The forthcoming Facebook movie exists thanks to an embittered co-founder who blabbed about the company's origins. Instant messages from CEO Mark Zuckerberg, below, describe the "dirty tricks" that made the co-founder so angry—and so indiscreet.
On October 1, Columbia Pictures will release The Social Network, a film that portrays Facebook's CEO and cofounder, Mark Zuckerberg, as an arrogant nerd-punk who betrays friends and classmates in order to get what he wants – sex, money, and power.
The movie is fiction. So is the book it's based on – Ben Mezrich's The Accidental Billionaires.
Facebook hates the movie. Zuckerberg says he will not watch it. Based on the early reviews of the movie, this makes sense. According to sources – sources who despise Mark Zuckerberg and sources who admire him – the only reason The Accidental Billionaires exists is because one of Mark's Facebook cofounders pitched the book to Mezrich in an attempt to permanently damage Mark's reputation. According to those sources, that cofounder and Harvard student is Eduardo Saverin.
This is the story of how Eduardo got so angry at Mark — how, from Eduardo's perspective, Mark screwed him out of a huge chunk of Facebook stock. It's also the story of how Mark solved an early problem at Facebook, one that could potentially have prevented the company from becoming the global behemoth it is today.
The story is sourced from people involved in the founding year of Facebook, sources close to Facebook, and documents viewed by Business Insider. It includes previously unpublished emails and instant messages between Mark Zuckerberg and early Facebook colleagues and confidants.
"A sucker born every day."
In late 2003, Harvard sophomore Mark Zuckerberg asked a Harvard student named Eduardo Saverin, a junior, to deposit $15,000 in a bank account that would be accessible to both of them. The money, Mark promised, would go toward the servers needed to host a site that Mark wanted to develop. The site would be called TheFacebook.com. Eduardo agreed.
Why did Mark choose Eduardo to be his first business partner?
Mark, Facebook, and Eduardo declined interview requests for this story, but we can infer some of Mark's thinking from previously unpublished instant messages he wrote during the time.
In one IM to a friend, Mark described his new partner, Eduardo, as the "head of the investment society." Eduardo was rich, Mark went on to say, because "apparently insider trading isn't illegal in Brazil."
Mark also partnered with Eduardo because Eduardo gave the impression he knew something about business. Eduardo was the kind of guy who wore suits to class at Harvard, and he left people—including Mark—with the impression that he was connected to the Brazilian mafia.
In another IM conversation, this one from January 8, 2004, Mark described the arrangement this way:
Zuckerberg: Eduardo is paying for my servers.
Friend: A sucker born every day.
Zuckerberg: Nah, he thinks it will make money.
Friend: What do you think?
Zuckerberg: Well I don't know business stuff
Zuckerberg: I'm content to make something cool.
So Mark appears to have approached Eduardo because Eduardo had money and a vision for how to make more of it. Mark, meanwhile, wanted to "make something cool."
With Eduardo's money paying for the servers, TheFacebook.com went live in February 2004. It was an instant sensation at Harvard. Students from other schools quickly clamored for the site's expansion, and Mark and his colleagues obliged.
By April, the site was doing so well that Mark, Eduardo, and a third Harvard sophomore named Dustin Muskovitz formed The Facebook as a limited-liability company (LLC) under Florida law. Two months later, on June 10, 2004, a Harvard commencement speaker mentioned the amazing popularity of thefacebook.com.
It was the high point in the relationship between the cofounders. Things quickly went south from there.
"I maintain that he fucked himself"
Six months after thefacebook.com launched, as the summer of 2004 began, Mark Zuckerberg and Dustin Moskovitz moved to Palo Alto, California where they planned to work on TheFacebook.com in a rented house. Eduardo Saverin went to New York for an internship at Lehman Brothers.
According to instant messages from this period, before Mark left for the West Coast, he asked Eduardo to work on three things: "to set up the company, get funding, and make a business model."
Almost immediately after the move, the relationship between cofounders began to fray.
At first, it was just a cultural divide. One awkward IM exchange reveals how different Mark's life in Palo Alto was compared to Eduardo's life back on the East Coast:
Saverin: So you guys go out a lot to partiens [sic] and such there?
Zuckerberg: But in general we don't do fun things.
Zuckerberg: But that's OK because the business is fun.
Saverin: Lol yeah it is fun. No fun things though?
Zuckerberg: Eh, enough.
But then Eduardo did something that really pissed Mark off: He ran unauthorized ads on Facebook.
Worse, the ads were for a startup Eduardo was running entirely on his own, a job boards site called Joboozle.
Mark flamed Eduardo for this in an email:
You developed Joboozle knowing that at some point Facebook would probably want to do something with jobs. This was pretty surprising to us, because you basically made something on the side that will end up competing with Facebook and that's pretty bad by itself. But putting ads up on Facebook to advertise it, especially for free, is just mean.
What finally sent the relationship between Eduardo and Mark down the tubes was Facebook's need for funding.
As that first summer went on and TheFacebook.com grew more popular than anyone imagined, the company needed money to keep running. Finding investors wasn't hard. As early as July, Silicon Valley bigwigs like Mark Pincus, Reid Hoffman, and Peter Thiel were lining up to give Mark cash. Things were going so well, in fact, that Mark soon decided to commit to the company and not return to Harvard for his junior year.
What was hard, however, was getting Facebook co-founder Eduardo Saverin's attention, getting him to make a decision, and getting him to sign off on the reformation of Facebook as a company under Delaware law – a crucial step before any funding deals could be completed.
At one point, Mark emailed Eduardo to offer him frequent flyer miles if it would get him out to Palo Alto. Eduardo didn't take the offer. The situation soon became critical, because without financing, TheFacebook.com would end up running on Zuckerberg family loans.
Eventually, Mark decided to solve the problem by cutting Eduardo out of the company.
In an IM with Dustin Moskovitz, Mark explained why:
I maintain that he fucked himself…He was supposed to set up the company, get funding, and make a business model. He failed at all three…Now that I'm not going back to Harvard I don't need to worry about getting beaten by Brazilian thugs.
"I'm just going to cut him out."
When Mark Zuckerberg and Dustin Moskovitz moved out to Palo Alto in June 2004, they ran into Sean Parker, an Internet startup kid best known for cofounding Napster. Sean soon joined TheFacebook.com.
Sean's first task was to do one of things Eduardo was supposed to do, but hadn't yet: help Facebook find money. Sean had raised money for Napster and he knew his way around Silicon Valley. He quickly proved himself capable. For Mark, this only reinforced the idea that Eduardo was expendable.
The only problem was: How would Mark cut Facebook's third-biggest stakeholder and co-founder out of the company?
In an IM exchange with Sean after a meeting with Peter Thiel, who would soon become Facebook's first outside investor, Mark and Sean discussed the Eduardo problem. Mark hinted at a hardball solution, one based on some "dirty tricks" used by Peter Thiel. Thiel had learned these tricks, Sean said, from one of the most legendary venture capitalists in the Valley, Michael Moritz of Sequoia. Sequoia has funded Google, Yahoo, PayPal, Zappos, and many other massive tech companies.
Parker: Peter [Thiel] tried some dirty tricks. All that shit he does is like classic Moritz shit.
Zuckerberg: Haha really?
Parker: Only Moritz does it way better.
Zuckerberg: That's weak.
Parker: I bet he learned that from Mike.
Zuckerberg: Well, now I learned it from him and I'll do it to Eduardo.
In later emails and IMs, we learn what "dirty tricks" Mark intended to pull to get TheFacebook.com funding without having to wait for sign-off from Eduardo.
His plan: Reduce Eduardo's stake in TheFacebook.com by creating a new company, a Delaware corporation, to acquire the old company (the Florida LLC formed in April), and then distribute new shares in the new company to everybody but Eduardo. Mark discussed this plan with confidants over IM several times.
Here's one instance:
Confidant: How are you going to get around Eduardo?
Zuckerberg: I'm going to buy the LLC
Zuckerberg: And then give him less shares in the company that bought it
Confidant: I'm not sure it's worth a potential lawsuit just to redistribute shares. You have nothing to gain.
Zuckerberg: No I do because until I do this I need to run everything by Eduardo. After this I have control
In another, Mark writes:
"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."
The plan goes into effect
In the middle of that summer, Mark went forward with his plan:
On July 29, 2004, the new company, TheFacebook.com was incorporated in Delaware. Then it acquired the old company, formed back in April as an LLC in Florida.
On September 27, 2004, Peter Thiel formally acquired 9% of the new company with a convertible note worth $500,000. Before the transaction, Facebook ownership was divided between Zuckerberg, with 65%, Saverin, with 30%, and Moskovitz, with 5%. After the transaction, the new company was divided between Zuckerberg, with 40%, Saverin, with 24%, Moskovitz, with 16%, and Thiel with 9%. The rest, about 20%, went to an options pool for future employees. From there, a good chunk of equity went to Eduardo's replacement, TheFacebook.com's new COO, Sean Parker.
On October 31, 2004, Eduardo signed a shareholder agreement that alloted him 3 million shares of common stock in the new company. In the agreement, he handed over all relevant intellectual property and turned over his voting rights to Mark Zuckerberg. Mark became Facebook's sole director.
On January 7, 2005, Mark caused Facebook to issue 9 million shares of common stock in the new company. He took 3.3. million shares for himself and gave 2 million to Sean Parker and 2 million to Dustin Moskovitz. This share issuance instantly diluted Eduardo's stake in the company from ~24% to below 10%.
Mark's plan had succeeded. Eduardo was, for all intents and purposes, gone.
Bringing down the house
In a testament to how little Eduardo was involved in Facebook's operations after Mark left Harvard, Eduardo apparently only found out how badly he'd been diluted in April 2005, when TheFacebook.com sent him a letter seeking approval for its second formal round of funding.
Fifteen days after that letter was sent from TheFacebook.com's HQ, one came back from Eduardo's lawyers. The next day, Mark finally fired Eduardo.
Had Mark misled Eduardo, screwing out of the majority of his stake in the company without telling Eduardo that that was what he was planning to do? Or had Eduardo just not been paying attention when he signed his rights away?
The answers aren't clear, but the lawsuits predictably followed.
First, Facebook filed a lawsuit against Saverin, arguing that the stock-purchase agreements he had signed in October were valid. Then Saverin sued Zuckerberg, alleging he spent Facebook's money (his money) on personal expenses over the summer.
The jilted Eduardo grew bitter. At one point, he reached out to Cameron Winklevoss, Tyler Winklevoss, and Divvya Narendra – the Harvard students who allege that Mark Zuckerberg stole their idea for the company in the first place.
Eventually, sources say, Eduardo decided to attack Mark's reputation.
He approached Ben Mezrich – the author of Bringing Down The House, a book about how a group of MIT students made it big in Vegas – and offered him a book about how a group of Harvard students made it big in Silicon Valley. Bringing Down The House makes its characters out to be rock stars and scoundrels; the Facebook book, Accidental Billionaires, does the same. The upcoming movie based on the book features cocaine, models, and dark, moody, lighting from the director who brought you Fight Club. It's a character assassination.
After Eduardo began talking to Mezrich, he and Facebook settled their lawsuits. Facebook went from officially denying Eduardo's status as a cofounder to listing him as one on its Web site. As a part of the settlement, Eduardo stopped talking to the press.
Like the Winklevoss brothers, Eduardo Saverin clearly felt he got screwed by Mark Zuckerberg in Facebook's early days, and in one way, he did. (Whether this move was justified based on Eduardo's behavior, however, is another question).
But also like the Winklevosses, Eduardo won huge in the end. Thanks to Mark and the rest of the Facebook team, Eduardo's little $15,000 investment is now worth more than $1 billion, with no further effort from himself.
It was certainly one of the best investments of all time.
Note: We've been in contact with Facebook and expect a statement shortly.
Republished with permission from BusinessInsider.com. Authored by Nicholas Carlson. Photo of Zuckerberg, top, via his Facebook account. Photo of Eduardo Saverin via Business Insider. Photo of Sean Parker via Getty Images.