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Facebook's Early Mistakes: Lessons for Every Startup Founder

Starting a BusinessFinanceLegal

Facebook’s spectacular success is one that every startup founder wants to emulate. But what about Facebook's failures? Its startup 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.

Winklevoss Twins lawsuit

If you’ve watched the movie The Social Network, you probably remember the Winklevoss twins, the Harvard classmates who claimed that 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 and 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. Eventually, the Ninth Circuit Court of Appeals said, "Sorry, a deal’s a deal."

Paul Ceglia lawsuit

Then there was Paul Ceglia, another person who claimed he was entitled to a piece of the Facebook pie because of a contract that allegedly existed involving startup funding and programming work. However, the judge in that case eventually dismissed Ceglia's claim as fraudulent.

So what are the important takeaways for every startup founder?

  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 be forced to spend large amounts of money to make them go away.

Startup founders: Protect your startup from the start

Success is the magnet that attracts “jilted” third parties. As a startup founder, 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.

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About the Author

Hanna Hasl-Kelchner is a business legal strategist, author, speaker, and trainer who 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. Follow Hanna on Twitter @nononsenselawyr.

Profile: Hanna Hasl-Kelchner