The $6.5Billon dollar mistake!

I finally had the opportunity to see the Social Network on DVD recently.   As a Lawyer, having felt like I had been in a very similar situation in a previous life (albeit we are not talking about a business any where near the size of Facebook), it was easy to recognise several points in time where Eduardo Saverin could have preserved the value of his equity in Facebook.

To put the gravity of this situation into perspective, if Eduardo Saverin’s share of Facebook had been maintained at thirty (30) percent, then his equity would be valued at $US7.5 billion dollars (at the time of writing this article) – calculated on the basis of his residual shareholding of $US75Million – that’s a $US 6.75 Billion dollar mistake!

…if Eduardo Saverin’s share of Facebook had been maintained at thirty (30) percent, then his equity would be valued at $US7.5 billion dollars

The legal context

The movie is scant on details and may (or may not be) a reflection of the real situation, however it would seem that Eduardo Saverin (Eduardo) was the only founding shareholder whose shareholding was diluted on the first round of VC Funding.

One of the scenes showing pre-trial discovery provided as follows:

Gretchen: What was Mr. Zuckerberg’s ownership share diluted down to?
Eduardo: It wasn’t.
Gretchen: What was Dustin Moskovitz’s ownership share diluted down to?
Eduardo: It wasn’t.
Gretchen: What was Sean Parker’s ownership share diluted down to?
Eduardo: It wasn’t.
Gretchen: What was Peter Thiel’s ownership share diluted down to?
Eduardo: It wasn’t.
Gretchen: And what was your ownership share diluted down to?
Eduardo: .03 percent.

In non-legal term, this probably meant that when the first round of $500,000 was invested, new shares were issued to the VC Fund, then also to all the founders except Eduardo. All the founders except Eduardo appear to have had non-dilution rights.

Moments of truth

If the storyline of the movie is to be believed as factual, there were several moments where Eduardo could have preserved the value of his equity:

  • In the scene were Mark Zuckerberg called the team together in his Dorm Room at Harvard and started planning on the white board and discussed who had what percentages (Planning Session); and
  • The scene where Eduardo had documents put in front of him by what appeared to be Facebook’s lawyers (Signing Scene).

The planning session

Whilst Mark Zuckerberg was in full swing with the expansion plans, it would have been an apt moment for Eduardo, as Chief Financial Officer (CFO) to take a leadership position and suggest that he get the legal documents together, or at very least, document who did what, in exchange for what equity. At that point, there was only a mention of the shareholdings that each would get. A simple document at this point could have saved Eduardo billions!

The signing scene

Eduardo assumed that the lawyers who put the documents in front of him were acting in his best interests.  They were the Lawyers for the Company and were (presumably) acting on the Board of Facebook’s instructions.

So why wasn’t Eduardo at the board meeting that approved the issuance of the shares to the VC Fund? And why had he not been sent a copy of the documents for his review prior to being required to sign them? It would seem that he had been excluded from the management of Facebook.

The lesson here is clear: never sign documents without having had the opportunity to obtain legal advice or at very least to read them in their entirety.

The $6.75 Billion Dollar Lesson!

The movie provides numerous lessons for entrepreneurs which, for brevity, are summarised as:

Make your intentions clear

Whilst the real facts of the situation may have obstructed what was an entertaining story, the most valuable lesson entrepreneurs should take away from this movie is to get quality legal advice early.  If Eduardo had have invested a small sum immediately after the Planning Session on a Shareholders Agreement, then he could have saved billions.

Consult a friendly lawyer from time to time

Similarly at the point that he was not involved in management, he should have consulted a Lawyer, as under Australian law, there appears to have been various breaches of the Corporations Act 2001 (Cth).

Never sign anything without reading it!

Clearly the movie showed the detriment that can occur when signing documents that a person is just told to “sign”.

Read everything and never be pressured to sign

The movie highlighted the many instances where a small amount of legal advice could make a very big difference.  Don’t make a $6.5 Billion dollar mistake by not calling a Lawyer!

If you want to avoid doing an Eduardo, contact Dundas Lawyers today!

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
Facsimile: (07) 3221 0031
Mobile 0419 726 535

Disclaimer

This article is general in nature and cannot be regarded as legal advice.  It is general commentary only. You should not rely on the contents of this article without consulting one of our lawyers. If you would like advice regarding how the law applies to your individual circumstances, then please contact one of our legal practitioners.

Dundas Lawyers
Street Address Suite 12, Level 9, 320 Adelaide Street Brisbane QLD 4001

Tel: 07 3221 0013

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