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Following Twitter, Zynga Now Threatening to Leave San Francisco

City officials stunned by demand for waiver on tax of employee stock options; union denounces "corporate handouts"

Updated 5:40 p.m.

Zynga, the Internet gaming company, is threatening to relocate its headquarters to Silicon Valley unless San Francisco officials waive a tax on employee stock options, according to several city officials familiar with the company’s demands.

Zynga is just one of many burgeoning tech companies that have approached the city in response to a proposal to grant Twitter a payroll tax exemption as an incentive to persuade the company to remain in San Francisco. 

In a meeting last week that included San Francisco Mayor Edwin Lee, Board of Supervisors President David Chiu, Zynga CEO Mark Pincus and CFO David Wehner, company executives indicated that without their own exemption Zynga may convert its 270,00 square-foot office into a call center and relocate its headquarters – including its programmers and highly paid staff – to Silicon Valley, according to people present at the meeting. In the week since, the company has contacted a number of supervisors to argue a similar case, said at least two supervisors who have met with the company.

Zynga, creator of popular online games like Farmville, is expected to go public within the next few years. The company is particularly concerned about a payroll tax provision unique to San Francisco that allows the city to tax gains on employee stock options.

Unless it is granted an exemption, Zynga would essentially receive a tax bill from the city when its employees opt to exercise their options. The company, with about 1,200 employees, is now valued at $10 billion.

Zynga executives have told city officials that the tax hit would be equivalent the total value of its lease on its new Townsend Street offices, which is not covered under the proposed mid-Market tax break that is under consideration with Twitter, said one city official.

“They let us know there is no way in the world that they can go public and pay payroll tax on all their employee stock options,” the city official said. “They mostly just dropped that in our laps and suggested we fix it pronto or watch them drive away south.”

Zynga said in a statement: “We are looking at a variety of options to grow the company in the Bay Area, and as part of that, we are in serious discussions with the city. It would be premature to comment on those conversations at this time. We are encouraged that the city is engaging with us on this issue.”

The meeting was first reported last week by the website TechCrunch. A Zynga spokesman said at the time that the company found the talks "productive and positive."

However, the City Hall delegation was stunned by Zynga’s threat, which came less than six months after the company inked its seven-year lease on the hulking Townsend Street building -- the largest lease deal in San Francisco since the 2008 financial crisis.

 In September, then-Mayor Gavin Newsom formally announced the lease in his remarks at the TechCrunch Disrupt Conference, congratulating the company for its “wisdom” in making a “long-term commitment to this city.”

He added: “In return, we are, as a city, making a long-term commitment to Zynga.”

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