I already made one post out of The Social Network (i.e., Why Mark Zuckerberg Won’t Sue For Defamation Over The Facebook Movie), which is one more than I expected, but apparently there’s another legal issue in there.
Gawker and Business Insider published a scoop yesterday on the "dirty tricks" that Mark Zuckerberg used to force co-founder Eduardo Saverin out of the company. Relevant to our interests:
As that first summer went on and TheFacebook.com grew more popular than anyone imagined, the company needed money to keep running. Finding investors wasn’t hard. As early as July, Silicon Valley bigwigs like Mark Pincus, Reid Hoffman, and Peter Thiel were lining up to give Mark cash. Things were going so well, in fact, that Mark soon decided to commit to the company and not return to Harvard for his junior year.
What was hard, however, was getting Facebook co-founder Eduardo Saverin’s attention, getting him to make a decision, and getting him to sign off on the reformation of Facebook as a company under Delaware law – a crucial step before any funding deals could be completed.
His plan: Reduce Eduardo’s stake in TheFacebook.com by creating a new company, a Delaware corporation, to acquire the old company (the Florida LLC formed in April), and then distribute new shares in the new company to everybody but Eduardo. Mark discussed this plan with confidants over IM several times.
Here’s one instance:
Confidant: How are you going to get around Eduardo?
Zuckerberg: I’m going to buy the LLC
Zuckerberg: And then give him less shares in the company that bought it
Confidant: I’m not sure it’s worth a potential lawsuit just to redistribute shares. You have nothing to gain.
Zuckerberg: No I do because until I do this I need to run everything by Eduardo. After this I have control
In another, Mark writes:
"Eduardo is refusing to co-operate at all…We basically now need to sign over our intellectual property to a new company and just take the lawsuit…I’m just going to cut him out and then settle with him. And he’ll get something I’m sure, but he deserves something…He has to sign stuff for investments and he’s lagging and I can’t take the lag."
I suppose we should give him credit for his candor. Gawker has more details of the transaction at their site. If the transaction was as described by Gawker, it was a blatant violation of fiduciary duty and a blatant act of minority shareholder oppression.
I often tell business clients that I can’t make decisions for them; all I can do is tell them the risks, recommend a course of action and make limited predictions about the possible outcomes.
It’s up to them to drop the hammer, like Zuckerberg did.
But before we drop that hammer, there’s always one big question I have for them: what’s your goal?
Sure, everyone wants to make money, but it’s never that simple. Do you want control? Do you want a long-term investment? Do you want to cash out? Each requires a completely different strategy.
Zuckerberg wanted control, and saw himself as engaging in "dirty tricks" to force Saverin out of the company so that Zuckerberg could gain total control. Gawker / Business Insider thus sees it one of two ways:
Had Mark misled Eduardo, screwing out of the majority of his stake in the company without telling Eduardo that that was what he was planning to do? Or had Eduardo just not been paying attention when he signed his rights away?
Both are possible, but let me suggest another possibility: Saverin saw the writing on the wall, knew he was going to be forced out, and so tried to protect his share.
Consider this: although Saverin had the second largest claim to ownership of the company, and had the means to jam up Zuckerberg’s proposed financing, he signed off on shareholder agreement that ratified (at least to some extent) the dilution and "handed over all relevant intellectual property and turned over his voting rights to Mark Zuckerberg."
That sounds crazy.
It’s unlikely Saverin dumbly presumed that Zuckerberg would act purely in his interests from then on. Saverin knew other investors were coming in, knew that relations with Zuckerberg had soured, and apparently realized his own inability (or unwillingness) to raise funds.
Consider this: despite signing off Zuckerberg’s new deal, Saverin nonetheless protected himself enough that, when things went sour, he was still able to sue, reach the expected settlement, and end up with a billion-dollar stake in Facebook. That suggests Saverin (or his lawyers) knew some "dirty tricks" were in the pipeline, and so protected themselves while also not obstructing the company’s progress. Sometimes "lead, follow, or get out of the way" means getting out of the way, and Saverin got out of the way for the new investors.
Just for kicks, Saverin was also able to tell author Ben Mezrich enough that Mezrich could write The Accidental Billionaires, the book upon which The Social Network is based, and thereby forever cast Zuckerberg as "an arrogant nerd-punk who betrays friends and classmates in order to get what he wants – sex, money, and power."
I guess everybody wins — Zuckerberg got his company, Saverin got his credit and money for co-founding Facebook — or loses, depending on your perspective. They all seem unhappy and frustrated with the result, despite become billionaires.
Perhaps that explains why the score for the movie is so dark.