
The Email Zuckerberg Sent to Cut His Cofounder Out of Facebook (2012) - seek3r00
https://www.businessinsider.com/exclusive-heres-the-email-zuckerberg-sent-to-cut-his-cofounder-out-of-facebook-2012-5
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adonese
In case you just want to skip into Zuck email part

“This email should probably be attorney-client privileged, not quite how to do
that though.

Anyhow, Sean and I have agreed that a price of one-half cent per share is the
way to go for now. We think we can maybe almost justify and if not, we'll just
deal with it later.

We also agreed that if the company bonusing us the amount we need for the
shares, plus tax, is a good solution to the problem of us all being completely
broke.

As far as Eduardo goes, I think it's safe to ask for his permission to make
grants. Especially if we do it in conjunction with raising money. It's
probably even OK to say how many shares we're adding to the pool. It's
probably less OK to tell him who's getting the shares, just because he might
have adverse reaction initially. But I think we may even be able to make him
understand that.

Is there a way to do this without making it painfully apparent to him that
he's being diluted to 10%?

OK, that's all for now. I'll send you the list of grants I need made in
another email in a second. Sean can send you grants for his people when he
stops coughing up his lungs.

Hope you guys both feel better, Mark”

~~~
mygo
This echoes quite a few of my experiences. Seems to be par for the course.
Once money comes into play, you get the privilege of witnessing all kinds of
aspects of human nature. Watch your back.

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seattle_spring
This happens to startup employees _who still work for their startup_ on a
daily basis. Crazy to me that founders don't bat an eye at screwing employees,
but everyone seems to be out for blood just because some FB founder who left
the company only got a gazillion dollars instead of 3 gazillion.

~~~
TAForObvReasons
This is a community of founders and soon-to-be founders, many members of whom
have received money as a result of FB, so the reaction isn't totally
surprising.

~~~
throwaway2048
The club of temporarily embarrassed billionaires

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mctt
In case anyone is wondering here are the net worth figures as of Sunday 20
January 2020:

Eduardo Saverin Net worth: 10.1 billion USD (June 2019)

Dustin Moskovitz Net worth: 13.4 billion USD (2020)

Sean Parker Net worth: 2.7 billion USD (2020)

Mark Zuckerberg Net worth: 80.7 billion USD (January 2020)

Chris Hughes Net worth: 430 USD million (2017)

Sorry if I have missed anyone off this list, it is just for simple comparison.

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ulfw
It’s shocking to me how many people trust this guy (>40K employees, >1B
‘customers’ between Facebook, Instagram and Whatsapp).

~~~
zaroth
It’s not at all shocking that a co-founder or early employee of a startup ends
up becoming disinterested, starts working on something else on the side, while
their shares continue vesting for months (assuming there’s even vesting
happening at all). By the time the early employee leaves or is fired, they
have an extremely disproportionate share of the company.

This happens _all the time_. It’s probably the rare company that doesn’t end
up with a wonky cap table by year 2 or 3 with shares that need to be adjusted
with grants in order to properly reward the people who are actually doing the
essential work of running the company.

I’ve had it happen in all 3 companies I’ve ever started. In some cases you can
have a discussion and you can get everyone to literally sign on the dotted
line to make the new share grants. In other cases, it’s a massive issue just
trying to refresh the option pool because you want unanimous shareholder
consent (exactly to avoid issues down the road) and there’s an early employee
with Founder’s shares who ghosted the company and literally won’t answer their
phone.

Don’t feel sorry for Eduardo. The guy did a couple years of work and ended up
a billionaire.

~~~
wtvanhest
I'm a huge believer that the way equity is distributed is entirely unfair to
early stage employees bc founders and boards can and do change terms post
vest.

But, I am rational and want to understand how it is fair to change someone's
earnings that everyone agreed to later.

Can you help me understand why it makes sense?

~~~
zaroth
The first day you create a company, three people put in $100 to each get
10,000 shares of the company at $0.01/share. The company has $300 in the bank
account, and is worth $300, and each of you own 1/3rd of the equity. Everyone
owns their shares outright, and there is no taxable event.

This represents the current ownership structure of the company. By no means is
it a promise that the company will be forever owned by just those three
people.

You start by doing all the work between the three of you, and then as the work
grows, you turn to some contractors. One of the co-founders puts in $10,000
and takes a Note Payable from the company for the $10k (typically at 0%
interest and with no actual terms but it will just sit as a liability) and now
someone is managing a bunch of contractors on top of what they were already
doing, and that person starts setting more and more of the direction by virtue
of having more horsepower to get shit done.

Over the next few months, one of the 3 co-founders becomes less involved but
because it's a remote team it's not like they stopped showing up to the office
every day, it's just that emails are answered a bit slower, deliverables come
through a bit later, etc. Then you see they've updated their LinkedIn and you
call them to find out they are working somewhere else, but they promise they
are still moonlighting with you.

By the end of the year you have either some revenue or some funding, and a
couple of your contract employees are ready to come on full-time, and you need
to make an option pool. Also, you met a VP in your exact industry who wants to
jump ship and join your startup to take the place of the co-founder who is
"moonlighting", and they need an offer from you in the next two weeks. An
offer which will need to include a compelling potential ownership stake.

So, let's step back. First of all, it's very rare for a newly established
company to get an option pool setup on day 1 - mostly because there's more
important things to think about, but also because it's expensive to get all
the legal docs written. Second, that option pool isn't going to contemplate a
C-level hire who is essentially replacing one of your co-founders. Third, just
because on Day 1 your $300 company was split evenly between 3 people, that
doesn't mean each of those 3 people have an indelible claim to 1/3rd of the
company in perpetuity.

In fact, if you're not able to authorize new shares to entice key future
hires, your company will almost certainly fail, and all those shares will
certainly be worth $0.

The way all of this is resolved, fairly, is to issue new shares. Our
hypothetical company with 30,000 shares could issue 100,000 new shares,
allocated 40,000 to an option pool, 20,000 each to the remaining co-founders,
and 20,000 to offer to the VP coming in at the C-level. The new cap table
would put the two remaining co-founders at 30,000 shares, the VP at 20,000
(vesting over 4 years), and an option pool of 40,000 "authorized but unissued"
shares (which means they don't currently dilute ownership of the other
shareholders, but you can safely assume they will ultimately be issued), and
the drop-out co-Founder remains with their original 10,000 shares.

So in this example, assuming all the new shares are vesting over 4 years with
a 1 year cliff, the drop-out Founder has 33% ownership which will fall to
11.1% over 4 years, and to 7.7% ownership once the option pool is fully issued
and vested, i.e. over the next 6-8 years. This is probably overly generous to
the Dropout IMO.

In order to issue these new shares, you have to take a Board Vote, and a
Shareholder Vote. Your Articles of Incorporation will likely state that a
simple majority is required in order to authorize or issue new shares. But
since new grants are going un-evenly to existing shareholders, what you really
want is Unanimous Shareholder Consent. This is important not just to protect
against a future lawsuit, but also to help in future fundraising because a
disgruntled early employee with a large initial stake who refuses to vote in
favor of Corporate Motions is a big red flag.

From the drop-out co-founder's perspective, they paid $100 and a couple months
of work to get a large early stake in a company worth basically nothing at the
time. A group of people are now slaving away at that company to try to turn it
into the Next Big Thing while Dropout has left to rake in the money at a FAANG
and is contributing nothing to New Co. Their shares are completely illiquid
and essentially worthless, but maybe they will be worth millions one day?

However, if 1/3rd of the company's equity is dead weight, a bunch of things
happen; 1) you can't raise money, 2) you can't hire qualified employees, 3)
the current shareholders are disincentivized to work on the company versus
dropping it to start over with something new that they own more of.

So it's really in the Dropout's best interest to sign the Consent, keep their
10,000 shares, and if the company goes on to greatness without them, they got
to essentially ride on the rocketship for free. But they might not see it that
way initially. Hence Zuckerberg's email.

One thing which has always rubbed me the wrong way is that just because you
are there on Day 1 that you are getting double-digit percentages of the
company. Everyone who comes even just a few months later is getting Option
Pool scraps. The way that illiquid startup shares are taxed makes it very hard
(impossible) to do it any other way though.

~~~
wtvanhest
Your explanation of the mechanics is excellent.

IMO, the current startup structures vastly overcompensate late employees who
took no risk at the expense of early employees that take lots of risk.

That is why FAANG/established companies are getting the best employees and why
startups are struggling to find talent

~~~
zaroth
Thank you. It’s interesting that, even as a Founder of a few _small_ startups
that I feel differently.

Yes, I take a lot of risk by working without pay initially. But my early
equity, even after dilution, means that once some funding has been raised and
is being used to pay a bunch of employees, they are all essentially working
for _me_ and creating value for _my_ shares.

Once there are hundreds of employees and millions of dollars at play
(unfortunately not a scenario I’ve personally experienced), the early
employees ride the rocketship and enjoy a 100x or maybe 1000x larger share of
the profits than slightly later hires who are working just as hard every hour
of the day.

~~~
wtvanhest
I think a nice balance would be an option pool set at 6% with a full ratchet
provision. The option pool could be established in such a way that any
employee gets points toward the pull based on a formula* and no employee would
need to exercise their options until their is a liquidity event that buys out
the pool.

 _Formula could be something like: # of days from when startup was founded to
liquidity event, that gives the equity per day.

Then divy up the equity per day by the number of employees that worked that
day.

In a hypothetical example where the company had 3 people for the first year,
those days would be worth a lot, but if it took 10 years to get to a huge
exit, the people that put that first year in would get about:

6%/10 years/3 = 0.2% equity which at a very large exit would be something
significant, but would also be somewhat fair because they did help get the
thing launched, which is hard. There could also be provisions which eliminate
or vastly reduce the value of equity earned for part-time employees or
employees with other jobs. Say a .1 multiplier. Now you guy that goes to
facebook after 3 months but moonlights for another 9 months gets:

(.06_(90/360))/10/3 + (.06 _(270 /360))/10/3)_.1) = 0.065%

The other 4% of the pool could be normal executive payouts that you need to
make later, and other bonus allocations.

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welder
So instead of re-issue stock, Zuckerberg should have had a vesting period and
fired Saverin?

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kyleblarson
"the guy everyone now hates because he's renouncing his US citizenship in
order to avoid a lot of taxes". That's a bit of a stretch isn't it?

~~~
zwily
When this article was written (...8 years ago...) that line made more sense.

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fit2rule
I've been cut out of some pretty significant deals in my time, one of them
would've made me _quite_ wealthy, and all I can say is - sucks to be this guy.

Greed and hubris are probably one of the biggest barriers to entrepreneurial
participation. I sure wish there had been at least some way to mediate my
particular dispute, but nevertheless: this is why you lawyer up.

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acvny
This article must be paid PR cleanup

~~~
antonf
Did Mark Zuckerberg need PR cleanup in 2012?

~~~
grawprog
To be fair, he's needed PR cleanup since the beginning of facebook.

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popup21
He would do Steve Jobs proud...the asshole of our generation

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JohnJamesRambo
“he might have adverse reaction initially.”

~~~
bryanrasmussen
As time goes by he'll see it was the best thing for me!

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julienreszka
How do those documents get leaked? Isn't this a breach of privacy? Can someone
please explain this to me?

~~~
Keverw
Probably if there was a lawsuit, these documents would be in the public record
then as part of the discovery process.

