Tony Avelar/Bloomberg News

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.

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Mr. Lee aired his surprise publicly on his blog. The gist of his complaint was that Skype’s terms were anything but the Silicon Valley norm. In the Valley, employees typically receive options that “cliff-vest” in one-year tranches over four years. This means that after each year, one-fourth of the options vest with the employee, but if the employee leaves the day before, the options are forfeit. This is the cliff. The convention in Silicon Valley is that once vested, options are kept by employees even if they leave.

Mr. Lee, who has worked about 15 years in Silicon Valley, complained that he was never told that the Skype terms were different and that he didn’t notice the language in his option agreements that spelled this out. He wrote, “I’ve seen my share of legal documents for tech companies [but] these clauses were hidden as one-liners in otherwise pretty standard-looking documents.”

After his blog post came the fury. Dan Primack at Fortune wrote that it looked as if Mr. Lee “was almost intentionally tricked.” The compensation consultant Graef Crystal told Bloomberg Business Week that the move “invalidates the meaning of the word ‘vested.’ ”

Despite the complaints, Skype and Silver Lake have refused to budge even though it would cost only about a million dollars or so to make the problem go away. Brian O’Shaughnessy, a spokesman for Skype, summed up the attitude as “you’ve got to be in it to win it,” telling Bloomberg Business Week that “this individual chose to leave, therefore he doesn’t get that benefit.”

The easy lesson here is the need to carefully read contracts before you agree to them and hire a lawyer if you don’t understand them. The language Mr. Lee complains about was certainly legalese but heralded caution.

More than this, his failure is baffling. In the land of V.C., options are everything; they are what employees see as the real payout. Even if the language was hard to understand, Mr. Lee had plenty of incentive to make the effort.

His lapse is not unique and is symptomatic of a wider problem. In Silicon Valley even the most sophisticated people too often don’t read the documents. Look at the mess around Facebook’s founding. Before its initial public offering, Google issued a number of its options in violation of the federal securities laws. In Silicon Valley, law and contracts are often ignored as unimportant details that only stifle the entrepreneurial spirit.

Yet this doesn’t explain the fury. Why care so much over a few employees’ relatively unimportant loss?

The anger is attributable to the clash between the two worlds. Private equity firms buy companies, and through financial engineering and a dose of operational and management restructuring make investor profits.

There is a real debate over whether private equity firms even create value. It may be that private equity makes money by operating companies more efficiently, but some instead argue that private equity’s success is attributable to the ability to borrow heavily and reap value through leverage and tax deductions. Regardless, private equity is commonly viewed as the world of New York finance.

Venture capital is adamantly not about financial engineering. It is about ideas and creativity, where people build next-generation companies. Sure, venture capital firms are good at finance, but the community is really about creating value from the “new new thing,” as Michael Lewis put it.

As a result, they have different operational methods.

Anyone who watched private equity firms during the financial crisis would not be surprised to learn of Mr. Lee’s lament. During the financial crisis, private equity firms repeatedly walked on acquisitions without regard to their reputations. In private equity reputation matters, but money triumphs. The highest bidder for a company wins, even if the bidder is not well liked. And that is why Silver Lake is not paying the measly $1 million it would cost it to solve this problem and not look greedy. It isn’t worth it to the firm.

But in Silicon Valley, the community is not only smaller, the people work together again and again, and so trust and reputation are valued more highly. On his LinkedIn page, Mr. Lee alone lists more than 10 companies where he has worked. When you are going to see and work with the same people repeatedly over many years, $1 million is small change to buy their needed loyalty.

This all ties into the venture capital community’s better public image. No one talks of taxing venture capital billionaires they way they do about private equity barons. Venture capital is viewed as a creative industry, while the world considers private equity as finance, money men who do not create.

I don’t think this is true. Private equity firms do create value, albeit with a heavy assist from financial engineering. Mr. Lee himself marveled on his blog at the ultimately successful restructuring Silver Lake undertook at Skype.

The perception is otherwise. Imagine if Lawrence H. Summers had joined Blackstone or Carlyle instead of recently becoming an adviser to the venture capital firm Andreessen Horowitz. He would be called a sellout akin to Peter Orszag, who left government service to become a vice chairman at Citigroup.

This brings us back to l’affaire Skype. Mr. Lee can be blamed, but instead it is Silver Lake that is vilified. The reason is that Silver Lake is not playing by venture capital rules.

Yet the private equity firm is being blamed for doing exactly what private equity firms do and what is expected of them. In this light, Silver Lake is not “evil. “ Silver Lake is not even acting illegally or immorally. If Mr. Lee had hired a lawyer for an hour, he would have learned of his dilemma.

Name-calling aside, this is all about all about what people think of the industries and venture capital’s innate fear of private equity methods. V.C. and P.E. just may not be right for each other.

Article source: http://feeds.nytimes.com/click.phdo?i=2d7f52ee24d19645b825d3ff00602f4b