Week 7 Assignment 2 to 3 pages
Read the case “Giving Away Facebook” at the end of Chapter 16.
Answer the following questions and/or statements in detail:
1. Can you know if you have a potentially hugely successful company on your hands when you first launch it?
2. Should all companies take the precautions Facebook failed to take? Or can some companies be more relaxed about such legal issues as partnerships and ownership? Why or why not? Use credible sources and research to support and explain.
3. What types of agreements and contracts do you think Mark Zuckerberg, his partners, and Facebook’s early investors should have drawn up? Use credible sources and research to support and explain.
4. What contracts do you think the Winklevoss twins and Divya Narendra should have drawn up when they hired Zuckerberg to work for their company? Use credible sources and research to support and explain.
Make sure you format your papers in proper APA 6th. Be sure to properly cite your sources inside your text using APA 6th citations rules as well as proper APA referencing guidelines in your “References” (bibliography) section at the end of your papers.
Giving Away Facebook
For a bunch of seemingly smart kids, the guys involved in Facebook’s
founding did some pretty stupid things—at least from a legal point of view.
This resulted in years of lawsuits and billions of dollars in settlements.
Most new start-ups are in the position of having to give up some
degree of ownership in return for early-stage financing. After all, investors
want to get something for their money, and that is typically a percent of the
equity—or ownership—of the company. And they deserve a big payout for
taking a chance on an entrepreneur, for risking their money before anyone
else. Nevertheless, those decisions shouldn’t be made lightly or without
considering the legal consequences, even when a “business” is still in the
idea stage. Or when it’s just being discussed in your college dorm.
The exact facts revolving around the founding of Facebook remain
in dispute. But some things are agreed upon. A site called “TheFacebook.
com” was launched in 2004, by Mark Zuckerberg, Dustin Moskovitz, Chris
Hughes, and Eduardo Saverin while they were students at Harvard University.
Saverin, a wealthy student, provided Zuckerberg with $15,000 to purchase
the servers for TheFacebook. In return, Zuckerberg allotted Saverin
30 percent of the company.1 That was generous—extremely so. And it was
a decision that would come back to haunt Zuckerberg.
In the meantime, while getting ready to launch TheFacebook, Zuckerberg
was also working for twins Cameron and Tyler Winklevoss and for
Divya Narendra, who had hired him to work on their own social networking
site. Their site had essentially the same concept that would become
Facebook. The decision not to tell his employers that he was working on a
competing site was another problem that would come back to haunt Zuckerberg
and Facebook.
Those are the facts that are agreed upon. Other issues remain in dispute
and have eventually ended up in court.
Like many teams in a start-up venture, some founders—notably Zuckerberg
and Moskovitz—stayed more closely involved with growing the
venture, while others, particularly Saverin, had other demands on their
time. When founders don’t clearly delineate their responsibilities and what
consequences will happen for failing to live up to their responsibilities (if
any), this inevitably creates tensions and disagreements, which is exactly
what happened in the case of Facebook.
Zuckerberg moved the new company to Palo Alto, California (from
Cambridge, Massachusetts). To help finance Facebook’s growth, Zuckerberg
brought in other investors, notably Peter Thiel, cofounder of PayPal.
As a result of this investment, Saverin’s 30 percent ownership was diluted
substantially. Saverin alleged this was done unfairly, and later sued the
company. Although the exact terms of the suit were not revealed, Saverin
eventually received 5 percent of the ownership of Facebook. His
$15,000 investment ended up being worth many billions.
Another complication came about because Zuckerberg failed
to disclose that he had a conflict of interest while working on the
Winklevosses’ project. He launched Facebook a few days before
their intended launch, and they immediately alleged that he had
stolen their idea and intentionally delayed the launch of their project
so he could launch his. The Winklevosses later sued, winning a lawsuit
against Facebook for more than a million shares of Facebook stock and $20
million in cash.
Zuckerberg’s legal complications continued. Another person, Paul
Ceglia, alleged that he hired Zuckerberg to work on his company, Street-
Fax.com, at the same time that he was working on what would become
Facebook. In 2010, Ceglia sued, producing a document showing that Zuckerberg
gave him 50 percent of the company in return for a $1,000 investment.
Facebook’s lawyers assert the document is a fake.2
Of course, it’s true that every extremely successful company is likely to
encounter legal challenges. After all, once millions or even billions of dollars
are involved, many people will want a piece of ownership. But many of the
problems and huge settlements encountered by Facebook were avoidable.
Zuckerberg was accepting money to work on the Winklevosses’ social
networking program while simultaneously developing his own competing
program. This was a clear scenario for conflict. It was inevitable that
his motives would come into question—especially when he launched a
competing site a mere few days before his employers planned to. It may
have seemed to Zuckerberg like a mere gig for him to pick up a few extra
dollars, but whenever you’re working on another company’s projects, you
are responsible for maintaining its trade secrets. Moreover, it’s likely that
Zuckerberg was laboring on a “work-for-hire” basis, meaning that anything
he produced while working for them—such as computer code—in fact
belonged to them. That could have been another area of conflict.
But perhaps the biggest problem was that in his eagerness to raise the
money he needed to launch, Zuckerberg gave away a huge percentage
of the company. He failed to get any kind of legal advice that might have
helped him structure an agreement that would have delayed putting a
percentage value on Saverin’s investment (such as until the first round of
financing) or that would have made clear how Saverin’s percentage would
be diluted.
As the Facebook example proves, simple college-dorm agreements can
later become the basis for extremely serious stock ownership battles.
Even though most of those involved with Facebook’s founding eventually
got fabulously rich, the complications arising from their lack of legal
foresight created tremendous problems, strained friendships, and led to
legal battles and settlements worth millions—even billions.
