Zynga's Biggest Threat: Mark Pincus

NEW YORK ( TheStreet) -- Those bullish on Zynga's impending IPO can point to the company's explosive growth and ties to Facebook.

But those with doubts about the social gaming company typically list founder Mark Pincus as its biggest threat.
Zynga CEO Mark Pincus

While Zynga's reportedly stressful and overly intense company culture led by Pincus has boosted the FarmVille maker to a jaw dropping $10 billion valuation in only five years, it may have also created a brain drain once top developers can cash out and leave after the IPO.

"Some Zynga employees already started to contact me months ago," said Amish Shah, the founder of recruiting firm Millennium Search. " A brain drain doesn't need to happen with startups...it didn't happen with LinkedIn ( LNKD) or with Salesforce ( CRM) back in the day. I haven't heard about a problem like this in a while."

Intensifying this concern for Zynga is a recent Wall Street Journal report alleging Pincus was threatening to fire several early employees unless they returned their unvested stock options. Stock options are often doled out by start-ups in lieu of cash as a way of attracting promising engineers and developers.

Zynga may now have more difficulty attracting top talent who are likely to question the company's willingness to properly compensate its employees.

"If Zynga bypasses giving employees options it's not only negative in the public eye, but it will be a concern attracting new employees," Shah said. "The press and the buzz are all negative--it's the first thing people will hear."

Zynga's poor reputation may poise a particular challenge for the company as a war for the best engineering talent wages on across Silicon Valley.

"I don't know how someone would want to work at Zynga with Google ( GOOG) and Facebook throwing money at developers," said Sam Hamadeh, CEO of Privco, a firm that tracks data from privately held companies.

Zynga's culture may also hamper its ability to broker deals with smaller gaming start-ups. The company has relied heavily on acquisitions for growth over the past two years, spending more than $140 million over the last seven quarters, according to regulatory filings.

"I've heard anecdotally that entrepreneurs are cautious about selling to Zynga," said an investment banker who works closely with gaming companies. "People would love to get acquired by a Google or Facebook because there's a certain cache and that's not there right now with Zynga."

Angry Birds maker Rovio reportedly turned down a $2.25 billion acquisition offer from Zynga.

Pincus' hard-driving personality and iron-fisted control over Zynga may also turn off employees. The CEO scored just a 46% approval rating among employees on career services firm Glassdoor, compared to an average approval rate of 62% of other chief execs on the site.

"Talking to colleagues and former Zynga employees, Pincus is considered somewhat difficult by pretty much everyone that knows him," said Max Wolff, a senior research analyst at Green Crest Capital who does not know Pincus personally.

Pincus isn't selling any shares in the IPO and will hold a class of shares that have 70 times more voting power than the common stock sold in the offering. Such a voting structure is unusual among tech companies, including newly public LinkedIn and Zillow ( Z) where certain shareholders had 10 times more voting power than public investors.

This move was likely made by Pincus to keep a large pool of shareholders from holding too much power in the company.

"He's the imperial CEO," said Wolff. "He's not going to lessen that white knuckle grip on voting rights in a post-IPO environment."

Zynga did not respond for comment about this story.

-- Written by Olivia Oran in New York.

>To follow the writer on Twitter, go to http://twitter.com/Ozoran.

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