When Mark Zuckerberg founded Facebook in 2004 with good friend and co-founder Eduardo Saverin, few would have predicted the legal wrangling that ensued over the years between the two. Their relationship eventually ended in a lawsuit, with Zuckerberg and Saverin suing one another. Zuckerberg’s initial legal complaint against Saverin alleged that he had abused his position of power and misused company funds. In 2007, Eduardo Saverin countersued, charging Zuckerberg with fraud and breach of fiduciary duty. The legal battle ended two years later when the parties reached an undisclosed settlement.
Facebook rapidly grew from a college-based social network with a few thousand users to a global phenomenon with millions of registered users. In contrast, the relationship between Zuckerberg and Saverin quickly soured, due to a disagreement over control of the site. As a result, Saverin was first sidelined and then excluded from Facebook’s operations altogether. Saverin alleged that his exclusion was a result of efforts to dilute his 30% stake in Facebook, which, when the company went public in 2012, ended up being worth an estimated $3.3 billion.
It was this accusation that formed the basis of Saverin’s now infamous lawsuit against Zuckerberg. According to Saverin’s complaint, Zuckerberg had reneged on a previous agreement to offer shares to Saverin in the event of an acquisition and instead held exclusive voting rights over the company’s decision-making structure. Saverin argued that this constituted fraud and breach of fiduciary duty. Zuckerberg, on the other hand, denied any wrongdoing and instead pointed to Saverin’s failure to make a required capital investment in the company as the reason for his exclusion.
The legal dispute ended in 2009 with both parties reaching a settlement, the terms of which were undisclosed. According to reports, Saverin had refused to accept a 20% stake in Facebook without a cash payment for his shares. Zuckerberg, for his part, offered to buy the shares but not to pay for them. In the end, the two parties were able to reach a compromise, with Saverin receiving a cash payment for his shares and becoming a major shareholder in the company.
The legal dispute between Zuckerberg and Saverin was widely reported in the media and featured heavily in the critically acclaimed movie The Social Network. Since then, both men have moved on to become major players in the business world. Zuckerberg is now widely regarded as one of the most successful entrepreneurs of all time, while Saverin has become a successful investor, angel investor and venture capitalist with a net worth estimated to be in the billions.
Zuckerberg’s Control Issues
Facebook has become such an enormous presence in today’s world, that the idea of just two people – Mark Zuckerberg and Eduardo Saverin – essentially controlling it seems almost hard to imagine. It was the issue of control that was thought to be at the center of their disagreements and legal disputes. As Facebook began to rapidly grow in popularity, Zuckerberg was determined to maintain a firm grip on the company that he could not envision lose. Meanwhile, Saverin, who was a minority shareholder, was increasingly finding himself sidelined from the decision-making and operational process.
Saverin’s role within the company was further diminished when, in 2007, the company made the decision to issue new class ‘B’ shares that amounted to a dilution of Saverin’s 30% stake down to an estimated 5%. This move by the company to effectively dilute Saverin’s voting control, was thought to be the final straw that led to Saverin’s filing of the lawsuit against Zuckerberg.
Zuckerberg, for his part, had been actively seeking a way to retain absolute control of the company and had approached a number of venture capital firms to invest in the company. As he looked to take on board investors, he was also looking for a way to insulate himself from the possibility of a takeover of the company, or at the very least have some control over the voting structure of the company – by issues of dual class shares.
The idea of dual class shares had been around since the 1930s and was a common tool used by the founders of many public companies to ensure they could maintain control of the company while still allowing investors to become shareholders. In the case of Zuckerberg, he made the decision to issue new shares with class ‘B’ voting rights and one new share with class ‘A’ voting rights. It was this decision that triggered the legal battle with Saverin.
Saverin’s Legal Complaint
In his legal complaint against Zuckerberg, Saverin alleged that he had been systematically frozen out of the company and had been denied a proper opportunity to receive a stake in the company from the start. He also alleged that Zuckerberg had misused company funds and abused his position of power. These allegations were backed up by evidence from former Facebook employees, who had stated that Saverin had been excluded from the inner workings of the company.
The case was a high-profile dispute between two major players in the tech world and was closely monitored by the media. It served to highlight the very real issues that can arise when there is a lack of transparency within a company. It was also a lesson in the importance of putting in place proper corporate governance policies when launching a business, particularly when there are minority shareholders involved. In the end, the court decided in favor of Saverin and ordered that he receive a cash payment for his shares, effectively ending the dispute.
The Future of Zuckerberg and Saverin
In the years since the legal dispute, both Mark Zuckerberg and Eduardo Saverin have gone on to great success. In the case of Zuckerberg, his success is well known, with the Facebook founder becoming one of the world’s richest and most influential people. He is currently estimated to be worth almost $90 billion, and the company he founded has a current market value of almost $650 billion.
Saverin also became a billionaire when Facebook went public in 2012, which resulted in his 30% stake in the company being valued at an estimated $3.3 billion. Since then, he has become heavily involved in venture capital investments and philanthropy. He also founded his own private equity firm, B Capital Group, which is focused on investing in tech start-ups around the world.
The Impact of the Dispute
The dispute between Saverin and Zuckerberg serves as an example of what can happen when the founders of a company have differing goals and visions. It also serves as a reminder of the importance of open communication and transparency in business. Although the exact terms of their settlement remain undisclosed, the case serves to highlight the potential danger of conflict between founders and the importance of having proper corporate governance in place.
The case has also sparked debate over the issue of dual class shares and the criteria that companies should adhere to if they wish to issue them to the founders or their investors. It is easy to understand why companies may want to issue dual class shares – to allow for better control of the company – but it is also important to understand the potential pitfalls. In Saverin’s case, the court found that he had been denied fair treatment as a minority shareholder by Zuckerberg’s decision to issue dual class shares.
Conclusion of the Case
The legal dispute between Mark Zuckerberg and Eduardo Saverin was a highly publicized case that brought to light some of the issues that can arise in tech start-ups. In the end, the court found in favor of Saverin, with the two parties ultimately reaching a settlement. Since then, both men have gone on to great success, with Zuckerberg now one of the world’s wealthiest people and Saverin having established his own venture capital firm. The case serves as a reminder of the importance of transparency, fairness and communication to avoid potential conflict between business partners.
