Two Contract-Language Lessons from the Skype Mess

The blogosphere has been full of stories about former Skype employees missing out on all or part of a payday when Skype’s acquisition by Microsoft closes.

It’s a rather complex story that I won’t attempt to recount in full. (A good place to start your reading about it would be Sarah Lacy’s account on TechCrunch.)

The angle that caught my eye was how already vested shares are being taken from Kuo-Yee Lee, a former Skype employee who quit.

Here’s the relevant provision from Lee’s stock option grant agreement:

If, in connection with the termination of a Participant’s Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.

This isn’t the clearest language. In this post, Reuters blogger Felix Salmon says that this provision “is borderline unreadable and … makes no sense outside a deep understanding of the Managing Partnership agreement” and is “a highly opaque clause which was clearly designed to be incomprehensible to anybody without extremely good lawyers.” In this post on CNNMoney, Dan Primack describes it as “intentionally incomprehensible.” And Michael Arrington says in this post on TechCrunch that “it appears that employees had no idea what they were signing.”

Lesson One: Make Sure Your Contracts Are Clear

On its face, nothing about this provision suggests to me that it’s the result of a ploy to bamboozle employees. (I don’t know whether employees were aware of what was in the management partnership agreement, but that’s a different issue.) Instead, it looks like the standard dysfunctional language of mainstream contract drafting. So rather than conspiracy, I see run-of-the-mill incompetence. (For some general background on that, see my National Law Journal article Dysfunctional Drafting.)

But consider the costs of that lack of clarity. According to Sarah Lacy, the provision in question is a fixture in the standard contract of Silver Lake (the private equity firm behind Skype) and the rationale behind the provision is unobjectionable. That may well be the case, but Silver Lake would have been far better off if the implications of the provision had been made clear to employees before they signed the contract. If a contract party finds itself in an unfortunate situation because it didn’t understand a contract provision, it may well be inclined to put up a fight. And if that contract party has little bargaining power—if it’s an employee, say—both courts and public opinion may be inclined to be sympathetic.

For Skype and anyone else entering into a contract, winning a dispute at some cost to your bottom line and your reputation is far inferior to avoiding the fight in the first place. You should make an extra effort to have your contracts be clear, particularly if the other party has little bargaining power. In other words, don’t rely on the traditional legalese of mainstream contract drafting.

Lesson Two: It’s Best to Understand a Contract Before You Sign It

This episode serves as a reminder it’s best not to sign a contract unless you understand it fully. If necessary, hire a lawyer to explain it to you. (The same applies when you’re drafting or reviewing a contract: If you don’t understand something, don’t ignore it.) That may not be realistic, particularly if you’re just one of many employees signing a given contract. But if it turns out that the contract contains some bit of unpleasantness, trying to fix it after you’ve come out on the losing end is an uncertain proposition.

So I endorse what Sarah Lacy says in her account:

Obviously, he didn’t understand the agreement, otherwise he probably would have waited a few months to quit. I’ll admit I didn’t have a lawyer look at my TechCrunch option paperwork when I signed it, and I had no idea what the terms were from reading it myself. If something like this happened, I’d be furious.

But I also wouldn’t have held TechCrunch accountable if it said something different than I assumed. It’s a bit like those 34-page terms of service agreements you have to opt into to buy something from the Apple store. I doubt anyone has actually read the whole thing. But that doesn’t mean I can sue Apple if they try to enforce it.

…

Well, now you’ve been warned. Get a lawyer to look at your contract or beware. Because no company—evil or not—is going to do it for you.