In Silicon Valley, a Culture Clash Sullies a Romance

Steven M. Davidoff reports on the New York Times DealBook blog:

 

Private equity has broken venture capital’s heart, and V.C. is not taking it well.

 

The romance ended when Silver Lake, the private equity firm, agreed to sell Skype to Microsoft. Silver Lake is estimated to be pocketing more than $4 billion from the sale.

 

This would normally be a joyous event for Skype’s employees as they too share the wealth. But it is nothing of the sort. The venture capital community appears to be up in arms about Silver Lake, a sentiment expressed in the extreme by the financial blogger Felix Salmon of Reuters, who branded the firm “evil.”

 

The reason: Silver Lake structured its options program for Skype so that, contrary to Silicon Valley convention, former Skype employees would not share in the windfall. The former employees will receive nothing.

 

Is the Valley right to be angry at Silver Lake? The answer lies in examining the two very different cultures of venture capital and private equity. While they are often lumped together, each has its own values and ways of doing things.

The controversy over Skype started in April when a former employee, Yee Lee, tried to exercise options he thought were worth more than $70,000.

Skype informed Mr. Lee that its option plan allowed Skype to buy back the options at their initial price if he was no longer employed by the company. Since he was a former employee, Skype was going to exercise this right. Mr. Lee would receive nothing.