The founders of a red-hot messaging company called Snapchat are suing each other over ownership of the company.
One of the co-founders, Reggie Brown, says two of his former frat brothers at Stanford, Evan Spiegel and Bobby Murphy, effectively stole his idea and then swindled him out of a huge stake in the company.
Spiegel and Murphy haven’t offered any alternative story, other than dismissing Brown’s claim with the usual anodyne legalese.
The case has surprising similarities to the lawsuits surrounding the origins of another massive social network founded in a dorm room, Facebook. And it will almost certainly end in the same way: With a humongous settlement in which Snapchat pays Brown tens or hundreds of millions of dollars to go away.
Based on the evidence that has come to light so far, by the way, that’s exactly how it should end.
The evidence and undisputed facts in the Snapchat case so far suggest that, even if Brown is lying about a verbal agreement in which he and his co-founders agreed to split Snapchat’s equity in a certain way (50/50 before Murphy was added to the team, and 1/3rd afterwards), Brown certainly deserves something for his early role.
Even Spiegel, Snapchat’s CEO, agrees on that!
Videos of depositions obtained by Business Insider’s Alyson Shontell show Spiegel saying that Brown deserves something. And the videos also show that several other key details are not in dispute:
- Everyone agrees that Snapchat’s “ousted co-founder,” Reggie Brown, thought of the idea for the app (disappearing pictures) and took it to his frat brother, Spiegel, who had some business experience
- Everyone agrees that Spiegel and Brown then pulled Murphy into the project, because, unlike Spiegel and Brown, Murphy knew how to code
- Everyone agrees that the three frat brothers then worked and lived together for several months until the product was released
- Everyone agrees that Spiegel and Murphy then decided to toss Brown out of the company
Given that these facts are undisputed, there is no question that Brown deserves something for his contributions to the company. To suggest otherwise would be grossly unfair. (And the fact that Spiegel and Murphy seem to be resisting giving Brown something makes them look like selfish, greedy arseholes.)
The disappearing-pictures app was Brown’s idea, after all, and he helped build it. Given that the app grew from a frat-house partnership among three college friends, it is unreasonable to think that Brown, Spiegel, and Murphy should have instantly lawyered up and incorporated before starting work and that, because they didn’t, whatever Spiegel recalls about a verbal agreement — nothing, apparently, according to Spiegel’s testimony — should now be law.
(If Spiegel really thought it was fair to take a friend’s idea and work with him for three months to make it a reality and then give the friend nothing for that, then Spiegel is the one who should have lawyered up and spelled that out. It’s hard to imagine that any neutral observer would have considered that fair.)
Brown says that, before the frat brothers started building the app, they agreed to split the company’s equity among them.
Spiegel testified that he doesn’t recall that conversation.
Spiegel also, however, testified that he believes that Brown “may deserve something.”
So the only question is… how much does Brown deserve?
Brown wants a third of the company — because that’s what he says he, Spiegel, and Murphy agreed to.
Unless some evidence surfaces that makes crystal clear that that’s what the three agreed to, it is highly unlikely that Brown will get a third of the orginal company. (This third of the original company has since been significantly diluted by several financing rounds, so it is absurd to think that Brown deserves a third of the current company.)
Under normal startup circumstances, moreover, Brown wouldn’t likely get a third of the company, even if that’s what the founders agreed to.
Because in well-organised startups, founders generally vest into their stakes over a period of years (3-4.) This vesting helps avoid exactly the problem that Snapchat ran into: Founders starting a company together and then discovering that they hate each other and can’t work together. In those cases, it would be unfair to the co-founders who stay at the company and devote their lives to building it to have their equity (compensation) shared equally with a co-founder who left and then contributed nothing.
If a co-founder leaves a company before his or her vesting is complete, there is normally some sort of exit agreement, in which the departing co-founder gets a portion of his or her full stake as a parting gift.
So let’s play out the Snapchat scenario…
Let’s pretend that the three frat brothers, Spiegel, Murphy, and Brown, had drawn up the paperwork and split Snapchat’s equity equally or close to equally before they started building the app. (This would have been a perfectly reasonable equity split. The idea for the app was Brown’s. He wanted to work with Spiegel and Murphy to build it. Unless Spiegel and Murphy wanted to just steal Brown’s idea, they would have had to have given Brown something. And Spiegel and Murphy’s business and coding experience was not so immense at that point that Brown would have had to settle for a tiny stake. On the contrary…)
Let’s say that, if Snapchat had been well-organised, Brown would have gotten between 20% and 33% of the original equity.
And let’s say that this ownership stake would have vested over 4 years.
Brown worked at Snapchat for about 4 months before getting tossed.
In those four months, he would have vested into 1/4 of his stake — or 1/12th of the overall stake.
Once Spiegel and Murphy decided to toss Brown, they would presumably have offered him an exit deal — perhaps one-year’s worth of his vesting.
And given that Brown had only worked for three months, the app was not yet guaranteed of success, and he was getting a year’s worth of equity, Brown would probably have accepted this.
So Brown might have left Snapchat with 1/4 of his 20%-33% original stake. This would have amounted to a range of 5%-8% of the original equity.
Then, over the next couple of years, this stake would have been diluted down by the various Snapchat financings.
Insiders know the exact percentage by which the founders’ original stakes have been diluted down, but for the sake of this discussion, we’ll just estimate it.
Let’s assume that the Shapchat founders’ stakes have been diluted by a third since the original split.
A 5%-8% stake diluted by 1/3rd becomes a 3%-5% stake.
So that’s one crack at how much of Snapchat’s current equity Reggie Brown deserves: 3%-5%.
Now that Snapchat is worth billions, that’s a whole lot of money ($90-$150 million, if we assume the common stock is worth $US3 billion).
Unless Murphy and Spiegel have been sitting on evidence that Brown is completely full of it, however, this stake also feels basically fair.
So Snapchat should stop wasting time on this lawsuit, give Brown his settlement, and move on.
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