This is our second post on startup lessons from the movie The Social Network, about the founding of Facebook. The movie did well over its opening weekend, reportedly bringing in $23 million, at the high end of studio estimates. But is it true to life?

Laura Sydell, a correspondent for NPR, saw the movie with half a dozen Silicon Valley entrepreneurs over the weekend. She reports their reactions:

“The movie captured the energy and intensity of an early stage startup,” says Ash Rust, an engineer at Klout, a company that ranks individual influence on Twitter. “People don’t sleep,” he says, “but when they do, they dream of a kingdom.” And the “kingdom” Rush and others dream about is “connecting the entire world” through their products.

“If I could create a revolution, I’m sure there would be casualties along the way,” says Jim Ying, general manager of Six Waves, a social gaming company that uses Facebook as its launch point.

Speaking of casualties, let’s look at our second lesson for anyone starting a new business.

Partnership agreements are really, really important

Aside from the vagueness surrounding their hiring of Zuckerberg, the Winklevoss brothers also apparently misunderstood the importance of getting all ownership and partnership agreements in writing. A subsequent arrangement they made with Wayne Chang, another student, to combine their ConnectU site with his i2hub filesharing program led to another lawsuit, and possibly one of the first official court complaints to include the transcript of an IM exchange as evidence of ownership shares.

But The Social Network is more concerned with another early partner, Eduardo Saverin. In 2004, Saverin was the CFO, and Zuckerberg’s roomate and good friend. He was also the main contributor to the book on which the film is based. A little revenge?

The facts: According to a June 28, 2006 article in The Rolling Stones, in 2004,

“He and Saverin each agreed to invest another $20,000 in the operation. While Zuckerberg was in California, Saverin stayed behind in New York. That decision would prove ill-advised… In July, Zuckerberg and Saverin had a mysterious falling out. Zuckerberg has filed a lawsuit, claiming Saverin jeopardized the company by freezing Facebook’s bank accounts. Saverin countersued, claiming that Zuckerberg never matched his $20,000 in seed money and, further, used that money for personal expenses. That summer, Zuckerberg transferred all intellectual-property rights and membership interests to a new version of the company in Delaware. The value of Saverin’s stock was unhinged from any further growth of Facebook, and Saverin was expunged as an employee.”

Zuckerberg explained his actions in an email to a friend by claiming that Saverin was jeopardizing the growth of the company: “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.”

This sure makes for good movie drama, but a good partnership agreement could have prevented much in both lawsuits:

• Valuing sweat equity vs. money: Any time you have people contributing unlike assets or expertise to a business, you have to agree in writing beforehand on the value of those contributions. In the Winklevoss/Chang case, Wang brought sweat equity, as well as the specific assets of i2hub. In his mind, that was worth at least as much as the $7,500 the Winklevosses later kicked in to keep the joint venture going, but they disagreed. In the Zuckerberg/Saverin case, there’s an argument ostensibly about an agreement for seed funding vs. the work that Zuckerberg put in to developing the site. Tim Berry offers lots of tips for dealing with sweat equity.
• A partnership is about decisions, as well as ownership: Many startup founders think that getting a partner is a great idea, because it will bring in more money. They forget that the partnership, unless specifically stated otherwise, also brings in another person for decision-making. If you anticipate the need to move fast on issues where you and a partner may not immediately agree, you need to spell out in your partnership agreement how decisions will be handled in that case. If you can’t figure out a way to solve that, maybe you should go it without a partner.

Saverin was eventually given credit (and shares) for his role in Facebook’s founding. Avoid this kind of media attention yourself by crafting a good solid partnership agreement.

Sara Prentice Manela
Editor

P.S. Speaking of Facebook – Have you joined our fanpage?

Well, Tax Day is upon us, and hopefully you’ve gotten your forms filled, your returns filed, and you’ve got a nice refund on the way. With all things fiscal in the air, it’s a good time to think about your company’s legal structure, and how that’s affecting your business tax status.

There are both legal and tax-related distinctions to different business types. Read these Bplans articles from the experts at Nolo to make sure you are structuring your business to use those differences for your benefit:

• How Sole Proprietors are Taxed
• How Corporations are Taxed
• How Limited Liability Companies (LLCs) Are Taxed
• How Partnerships are Taxed
• Earning Income as a Nonprofit Corporation

Sara Prentice Manela
Editor

It seems that there is no human endeavor that will not be subverted by those with evil intent. The social-mediasphere is no exception. This recent Yahoo! News article, Injunction by Twitter: A Blogger Makes History Trying to Unmask His Impostor reports how the English High Court is using Twitter to serve an injunction against a Twitter user/identity impostor.

The case has many facets, including political campaigning, impersonation, possible slander, character assassination via misrepresentation, mainstream media reporting, and the impact on everyone’s use of Twitter through increased legal action and greater government regulation in social media.

The high-profile court action, says Time, “also highlights the increasing dangers of identity misappropriation” on social media sites. A cited example involved Foreign Secretary, David Miliband, when a Twitter impostor posted, “an elegiac tweet on Michael Jackson’s death [which] was widely quoted by credulous media.”

The plaintiff in this lawsuit is also considering a suit against Twitter, because he experienced Twitter’s own procedures slow to respond. Further legal action could force Twitter to reveal account holders’ identities, which would set a precedent for the wider social media environment.

Another legal response to questionable blog and Twitter activities was posted by Tim Berry on his Planning Startups Stories blog in FTC vs. Social Media Wolves in Sheep’s Clothing. This governmental action concerns people who accept payment to post advertisements in the guise of “personal” reviews, recommendations, and conversations.

Social media, which started out as an unfettered, community-gathering-place-of-sorts is becoming as hazardous and risky as any other commercial or political arena. And as regulated and litigation-bound. Be aware, be paranoid, be skeptical of what you read. Be prepared to defend your good name.

Steve Lange
Palo Alto Software

The marketing potential of social media has been recognized since its inception. And, for just as long, there have been those people who are willing to manipulate that potential. One of those ways has been the posting of fake reviews. This involves filling blogs and sites full of ostensibly genuine, satisfied-customer-written reviews, extolling the excellence of a product or service, when in fact, the reviews are churned out in-house, or by a review-generating mill. Another is stuffing the ballot box, as it were, by sending a flood of fake good reviews to the review listings for your own product, or fake bad reviews lambasting a competitor’s, on retailer websites, such as Amazon.com.

In his Social Media Safety Warning post of 15 July, Andy Sernovitz reports in the Huffington Post on the New York Attorney General fining a company $300,000 for fake reviews.

[The company] employees published positive reviews and comments about the company to trick Web-browsing consumers into believing that satisfied customers were posting their own stories. These tactics constitute deceptive commercial practices, false advertising, and fraudulent and illegal conduct under New York and federal consumer protection law. The settlement marks a strike against the growing practice of “astroturfing,” in which employees pose as independent consumers to post positive reviews and commentary to Web sites and Internet message boards about their own company.

“This company’s attempt to generate business by duping consumers was cynical, manipulative, and illegal,” said Attorney General Cuomo. “My office has and will continue to be on the forefront in protecting consumers against emerging fraud and deception, including ‘astroturfing,’ on the Internet.” —excerpted from the NY Attorney General Media Center

Sernovitz points out that this ruling now makes false reviews illegal. It’s no longer a gray area, open for broad interpretation. This is a boon for ethical social media marketers, businesses, and customers. It is now a time to rebuild trust and establish brand integrity.

Sernovitz lists six ways for businesses to market safely in social media:
1. Never pay for posts or reviews.
2. Stay away from fake-review or mass-blogging services.
3. Create a formal, public policy.
4. Train your team.
5. Bind your agencies.
6. Monitor.

A recommendation from a satisfied customer can be one of the most powerful marketing messages you can use. It is in your very best interest to collect them, and use them, but only if they are real!

Steve Lange
Senior Editor
Palo Alto Software
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