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 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, Zuckerberg emailed Saverin to offer him frequent flyer miles if it would get him out to Palo Alto. Saverin didn't take the offer. The situation soon became critical, because without financing, TheFacebook.com would end up running on Zuckerberg family loans.
Eventually, Zuckerberg decided to solve the problem by cutting Saverin out of the company.
In an IM with Moskovitz, Zuckerberg 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 thugsSean Parker Ellis Hamburger, Business Insider"I'm just going to cut him out."
When Zuckerberg and Moskovitz moved out to Palo Alto in June 2004, they ran into
Sean Parker, an Internet startup kid best known for cofounding
Napster. Parker soon joined TheFacebook.com.
Parker's first task was to do one of things Saverin was supposed to do, but hadn't yet: help Facebook find money. Parker had raised money for Napster and he knew his way around Silicon Valley. He quickly proved himself capable. For Zuckerberg, this only reinforced the idea that Saverin was expendable.
The only problem was: How would Zuckerberg cut Facebook's third-biggest stakeholder and co-founder out of the company?
In an IM exchange with Parker after a meeting with Peter Thiel, who would soon become Facebook's first outside investor, Mark and Sean discussed the Saverin problem. Zuckerberg hinted at a hardball solution, one based on some "dirty tricks" used by Peter Thiel.
Thiel had learned these tricks, Parker 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" Zuckerberg intended to pull to get TheFacebook.com funding without having to wait for sign-off from Saverin.
His plan: Reduce Saverin'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 Saverin. 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."
Zuckerberg pulled the trigger, sending an email to his lawyer telling him to put the plan into effect.
In this previously unpublished email, Zuckerberg writes of Saverin: "Is there a way to do this without making it painfully apparent to him that he's being diluted to 10%?"
In response, Zuckerberg's lawyer issues a prescient warning:
"As Eduardo is the only shareholder being diluted by the grants issuances there is substantial risk that he may claim the issuances, especially the ones to Dustin and Mark, but also to Sean, are a breach of fiduciary duty later on if not now. "
The plan works
In the middle of that summer, Zuckerberg's plan to oust his cofounder went off without a hitch.
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, Saverin 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. Zuckerberg became Facebook's sole director.
On January 7, 2005, Zuckerberg 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 Saverin'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 Saverin was involved in Facebook's operations after Zuckerberg left Harvard, Saverin 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, Zuckerberg finally fired Saverin.
It was this moment in history that "The Social Network" attempted to capture in the scene we embedded at the start of this story.
The lawsuits predictably followed.
First, Facebook filed a lawsuit against Saverin, arguing that the stock-purchase agreements he had signed in October were invalid. Then Saverin sued Zuckerberg, alleging he spent Facebook's money (his money) on personal expenses over the summer.
The jilted Saverin 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, Saverin decided to attack Zuckerberg'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.