It was a Christmas present everyone in Silicon Valley was wishing for: a Zynga IPO that would reinstate the faith in the Valley's tech companies. On December 16, 2011, the company's founder and CEO, Mark Pincus, rang the closing bell at Nasdaq, proclaiming, "With our IPO, we are accelerating this mission of connecting the world through games."

Valued at $7 billion, Zynga was the biggest initial public offering in gaming history, and--at that time--the largest tech IPO since that of Google in 2004.

For the first few months, the stock traded evenly. In March 2012, on a positive first-quarter earnings report, the stock price surged to nearly $16 a share. The sun shone on FarmVille, and the world learned that sowing virtual corn could reap real payoffs.

That's when everything seemed to start unraveling.

Shares in Zynga tumbled about 23 percent when Facebook went public in May. Then, when Zynga officials presented its second-quarter earnings report on July 25, in which the company lowered its outlook "to reflect delays in launching new games, a faster decline in existing Web games due in part to a more challenging environment on the Facebook Web platform, and reduced expectations for Draw Something," the company's stock price plunged, falling some 35 percent overnight.

And on August 8, John Schappert, the chief operating officer and director of Zynga, officially resigned from the company. Although Schappert's resignation from the board was not connected with any disagreement with the company (in an SEC filing, the company "wishes him all the best"), it's safe to assume Schappert is in some way being scapegoated for the company's disastrous quarter.

"Much worse than even we had anticipated."

"Zynga is being punished in the public market," says Jeff Clavier, a venture capitalist and managing partner of SoftTech VC, an early-stage venture firm that has invested in the social gaming industry. "There was a perception that there would be a constant supply of new gamers and potential gaming hours and that you could monetize all those platforms. It's just not the case."

Analysts offered a bleak perspective.

"While we have been bearish on the story since the beginning, these results and the current trends appear to be much worse than even we had anticipated," said Arvind Bhatia, a Sterne Agee senior research analyst.

Ken Sena, a managing partner at Evercore, an investment-banking advisory firm, noted that "we would caution investors to be wary, as we don't see these negative factors improving anytime soon."

Last week, a New York law firm filed suit against Zynga, claiming many of its executives and early investors knew the company was struggling when they sold off significant portions of their shares, shortly before the stock price fell. 

How significant? In total, investors issued a $515 million secondary offering, which, though perfectly legal, raised some eyebrows at the time. According to documents filed with the SEC, Pincus sold 16.5 million shares for $200 million, while Institutional Venture Partners walked away with $70 million, Union Square Ventures pocketed $62 million, and Reid Hoffman, co-founder of LinkedIn, sold off nearly 700,000 shares for $8.2 million.

The language of the lawsuit was eerily reminiscent of news heard during the April 2000 tech crash:

"Zynga had misrepresented and/or failed to fully disclose the true extent to which it had been experiencing a sharp drop-off in users of its most profitable Web games and delays in developing new games to launch on social media platforms," lawyers assert in the class action, filed in the Northern District of California. 

It continues: "Such material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Zynga's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities."

No fun inside the Zynga fun factory.

One former employee, who preferred to remain anonymous, describes employee sentiment as one of "disillusionment and discontent," adding that that many employees bristle at the fact that Pincus cashed out so early. That source explained that many employees borrowed money to purchase stock options, only to find themselves underwater now that the price has bottomed out at around $3.

Pincus, a Harvard M.B.A. who had three successful exits as an entrepreneur, including the $38 million sale of Freeloader Inc., founded the social-games company in 2007. He named the company after his pet bulldog, Zinga, who is now pictured in the company's logo. 

The company's first game, Texas Hold'Em Poker, was a smash hit, and Zynga quickly rose to the top of Facebook's developer chart. In 2008, the start-up attracted the attention of Union Square Ventures, which invested $10 million in the company. Later that year, Kleiner Perkins invested $29 million. Zynga then began its aggressive expansion, acquiring several popular game-design companies and games while also developing its own, including CityVille, FarmVille, and MafiaWars.

The company has made Pincus fabulously rich. When Zynga went public in December 2011, raising $1 billion in 100 million shares valued at $10 each, it instantly made Pincus a billionaire, worth about $1.12 billion on paper.

Of course, recent events have made the company's 3,000 employees seethe. But according to several former employees, the situation inside the company may be far worse than what's reported on balance sheets.

One former employee, who preferred to remain anonymous, described the culture within the company as "extremely mercenary" and shortsighted.

"Mark would speak about 'connecting the world through games' and 'making users happy,' but the stated values and our desire to create a good user experience was at complete odds with how the company was actually run, which was extremely short-term-focused," the source says. 

The source offered an example.

Every week, general managers from each of the company's studios would convene with Pincus and other top executives and present revenue and user numbers from the previous seven days. If numbers were down, "the meeting would not be fun," says the source. But to boost numbers, general managers would have "blowout sales" at the end of the period, which could potentially make a studio 10 times the average daily revenue. In other words, the studio would look good on paper, as least in the short term.

"There wasn't a whole lot of thought about how we could optimize for what the numbers are going to be six months or a year from now," the source says. "People talked about it, but the way the profit meetings were run, in practice, nothing ever got worked on."

The source added:

"You'd get an all-hands email saying congratulations, but no one thought to consider, 'Hey, the fact that we're marketing this sale, wouldn't that depress revenues for 30 days before? Wouldn't that depress revenues for 30 days after because people ended up spending all on that one day? Wouldn't it reduce revenue over the long run because people will be waiting for quarterly sales discounted by a major margin?' People didn't ask if it was worth it. They'd just say, 'Hey, we can make a crap-ton of money and be the best and highest revenue-generating studio next week, so we're going to do that.'"

"They're business people. They're making slot machines."

Discontent at Zynga has been percolating for a while now. Glassdoor.com, a website on which users can anonymously review their employers, offers a good barometer for employee sentiment at Zynga: Only 49 percent of reviewers say they would recommend working at Zynga to their friends, compared with 93 percent at Facebook and 84 percent at LinkedIn. Electronic Arts, one of Zynga's major competitors (and ranked in April as "The Worst Company in America"), fared better than Zynga on Glassdoor.com, generating an approval rating of 64 percent.

In November 2011, The New York Times published a fairly scathing dive into Zynga's culture, detailing overworked employees, a cutthroat environment, and Pincus's aggressive nature. 

"Zynga should be an example of entrepreneurship at its best," Roger McNamee, co-founder of the venture capital firm Elevation Partners, told the publication. "Instead, it's going to be a Harvard Business School case study on founder overreach--this will be a cautionary tale."

One of the sources to speak with Inc. described mixed feelings among the company's 3,000 employees. Many on the ground level, the source said, were content with their jobs. After all, employees are rewarded generously, offered free food and free Blue Bottle coffee, and are allowed to bring their dogs to work. But middle managers were less happy. 

"It's mixed," the source said. "The internal surveys are quite high. The way I would describe it, the closer you are to [Pincus], the more negativity you have to him."

In a recent interview with The Wall Street Journal, Pincus reflected on the work culture at Zynga.

"The culture inside Zynga is not ultracompetitive, but Zynga is very competitive, and we're in a very competitive industry," he said. "We have teams that push themselves very hard, but it's driven by themselves."

However, one source told Inc. that the pressure was not always self-inflicted: "If your numbers were going down, your studio would be called into a Code Red mode, which meant people would put in 12-hour days--and weekends, too--to get the numbers back up."

Game designers outside the company are skeptical of Zynga, too. 

"It's only a games company on the surface, is the impression I get," says one Bay Area game designer, Gabe Smedresman. "They're business people. They're making slot machines; they're not really making games. When you hear about their business strategy, it's all about innovations in microtransactions and innovations in understanding player psychology. This isn't about art; it's about running a casino."