Exclusive: How Mark Zuckerberg Throws His Co-founder Out Of The Company?

Posted on May 16 2012 - 7:46am by Editorial Staff

There is an interesting piece of detail that might be not known much by many in Business Insider about the various things that stimulate how Facebook CEO Mark Zuckerberg felt co-founder Eduardo Saverin committed during Facebook’s launch. Eduardo Saverin has recently renounced his US citizenship in order to avoid a boatload of taxes but what makes him to do something like this and that too ahead of giant IPO.

How the Story Starts?

Back in late 2003, Harvard sophomore Mark Zuckerberg asked a Harvard student named Eduardo Saverin, to deposit $15,000 in a bank account that would be accessible both Zuckerberg and Saverin. The money would go toward the servers needed to host the site. The site at that time called as TheFacebook.com, agreed by Saverin. When Business Insider asked Zuckerberg, Saverin and Facebook that why Zuckerberg choose Saverin as his first business partner, none provided the actual reason behind it.

But Business Insider revealed that Zuckerberg described his new partner, Saverin, as the “head of the investment society.” Saverin was rich, Zuckerberg went on to say, because “apparently insider trading isn’t illegal in Brazil.” He also partnered with him as Saverin gave the impression he knew something about business. Saverin was the kind of guy who wore suits to class at Harvard, and he left people—including Zuckerberg—with the impression that he was connected to the Brazilian mafia.

By April, Zuckerberg, Saverin, and a third Harvard sophomore named Dustin Muskovitz formed The Facebook as a limited-liability company (LLC) under Florida law – the partnership going pretty well. Six months after the launch, Zuckerberg and Moskovitz moved to Palo Alto, California while Saverin went to New York for an internship at Lehman Brothers. Zuckerberg left for the West Coast, he asked Saverin to work on three things: “to set up the company, get funding, and make a business model.”

“I MAINTAINED THAT HE FUCKED HIMSELF”

But then Saverin did something that really pissed Zuckerberg off: He ran unauthorized ads on Facebook. Zuckerberg blasted Saverin for this in an email:

You developed Joboozle knowing that at some point Facebook would probably want to do something with jobs. This was pretty surprising to us, because you basically made something on the side that will end up competing with Facebook and that’s pretty bad by itself. But putting ads up on Facebook to advertise it, especially for free, is just mean.

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.

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 thugs.

Part of story when Sean Parker made an entry:

In June 2004, when Zuckerberg and Moskovitz moved out to Palo Alto, they ran into Sean Parker, who cofounded Napster. Parker soon joined TheFacebook.com. Parker helped the company to get funding, the part that Saverin was supposed to do. With his early contacts as he being able to grab money for Napster, he proved himself capable.

How to throw Saverin out of the company?

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.

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.”

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:

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%. 

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Editorial Staff

Editorial Staff at I2Mag is a team of subject experts led by Karan Chopra.