How Zuck screwed Saverin (the FACTS) - Company Forensics

climax of The Social Network movie lives in every Founder's head rent-free my brother's at the cleaners and what was your ownership Shear diluted down to .03 but it's also a complete lie I mean kind of yes it's Hollywood yes we know or we should know that all stories are twisted for dramatic effect holy but even the book that inspired the movie script was criticized for its accuracy and more importantly the main consultant the source of details for the story was Eduardo Saverin himself precisely during the time that he was suing Mark Zuckerberg but for an entire generation of future entrepreneurs and I'm including myself in there this film gave us a first glimpse into a startup World The Social Network Mark Zuckerberg has turned his social networking website Facebook into what it could be to become a tech entrepreneur or so it seems every three minutes [Applause] first time I had ever heard about Peter Thiel or venture capital or shares of stock in all honesty I thought they were my lawyers even what we think of Mark Zuckerberg today is inevitably influenced by what we saw in this film and it's measurable in 2021 Forbes determined that most Americans saw Mark unfavorably which was disconnected from the perception of the brand or the company so what the hell actually happened here did Mark actually do anything illegal or was it just Eduardo signing without reading like to use my pen or was it Mark intentionally trying to screw his best friend we went on a hunt for the original story for the real story the facts not the fiction the numbers and the legal paperwork and this is a mandatory cautionary tale for any startup founder here's the real story of how Mark Zuckerberg screwed his best friend thank you [Music] now you're going to see in a minute the tricks that Mark was able to pull to screw Eduardo Sovereign in this transaction but the truth is that as Founders we have to make these decisions we have to sign these documents incorporate companies without a real 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screenwriters of our time plays during two lawsuits and and to understand what happened between Mark and Eduardo we must also understand what happens with the other lawsuit lawsuit one is from the Winkle bosses we have an idea we want to talk to you about it's called The Harvard connection you create your own page interest bio friend isn't this the exact project that we were working on and isn't this the exact person that we were working on it was to sued Mark for stealing their idea for a social network and for the most part the version of the story that's portrayed in the film is real so the Winkle bosses and divine Narendra did reach out to Mark to build their website Harvard connect Mark agreed to partner with them and to help them build their website and after that initial conversation on November 25th Mark sent a bunch of emails to them telling them how the project was sometimes moving along but also not because he was very busy I'm also really busy tomorrow okay anybody else feel like there's something up with this guy all of these emails are real when the lawsuit happened these emails were made public and Facebook's lawyers didn't question them so essentially a fact but years later another set of messages was leaked to the public private messages from Mark that showed his real intention surrounding Harvard connect it's it's hard to argue for Mark Zuckerberg on this one I mean the whole evidence points to what we all understood from the film he stalled the team to get the upper hand on the release of the Facebook now the movie thankfully doesn't bother you with all the details about the absolute legal chaos that was all of these lawsuits because it wasn't just the winklevosses and the company connect you suing mark it was Facebook suing back connect you and then a company called I2 Hub over their attempt to copy Facebook with another platform called social butterfly and then they settled this lawsuit Facebook agreed to pay connect you with a company nation of cash and shares but then more lawsuits happen connect you weeks just weeks after the settlement again questioning the value of the shares that they have received as part of the settlement they sued their Law Firm for malpractice who actually suit them back I mean let me be a judge here for a second the winklevosses are bad losers they were screwed by Mark yes but even after their first settlement they were still sour and they wanted to squeeze more out of this deal let's get the freaking nerd now how much of Facebook should they be entitled to I really don't know and I really want to hear what you guys think but the matter was finally settled by a panel of three judges in San Francisco years later who ruled that they were entitled to what they agreed that they were going to be entitled to when they settled that lawsuit originally in other words they said no backseats nobody put a gun to your head back in 2008 to take whatever however many millions of dollars why do these guys deserve a second feeling the the spirit of the agreement that we entered into uh has not been upheld by the other side uh with respect to part of the consideration being in equity they misled us to the evaluation of the company and the actual stock that we were to receive they were even sour about that and they even threatened to take this case to the Supreme Court which eventually stopped them now the lesson that many Founders will extract out of this whole story is don't tell your idea to anybody because they might steal it and I think that's a lesson the real lesson to me is that execution is everything it's not the first one to launch it's not the one that comes up with the idea it's who does it better more than an idea more than how smart or how cheating Mark might have been here Facebook had one advantage over connecting you its ability to execute with in-house Talent no contractors no external developers but the key skills to build Facebook were contained with the founding members of the company I see so many winklevances really I do in my work maybe maybe not as rich but the type of founder with an idea that is just looking to recruit a developer to build it and there's always that relationship it's my idea you're just my employee and you're building it so just do what I say and that's not how things work if your startup can't exist unless you recruit that person with that specific skill coding then they are as important to the company as you are so you must treat them as partners as your peers which is not the case in this story you guys were the inventors of Facebook you'd have invented Facebook and that of course brings me to mark and Eduardo's relationship not before throwing she had one last time at the winklevosses not because of the actor who played them but the real ones more recently because their crypto exchange crashed after they put too much trust in another Kiki character but that's a story for another day which we actually already covered but let's go back to Eduardo's story now for us middle class people it's always I guess it's always easier to relate to a rags to riches story Steve Jobs who was an orphan or you know that type of story Zuck was not that Eduardo zaverin was not that Eduardo was Brazilian he's the son of Roberto Saverin a well-known Rich businessman in Brazil investor in retail and real estate and Logistics that story in the movie about him learning hurricane patterns and predicting the price of oil the weather You can predict the price of heating oil like he also did wear a suit to class but remember the main source material for the film comes from a sour Eduardo Sovereign with an active lawsuit against Facebook the screenwriter also took some liberties from the books so here's really how much Sovereign was involved with Facebook on October 28 2003 a drunk married Zuckerberg hacked face match after breaking up with his girlfriend that's a fact it crashed Harvard's server after a few days not overnight and Sovereign was Piers supporting him through the breakup and the Mischief after the success of face match and some inspiration from the Winkle of answers he figured what he needed to build the Facebook now what we know about this comes from a combination of interviews with people close to Facebook during those first few years it partly comes from the leaked instant messages that we mentioned earlier and from the research on the book which there is some truth to it anyway apparently Mark didn't just want Eduardo next to him in the company because of the money Eduardo was connected he was head of the investment society and to an engineer like Mark who loves coding he needed this understanding of business and that's why Eduardo was key in exchange for his participation Mark offered him about two-thirds of the company Eduardo is CFO knows 30 of the company now the first company investment was actually one thousand dollars each according to Rolling Stone and even in one of the lawsuits Sovereign stated that they both had agreed to contribute twenty thousand dollars each in cash for the company and he actually claimed that Mark never brought that money in through an instant messaging conversation it was apparently clear that Eduardo was the one covering most of the server costs during that time now a new member Dustin Moskowitz joined the company got five percent out of Mark's share that's also a fact 65 for Mark Zuckerberg 30 for Eduardo Severin and five percent for Dustin Moskowitz now in the summer of that first first year Dustin and Mark moved to a house in Palo Alto fact well Edward where's Eduardo he got an internship in New York Eduardo didn't come out Eduardo was tasked with three things during this separation to set up the company to get funding and to write a business model which is not a thing you need these days imagine if sleeping had existed at the time they would have been done in a day now he actually did set up the company in April of that year a Florida limited liability corporation which was a bad idea we also made a whole video about that anyway the coast to coast separation between these two guys seemed to cause some trouble now Eduardo was running another startup called jabuzzle which was this job Board site he was running it on his own and apparently he put ads on Facebook for it without asking Mark first which of course sparked a discussion now during the summer mark and Dustin met Sean Parker and you have heard of him I'm Sean Parker what do you do you must be Eduardo and Christy and Mark Sean was really one of three co-founders of Napster having been in this startup World in California for a while he understood how to navigate all of this so Mark decided to skip school next year and to work entirely on Facebook as long as he could secure some funding hey guys come on back and Sean Parker was able to Rally investors around the starter mainly Peter teal now Peter Thiel was already a big well-known investor in the valley he co-founded PayPal and was therefore one of the so-called PayPal Mafia along with others like Elon Musk and the founders of YouTube and there's a whole video about it but there was still a problem there was a 30 problem here because the Company CFO a huge chunk of the cap table was on the other side of the country working on a different startup and seemingly not really interested in the Facebook and Mark tried Business Insider found an email from Mark offering Eduardo frequent flyer mile so he that he could come to California but regardless of what Mark thought for a VC one third of debt equity in the company is a really really bad deal it means that every future round of investment you're gonna have to explain why somebody who isn't bringing value to the business owns such a big chunk of it it can be truly a deal breaker for investors in the future and so Dustin muskowitz Mark and Sean Parker started plotting really how to get Eduardo out foreign Mark's head Eduardo had failed at his job he had a bad company structure he hadn't secured any funding and he hadn't written a business plan he was kind of right and and Sean could do all these things heck he already started and he made it quite clear Insider found several instant messages discussing this with various people he wanted to get Eduardo out and he did it and here's exactly what he did so an LLC had been created in Florida but LLCs are really bad if you want to raise Venture Capital that's true there's no trickery in that so it made a lot of sense to create a new a Delaware C corporation and have this Corporation absorb the Florida LLC and and its IP and the code and everything that's fine so far now Locs and C Corps work differently in one fundamental way and LLC is a partnership between people the rules are set in this operation agreement that defines what percentage of the partnership each member owns now they are really not shareholders but partners with a percentage of ownership now in order to change that distribution every single time a new agreement would need to be put in place and this is one of the reasons why LLCs are really bad for companies that are going to go through multiple rounds of funding because you don't want to be rewriting these agreement all the time now on a C Corp on the other hand distribution works by shares when you own shares in a C Corp you don't really transfer or sell those shares to anybody instead when new investors come along the company issues brand new shares to the new stakeholders now issuing shares creating shares means everyone keeps the same number of shares but since the company has created more shares the ones that you own represent a smaller percentage than the total this is called dilution your Shares are essentially diluted in value that is again a completely normal and expected practice companies around the world as they raise money from investors now the rules of how these shares can be issued are based on a different document that's called the bylaws now the bylaws are like the Constitution the governing document for everything that the company does and it's going to be really important in a second now in Facebook's specific case a new C Corp was established with a shared distribution that looked something like this different accounts vary in the exact numbers and we've been digging through a lot of data and documents to find the right numbers and this is the closest that we could find source from a combination of again Business Insider articles the book and the Facebook effect another book that tells the story now accounts say that when the new C corporation was established Mark agreed to change the distribution a little bit to increase Dustin's share ownership as well as carving out a portion for Sean Parker while leaving Eduardo's percentage ownership untouched for now now Peter Thiel and a couple of extra investors invested 510 000 via a convertible note a convertible note is like a loan that's eventually meant to convert into Equity into stock in the company but it happens later in the future with the next round of funding for the company the convertible node has something called evaluation cap which is about five million dollars in this case which meant that when the company secured additional funding this Capital would convert to around 10.2 percent of companies stock we have a whole video detailing how these convertible notes work we have a financial model template with a cap table section to run your own math in these cases and I'm going to put it in the comments but the point is everything so far has been perfectly done by the book something about this restructuring didn't sit well with Eduardo he he became suspicious and it was around this time that he froze the bank account to the Florida LLC Bank account which he still had some control over that's a fact I'd like to freeze this bank account and cancel all existing checks and lines of credit now we know about this because of the lawsuits we know that Mark's family had to step in and inject up to 85 000 to help the company survive through these days while Peter thiel's money came into the company it pays off to have Rich parents but soon enough Peter seals money came in things continued to operate smoothly through the end of 2004 and that's when the company hit its first million users and here comes Mark's trick at the beginning of 2005. when signing for his 3.4 million shares in the new company Mark convinced Eduardo to renounce the voting rights of his share years and to delegate those voting rights to Mark's shares now so Mark became the only director in the company the company bylaws and the rules allowed him to make certain decisions without the need of approval from the other shareholders and then finally when signing his shares Eduardo also accepted that he was not going to be an employee of Facebook it's going to be like I'm not a part of Facebook and then finally in January Mark finally had everything he needed to execute his plan he issued millions of new shares and he didn't need shareholder votes for this he didn't even need to ask for your deal about it because remember this is a convertible note his investment is still considered a loan so he isn't a shareholder yet Peter Thiel and the other investors were still going to get that 10.2 percent on the future round of funding it didn't matter how the rest of the shares were distributed this was a real master plan devised over months by the Facebook team and confirmed by many leaked messages and inspired apparently by dirty tricks that Peter Thiel had learned through his time and started and Venture Capital now some accounts estimate that 9 million shares were issued by Mark during this time and the point is that these shares were to be issued as compensation to active employees in the company in exchange for staying longer or for their hard work in the business and this is also very normal this is called a stock option pool which is a common method to reward employees and startups and once again we made a whole video about it the difference here is that this stock option pool was huge and it was deliberately made to benefit to give those shares to the existing shareholders everyone except Eduardo to dilute his shares without him knowing because his number of shares was not changing it's just that the company had suddenly created many more shares and had given them to the same people mark would then double the shares for Sean Parker and for Dustin Moskowitz in exchange for their commitment with the company for another year and he would also take additional shares himself in exchange for his own involvement now since Eduardo was not an employee he would never be entitled to any of these stock options or additional shares by April 2005 5 the company closed another round of funding 12 almost 13 million dollars at a 98 million dollar valuation led by actual partners and this meant once again that the company was going to issue new shares that was going to delude everyone's shares evenly this time and when signing these documents that's where an Eduardo finally noticed and what was your ownership share diluted down to .03 it was never 0.3 by the way that was just made for dramatic effect but for the movie Works honestly pretty well he had suddenly been diluted from 30 percent of the company down to under 10 this trick was dirty but under the scope of the documents I think it could be justified as legal and it was really never judged by Court they reached the settlement now the lawsuits were settled while the book was still in process at some point Facebook had even removed Sovereign from the co-founder list my name's on the Masthead you might want to check again that's a fact which they have to reinstate after the settlement Sovereign stopped working with Ben and new interviews he speaks rather well of Mark he says that there are no hard feelings but damage was clearly already done now it's unclear how many shares Eduardo got after the settlement but here's how the cap table looked when Facebook went public in the stock market with 104 billion dollar valuation Eduardo Scott was five percent that's five billion dollars for a fifteen thousand dollar investment and not a lot of help Eduardo by the way is a nationalized American and when being in America required him to pay a few hundred of millions of dollars in taxes he figured that it was just simpler to renounce his U.S citizenship and move to Singapore where there's no dividend tax as for Mark when Facebook I peeled he still had 29 of the company this made him officially one of the youngest billionaires in the world and the same was for the original founding team now Aaron Sorkin again one of the greatest screenwriters of our time adapted the script from the book that came out of Eduardo's side of the story it was called The Accidental billionaires what's special about it is that it captures this unique moment this this moment of an angry desperate Edward trying desperately to sink Mark for what he did to him now you'll you'll read dozens of articles online blasting the author questioning the veracity or the exaggerations in the book but after everyone became a billionaire except for the Winkle bosses I guess many of them stopped complaining The Social Network the film is brilliantly written to cause this Clash of feelings it's designed to leave the role of the antagonist open some of you will side with Mark because you identify it with his nerdy character or because you like Jesse Eisenberg you ever end up uh seeing seeing the film that social it was a wizard but some of you will side with Eduardo he has a valid case an agreement is an agreement and Mark intentionally schemed to walk out of it I don't know if Sean Parker is a douchebag as Justin Timberlake portrayed him but who is the antagonist who is the good guy here coming away guys see you next week [Music]

Channel: Slidebean

Views: 227,427

Keywords: slidebean, caya slidebean, company forensics, caya, startups, startups 101, mark zuckerberg, the social network, the social network fact vs fiction, the social network ending, the social network clips, eduardo saverin the social network, eduardo saverin interview, peter thiel, eduardo saverin, the facebook dilemma, the facebook movie, how mark zuckerberg stole facebook, winklevoss the social network, the social network fact check, startup company

Id: hhKPBGYkwiE

Length: 22min 15sec (1335 seconds)

Published: Tue Apr 11 2023