Facebook Failures: Lessons for Every Startup

Facebook’s spectacular success is one that every start-up venture wants to emulate. But what about Facebook’s failures? Its start-up mistakes? We typically don’t associate Facebook with failure, but it is those mistakes that we can learn from the most because without Facebook’s uber-sized financial success such mistakes could swallow your company whole.

If you’ve saw The Social Network you probably remember the Winklevoss twins, the Harvard classmates who claimed Facebook founder, Mark Zuckerberg, stole their idea after he worked on a similar concept for the Winklevoss’ fledgling company, ConnectU. While the movie did engage in artistic license in some areas, the Winklevoss case isn’t one of them. Their dispute with Zuckerberg is real. They really did sue Facebook.

After multiple gyrations in court and tons of legal fees, the brothers Winklevoss walked away with a settlement of $20 million in cash plus $45 million in Facebook stock. You’d think that would be the end of the Winklevoss-Facebook story; but no. Not long after they were back in court, trying to set aside the deal on the grounds that Facebook had revalued the company shortly after the settlement and if the new valuation had been used to calculate their share of the company they would have received more than the $45 million in stock. In other words, they were cheated.

Earlier this week the Ninth Circuit Court of Appeals said “sorry, a deal’s a deal.” But with $20 million in cash burning a hole through your pocket, you can both find and afford the lawyers necessary to keep the dispute alive. News reports say the boys plan to file for a rehearing en banc– that’s lawyer speak for “I want the entire panel of judges on 9th Circuit Court to hear my case – not just the few judges who heard it the last time.” [Note: rehearings rarely change the court’s mind.]

Now comes Paul Ceglia. Who? Paul Ceglia, another person who claims he is entitled to a piece of the Facebook pie. And why is that? Because of a contract that allegedly exists involving start-up funding and programming work, that’s why. He’s taken a flier at Zuckerberg before, but with new lawyers his suit has been amended and rejuvenated.

So what are the take-aways for start-ups?

  1. Manage expectations of investors and work for hire contractors carefully. Clearly identify who owns what.
  2. Don’t offer to give up part of your company unless you’re really prepared to share because when you’re successful those third parties will come out of the woodwork and try to hold you to your word.
  3. Respect the power of contracts. Courts are loath to unwind contracts. What that means for you is that when “a deal’s a deal” you can end up with unwanted partners or separated from large amounts of money to make them go away.

Success is the magnet that attracts “jilted” third parties. Assume your business WILL be successful and plan from the start to avoid messy lawsuits that will distract your time, money and energy by using contracts wisely and recognizing how contracts can be formed, even without big fancy documents.

Hanna Hasl-Kelchner is a business legal strategist, author, speaker and trainer who teaches and coaches business people on how to avoid lawsuits.  She is the author of The Business Guide to Legal Literacy: What Every Manager Should Know About the Law and forthcoming How to Turn Your Business into a Litigator’s Chew Toy: Taking the Bite Out of Legal Liability.  Follow Hanna on Twitter @nononsenselawyr and her Chew Toy sidekick @acelitigatorwit.  Subscribe to this blog’s RSS feed to get the latest updates.