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, people 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 It includes previously unpublished emails and instant messages between Mark Zuckerberg and early Facebook colleagues and confidants.
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and Eduardo declined interview requests for this story, but we can infer some of Mark's thinking from previously unpublished instant messages he wrote during the time.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.
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.
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 assasination.
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 behaviour, 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.
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