The WSJ recently reported in Zynga Leans on Some Workers to Surrender Pre-IPO Shares that the technology company is making certain employees an offer they can’t refuse: cough up your pre-IPO stock options or your first born is dead. Well, not really. The threat is that the employee will lose his or her job. While it is understandable that the company doesn’t want to have another Google cook who makes out like a bandit when Zynga goes IPO, it is also unclear whether Zynga’s approach is either legal or wise.
Under New York’s Limited Liability Company Act, for example, an employee’s sweat equity is valued like a cash contribution. So if you offer $50,000.00 of your cooking services to a cash starved start-up in exchange for 2% of the company and a measly $25,000.00 salary, you are in the same position as another investor who put in $50,000.00 cash for 2%. Of course, you could end up getting a windfall if the company eventually goes public and is worth $2 billion.
That is the position Zynga is about to find itself when it goes public. To rectify the problem of attracting new talent with not enough shares to dole out, the company is apparently going to certain employees and demanding that they return some or all of their stock options, or else. If this is merely a case buyer’s remorse, then Zynga will be asking for a great deal of breach of contract and wrongful termination litigation from terminated employees. Of course, if the employees have not lived up to their part of the bargain, then the law in New York at least allows companies like Zynga to ask for interests back under threat of breach of contract litigation against the employee.
In either case, it doesn’t seem like good business. People will be more reticent to work with start-ups if they expect that, down the line, the company will finagle them out of their not yet vested stock options so that they can go to more efficient resources — i.e. more valuable people. If a company is worried about getting itself into a tight bind like this, it seems better to hybrid the transaction with some cash so that the company doesn’t find itself later on with not enough stock to go around, or, worse, embroiled in class action litigation. Otherwise, the company shouldn’t make the deal in the first place.
Banksy and other graffiti artists are gaining increased commercial acceptance in the traditional art world. The Los Angeles Museum of Contemporary Art recently had an exhibition called Art in the Streets featuring artists such as Banksy and others. But whether such artists’ works are protected by the Copyright Act, among other legal doctrines, is unclear. There is paltry case law on point. We recently found this out when researching the issue for a somewhat famous — or some might say infamous — New York graffiti legend.
The Copyright Act generally protects creative works fixed in a tangible medium. Song lyrics are a good example. When Bob Dylan writes his song, All Along The Watch Tower, on a piece a paper, he can register the song with the Copyright Office. Only then can Mr. Dylan can than pursue others for using the song unlawfully. Many federal courts require a work to be so registered before suit can be brought by the artist for damages, attorney’s fees, and statutory damages.
But what about creative works that are fixed by graffiti artists all around New York City’s walls and subways? Assume Banksy paints the picture above on a Fifth Avenue wall. Could he then go and register the work with the Copyright Office, just as Mr. Dylan did with his song? Even if he can’t, does that mean Bansky has no legal protection? The questions are simple. But the answers are not so clear.
There are no cases directly on point. There is one case from the Northern District of Illinois, entitled Villa v. Pearson Education, Inc., in which the court denied the defendant’s motion to dismiss the graffiti artist’s copyright infringement claim because there was an issue of fact whether his art was illegal. There is also another case pending overseas between graffiti artist CanTwo and the Spanish Olympic Committee, reports the Wall Street Journal in CanTwo Says “Can Not!” to Spanish Swimmers. But that case is not yet decided and it involved apparently legal graffiti.
While this uncertainty is troubling, a graffiti artist should nonetheless be able to argue that a gallery is unjustly enriched when they sell a photo of his work but don’t pay him even if he does not have a copyright claim. That’s because what is good for the goose is good for the gander. If a gallery is going to commodify the artist’s graffiti efforts in a secondary market, it will be hard pressed to argue that the artist has no rights in the primary market because the work was illegal.