Lessons From Hollywood | What entrepreneurs can learn from the movie on Facebook's founding
The dramatization of the creation of the social networking site Facebook has turned into box-office gold for the Hollywood producers of “The Social Network.” But the movie isn’t just entertainment. It’s also a cautionary tale on what entrepreneurs should avoid.
Below are some of the legal lessons to be found in the story of “The Social Network.”
Own your idea. The film’s story hinges on the idea that Mark Zuckerberg, as a college freshman at Harvard University, stole the idea of Facebook from twin brothers and fellow Harvard men, Cameron and Tyler Winklevoss. According to the movie, the Winklevoss twins received a hefty cash settlement after filing suit.
The legal wrangling between Zuckerberg and the Winklevosses underscores the fact that good ideas need to be protected, whether through patents, trademarks or copyrights.
Get it in writing. Another conflict central to “The Social Network” was the disagreement that developed between Zuckerberg and his friend Eduardo Saverin. Saverin formed an LLC and provided minimal seed money for the initial development of Facebook. The terms of the deal, however, were in dispute, and there seemed to be nothing in writing that explained ownership structure.
Founders are wise to enter into a formal written agreement. The agreement should address percentage ownership, termination, sale of the company and voting rights, among other topics.
Stock is not Monopoly money. Zuckerberg gave away percentages of his company without seeming to appreciate its possible value. Often founders are willing to give up ownership to employees or founders as if the stock is Monopoly money. While stock and its potential increase can be a great incentive, it is important to have an agreement in place to buy back the stock in the event that the employee leaves or is terminated. It is also essential to understand the value of issuing stock and its tax implications on both the company and the employee.
Define leadership roles. Zuckerberg and Saverin had defined roles in the company’s early stages, but when Sean Parker, founder of Napster, entered the picture and lured Zuckerberg to Silicon Valley to continue development of the site, Saverin quickly lost control and perhaps Zuckerberg’s confidence.
Founders of a company often struggle with decision making. It is important to understand who is in charge of making the final decision as to the direction of the company. It could be that day-to-day decisions are made by one person, with more important decisions made by the board of directors or stockholders or owners with a veto right.
Understand how you can get diluted. When Parker and Zuckerberg secured venture capital funding, Saverin saw his stake in the company disappear. Venture capital and other funding can be very attractive to founders. But it comes with a cost in dilution of ownership. Retaining control, both ownership and voting control, are essential to founders.
Get counsel. Saverin complained that he thought the papers he had signed regarding the initial VC investment were prepared by his lawyers and he trusted them to be correct. However, the papers were prepared by lawyers who did not represent Saverin, and either represented the venture capitalists, or possibly the company or Zuckerberg. Before signing, Saverin should have had his own lawyer review the papers to give him a complete understanding of their effect on his ownership.
Mike Refolo is a partner of at the Worcester-based law firm of Mirick O’Connell. He can be reached at mrefolo@mirickoconnell.com.
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