

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