My wife and I saw The Social Network this past Saturday which tells the story of how the social website phenomenon Facebook started. Although I try to leave my law practice out of my weekend entertainment, the movie vividly highlighted how the story might have been very different had any of the protagonists had some friends over at Langdell Hall where Harvard law students study.
The Winkelvoss brothers offer computer programmer extraordinaire Mark Zuckerberg a sandwich as they casually explain their idea for a social networking site they wish to call Club U. The site will allow Harvard students to follow other Harvard friends via a website. They ask Mark if he can write the code for the site. Mark readily agrees, they shake hands and shortly afterwards Mark decides he can take the idea and do it better. This scene might have played out differently had the brothers trekked over to Langdell Hall. Had they done so, they might have insisted Mark sign a non disclosure agreement for the idea prior to disclosing the idea to him. They, moreover, would have asked him to sign an independent contractor agreement where all the code he developed belonged to the Winkelvoss brothers. At the time they pitched the idea, the Winkelvoss brothers has no idea Mark might take their idea and start his own business. Does that sound familiar? In the movie, the Winkelvoss brothers came from a privileged background and had the financial ability and legal contacts to sue Mark Zuckerberg. Most of the time, however, entrepreneurs dealing with Fortune 500 companies have neither the means nor the time to fight these companies if their ideas are stolen.
Mark Zuckerberg starts his online site “The Facebook” and enlists the help of his friend Eduardo Saverin to start and grow the business. They have a conversation where Mark tells Eduardo that Mark will own 70% of the company and Eduardo will own 30%. A handshake deal among friends nothing in writing. Later in the movie, Mark meets Sean Parker who tells Mark to move to Silicon Valley as that is where the action is to grow the business. Eduardo does not like Sean and thinks Sean should not be part of the company. Mark successfully obtains a $500,000 angel investment and Eduardo is asked to sign some paperwork reincorporating the company in Delaware while giving him 35% of the company. Eduardo, without an attorney, signs the paperwork. Later Eduardo realizes he did not understand the fine print which allows the company to reduce his shares while the other founders shares are not reduced. Eduardo laments that he did not have a lawyer representing him. He simply believed what the lawyers representing the venture capital company told him about owning 35% which was true. They simply chose not to tell him that he could be diluted later when additional investors put money into the company. This story echoes a familiar refrain: a business deal turns deadly as a result of the details when you fail to consider the “what if”. Here the “what if” was what if additional funds are put into the company, are the founding shareholders ownership reduced? The question wasn’t asked because Eduardo lacked intelligence, it went unasked because he did not have experience with venture capital firms and how their deals work.
Given all the mistakes that occurred and the money involved once the idea really took off, litigation inevitably ensued with the Winkelvoss brothers and Eduardo separately suing Mark Zuckerberg. At his deposition, Mark’s arrogance and sarcasm become abundantly clear. Litigation is a lot like going to Las Vegas, the likability factor of the people involved and chance often trump the facts and the law. In the movie, a competent lawyer would have easily been able to paint Mark as an arrogant person who betrayed his friend’s trust as well as stealing an idea from other Harvard students. This factor, among others, persuaded Mark to write a sixty-five million dollar check to the Winkelvoss brothers and a separate undisclosed sum to Eduardo and acknowledge him as a Facebook co-founder.
The Social Network highlights how well intentioned entrepreneurs who simply trust their business partners watch helplessly as others capitalize on their ideas. Friendship is also put to the test when friends embark on a business venture with no written agreements then start to have disagreements on the direction of the company. Absent a simple non disclosure agreement and a independent contractor agreement, the Winkelvoss brothers watched in horror as Mark Zuckerberg turned their idea into an international phenomenon. Eduardo Saverin, absent competent legal counsel, signed legal agreements that sealed his ultimate departure from the company. Unlike most entrepreneurs who have their ideas stolen, the Winkelvoss brothers and Eduardo Saverin managed to obtain compensation for their efforts in Facebook’s creation. Most entrepreneurs who make these same mistakes are far less fortunate and find the lesson learned painfully expensive. They should never forget a very simple equation: Business Ideas – Legal Protection = Philanthropy.
Justin S. Daniels, JD, MBA
Trusted Practitioner of Practical Legal Advice.