Zynga: One innovation Silicon Valley doesn't need

Zynga Mafia Wars

COMMENTARY. One of the tenets I've come to live by is: "If it ain't broke, don't fix it." Said another way, when you find a winning formula, stick with it. Sure, things evolve over time, but don't lose the essence of what makes the formula work.

That simple philosophy is at the heart of some of the greatest corporate cultures of all time, enabling companies like Apple, Intel, and Texas Instruments to consistently out-innovate competitors. It's also how Silicon Valley became the innovation capital of the world.

You see, there are several factors at the core of the Silicon Valley formula, and one of them is using equity or stock option grants in lieu of fixed compensation. Since Intel started the practice of widely disseminating stock options to employees, it's become the cornerstone of how cash-strapped, high-risk startups hire and retain the talent they need to innovate.

Now Zynga -- an online gaming site that's preparing its initial public offering -- and a handful of other social media companies are threatening to undermine the integrity of the practice. If their actions become widespread, it could destroy a key underpinning of America's high technology industry.

There's something's rotten in ZyngaVille

According to the Wall Street Journal, Zynga CEO Mark Pincus has come up with a unique way of getting back stock options he's already granted. Last year, he started a systematic practice of evaluating employees and forcing some to forfeit a portion of their unvested stock options if they want to keep their jobs.

More coverage: Zynga to employees: Drop those stock shares

On the surface, that actually sounds reasonable. It's pay for performance, right? If an employee's responsibility and salary can be diminished, then why not unvested equity? In an email to employees, Pincus calls the company a "meritocracy," meaning employment and compensation is based on merit. Well, I'm all for that.

Except there's one big problem with that argument. Equity isn't like any other form of compensation because, in the vast majority of cases, it ends up being worthless. It's a high-risk bet that employees make and, if they didn't make it in droves, there would be no Silicon Valley, at least not as we know it today.

The way it works is, an employee joins a risky startup and accepts an option grant -- in lieu of higher compensation from a larger, more stable company -- on the outside chance that the company makes it, achieves a liquidity event like an IPO, and makes it big.

Unlike title and salary, a stock option grant is an actual contract between employee and corporation. And the contract essentially says that, in exchange for this grant of worthless stock, you get to work long, crazy hours and give up your personal life in the hope that someday you'll hit the motherload and it'll all have been worth it.

No, that's not really what the contract says, but it also doesn't say that, once the company achieves success and begins to plan its IPO -- based primarily on the efforts of its employees -- it may rescind all or part of the unvested portion of the grant if that's deemed to be in the best interest of the company at the time.

That's apparently what's been happening at Zynga.