In April, a small circle of top Zynga executives and early investors scored a $500 million-plus payday via a choreographed private share sale.
That deal was well-timed. Since then, the online gaming company's stock has shed almost half of its value as investors questioned Zynga's long-term prospects and Facebook Inc's sputtering IPO sapped confidence in the consumer Internet.
The share sale may have helped nudge Zynga's stock price into a steady decline that has stoked discontent at the company, which, like much of Silicon Valley, relies on generous stock awards to attract talent.
The Farmville publisher is now barely holding at $6, down 40 percent from a December IPO price of $10, as employees at the end of April were freed from their "lock-up" agreements to sell their stock holdings. Employees past and present told Reuters that morale is ebbing along with the stock price.
"Zynga's a tough place to work," said Lou Kerner, founder of the Social Internet Fund, who has invested in Zynga. "You go there because there's a lot of upside to the shares, so it's disappointing when the markets are against you."
Chief Executive Mark Pincus parried questions at the All Things Digital conference on Wednesday, where he defended his stock price, Zynga's ability today to attract top-notch engineers, and the acquisition of OMGPOP, developer of mobile hit Draw Something.
"I can't think of any real difference in recruiting that's happened because of being public or because of our stock being up or down," Pincus said. "My job is focusing on building products ..., not really trying to figure out whether the markets are valued right."
Hundreds of former employees and other investors were allowed this week to offload up to 352 million shares -- the majority of outstanding stock -- for the first time since the company debuted on the Nasdaq in December. The company's shares traded at $6.00, down 4.2 percent, on Friday afternoon.
Facebook shares were down 5.7 percent at $27.92 on Friday, and shares of Groupon, another Internet IPO darling, were off 8.9 percent at $9.70, just cents above their all-time low.
Employees at Facebook are allowed to begin cashing in this November, six months after its IPO, when up to 1.2 billion Facebook shares could hit the open market. But the effect of the lock-up expiration on Facebook's stock price is expected to be relatively muted, due to the high percentage of stock that was floated during Facebook's IPO, analysts say.
Zynga, named after Pincus's bulldog, stands out as a notorious pressure cooker even in a gaming industry chock full of hard-driving workplaces. In return for long hours and brutal deadlines - working at "Zynga Speed," employees joke - workers get lavish incentives often tied to company shares.
"It's distracting because people have a lot of wealth tied up and have been doing calculations of how long they're sticking at Zynga," said one of the company's earliest hires, who departed recently. "From the beginning there were expectation-setting signals that you're going to burn red for a while, you're not going to have weekends, and you'll be here until 2 a.m., but the result is that you're going to be a millionaire."
Those who can prove their worth, thrive. For several years, management has called all-hands assemblies every quarter where a handful of Zynga's high performers are each awarded $100,000 worth of vested stock.
But a former employee, who left the company in April after two years as a developer said frustration was bubbling among some of the rank and file as the value of their holdings slid and project launches were delayed. In Austin, Texas, where Zynga employs scores of workers, a recent internal survey showed only 20 percent confidence in management, he said. After that, office managers held meetings with staff to discuss the results and air grievances.
"I didn't see anything coming out of the company that could result in the stock price going up," said the developer. "There's a big reason why Zynga is making a big push for external acquisitions."
Zynga's biggest acquisition to date has been OMGPOP, at a cost of $183 million. Analysts have voiced concerns about Zynga's ability to wring revenue out of mobile games, and the purchase of OMGPOP was intended to address that need.
But the deal has drawn fire as usage numbers appeared to wane.
"We didn't buy them for the short-term impact," countered Pincus at the D conference, noting that Draw Something's traffic was higher than when Zynga first "engaged" to purchase the company.
Draw Something, he added, "is the game that we think we can support and market for five years and 10 years."
A bumpy road
Pincus and other executives sold 43 million shares, at $12 each, in the April deal. Limited to senior management and directors, it was explained as an effort to stagger the timing of when stockholders may cash out, preventing a simultaneous sell-off at the expiration of the lock-up.
Pincus, Chief Financial Officer David Wehner and Chief Operating Officer John Schappert each sold 15 percent of their granted shares. Other sellers included early investors like venture funds Institutional Venture Partners and Union Square Ventures, as well as directors Owen Van Natta, a former Myspace CEO, and Reid Hoffman, the founder of LinkedIn.
All told, they raked in about $515.6 million. Those involved agreed to a longer lock-up period for the remainder of their shares, according to SEC filings. And current employees at the time of the offering were released from their lock-up at the end of April, a month earlier than the date originally set.
But when top executives with "more information in the company" are selling stock, said Ye Cai, a professor of finance at Santa Clara University, "that's sending a bad signal to the market that the stock is overvalued."
On Wall Street, some still see potential in the business.
"The stock's been a disaster," said Colin Sebastian, an Internet entertainment analyst at Robert W. Baird. "There's been so much negativity in the stock related to insider sales, the lock-up sales, Facebook's IPO and risks from mobile devices that it seemed a little overdone."
"But over the intermediate term we see potential growth."
On Thursday, Zynga launched a new mobile title, "Zombie Swipeout." The company is also betting heavily on casino games like Bingo and Poker and hopes to introduce real-cash gambling, which could prove enormously profitable but remains a distant prospect with lots of regulatory hurdles in the United States.
And then there's Project Z, the gaming platform Zynga is working on as a way to wean itself from Facebook. In recent months, the company has nabbed partnerships with major game developers like Konami to produce games for the platform.
As Zynga undergoes its transformation, Pincus acknowledged that the road ahead could be bumpy.
"There is for sure an element of the games business that's like a media business," Pincus said. "You see audiences go up and peak and sometimes fall."