Just about every and any business institution and every college around the U.S has studied the story of Facebook. It was even made into a movie. One thing is obvious to those that aren’t familiar with its history during its idea, conception and subsequent start-up is that it gave away a lot of money in litigation and contractual obligations due to poor business decisions being made early on by Mark Zuckerberg. This paper will examine the precautions that could have been taken by Zuckerberg and the types of contracts or agreements that could have been used that would have made life much, much easier later on.
Can you know if you have a potentially hugely successful company early on?
Ask any entrepreneur about their start-up company and chances are every one of them will say their company is going to be hugely successful and it’s one of a kind. The reality is much, much different, as statistically it’s been shown that over 75% of new businesses will fail over time.
But ask a seasoned entrepreneur who has failed once or twice, and kept at it starting new venture after new venture, and chances are they’ll know deep down how potentially successful that particular business venture will be. Sometimes, a certain product or idea will create so much buzz early on, that the possibility exists that it is immediately known “we have something big on our hands here.” This is the exception and not the norm though.
Should all companies take the precautions Facebook failed to take, or can some companies be more relaxed about such legal issues?
Every company, no matter how small should take every precaution possible to avoid the legal catastrophe FaceBook went through, because of either a lack of knowledge or a lack of planning. As a new start-up, you will face a litany of huge amounts of risk, which can have tremendous consequences. According to Steven Gladstone, a lawyer in Atlanta with over four decades of experience forming companies and structuring private placements, “Not getting legal assistance from the beginning is the number one mistake made.”
A recent study by LegalShield found that, while 60% of small businesses experienced a “significant legal event” in the last two years, just half of those sought the help of a lawyer to deal with them. (Nelson, 2013) While some may be able to “wing it” and perhaps get away with not seeking legal advice, statistics show that when a new business, two years or less, has a major incident that results in litigation almost none make it.
So what are new entrepreneurs to do? Lawyers are expensive, see if you can use SCORE or find an attorney that works pro-bono, or research yourself and incorporate your decisions and ideas into the business plan.
What types of agreements and contracts could Mark Zuckerberg and his partners, and early investors have drawn up?
Early on Zuckerberg had no idea how big Facebook would become one day, all he knew was he had an idea that was receiving a lot of attention which told him there was a demand for it. What he didn’t do though was study that demand or even write a business plan. Instead, he began writing code in his Harvard dorm room and as the Winkelvosses would later contend, stole their idea for what would ultimately become Facebook.
What Zuckerberg should have done was write a business plan. The fact that he didn’t and Facebook grew into what it was is astounding, nonetheless, at a minimum Zuckerberg should have divvied up equity by vesting persons he needed early on. Namely Saverin and Moskovitz. Instead, he chose to arbitrarily give up huge chunks of the company in an almost willy-nilly fashion late one red bull fueled coding night.
“Vesting is the simplest way to meet halfway between giving it all away before a person has proven themselves and not giving them anything at all (which obviously risks losing a good team member).” (Bergamnn, 2014) Zuckerberg should have compensated value, not time, which is what he required early on.
At a minimum, he could have downloaded management agreements that he could have had all new hires sign, non-disclosure agreements, and an operating agreement after he incorporated Facebook. Saverin, Facebooks, first investor, should have had an investors agreement for shares etc which spelled out what was going to be given in return for his $15,000 investment and over what period of time.
What contracts could have the Winkelvosses and and Divya Narendra drawn up when they hired Zuckerberg to work for their company?
There is no doubt that Facebook will always have to face the fact that its inception based on the idea of a social media networking capability was stolen by Mark Zuckerberg from 3 other Harvard students, the Winkelvoss twins, and Divya Narenda. Originally it was called “Thefacebook.com,” The ensuing lawsuit filed by the 3 Harvard students against Zuckerberg and Facebook (the name was changed later), centered around had they entered into any agreements.
The Winkelvosses had no formal contract that outlined what Zuckerberg was going to do and what his compensation was going to be, neither did they have a Non-Disclosure agreement signed. “In 2007, Massachusetts Judge Douglas P. Woodlock called their allegations “tissue thin.” Referring to the agreement that Mark had allegedly breached, Woodlock also wrote, “Dorm room chit-chat does not make a contract.”
A year later, the end finally seemed in sight: a judge ruled against Facebook’s move to dismiss the case. Shortly thereafter, the parties agreed to settle.” (Carson, 2010) Facebook had grown so much that it understood that settling now would save money in the long-term as its value grew. The Winkelvosses and Narenda got lucky, had they taken 30 minutes to draft at a minimum two agreements, one for work performed and a Non-Disclosure non-circumvent agreement they probably could have prevailed in court and Facebook’s owners may have been different people.
In conclusion Facebook, or better yet its creator Mark Zuckerberg, could have done a whole bunch of things early on that would have saved the company millions if not billions of dollars down the road. Had he just taken the time to draft several contracts (readily available from the internet) and spelled out roles, responsibilities, and compensation, most if not all of its legal problems may have been alleviated.
The Winkelvosses and Narenda too, had a similar fate, and it demonstrates how a lack of basic business comprehension and a failure to get sound legal advice can cost an organization dearly both in monetary and a public relations point of view. Facebook, Mark Zuckerberg and all the other parties involved got lucky that Facebook was such a huge success that was growing, and while the money was flowing freely able to settle. Most companies that would have started off this way would not be around today to talk about it.
Bergamnn, W. (2014, May 28). How to Split Equity Without Giving Away the Company. Retrieved from http://www.entrepreneur.com/article/234230
Nelson, B. (2013, August 29). Seven Sadly Common Mistakes When Forming A New Company. Retrieved from http://www.forbes.com/sites/brettnelson/2013/08/29/seven-sadly-common-mistakes-when-forming-a-new-company/
Carson, N. (2010, March 5). How Facebook Was Founded – Business Insider. Retrieved from http://www.businessinsider.com/how-facebook-was-founded-2010-3