partnerships

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

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