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Analyzing The Facebook Contract: Is Mark Zuckerberg Screwed?
Henry Blodget | Jul. 23, 2010, 11:33 AM |27,259 | 
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Image: All Things D
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Now that we've seen the full alleged "contract" that Mark Zuckerberg signed in 2003 with upstate New York wood-pellet vendor Paul Ceglia (read it here), two things seem clear:
* First, if the contract is legit, Ceglia has a much stronger case than most people think (Ceglia claims the contract gives him 84% ownership of Facebook)
* Two, unless Facebook can easily prove that the contract is a forgery--or, alternatively, have the case dismissed on a statute-of-limitations technicality--Mr. Ceglia will soon be a very rich man.
To begin with, here's what the contract says. It covers TWO (2) transactions between Mark and Paul (let's call him Paul, shall we?), which involved TWO (2) payments of $1,000 from Paul to Mark.
The first transaction, which appears undisputed at this point, covers web-development work Mark was to perform for a Paul Ceglia company called StreetFax. No issue there.
The SECOND transaction (and this is the key part) calls for Paul to PURCHASE (yes, it says "purchase") a 50% interest in a project that Mark is already working on--an online yearbook for Harvard students known as "The Face Book". There are also penalties for late completion that increase this ownership percentage over time.
The reference to "The Face Book" transaction is repeated many times, in separate sections of the contract.
Here is some of the exact language:
The contract between the Purchaser and Seller as Purchase agreement and "work made for hire" reflects two separate business ventures, the first being for the work to be performed for the StreetFax Database and the Programming language to be provided by Seller.
Second, it is for the continued development of the Software, program and for the purchase and design of a suitable website for the project Seller has already initiated that is designed to offer the students of Harvard university access to a wesite [sic] similar to a live-functioning yearbook with the working title of "The Face Book."
It is agreed that Purchaser will own a half interest (50%) in the Software, programming language and business Interests derived from the expansion of the service to a larger audience.
(Emphasis ours.) The next section of the contract covers the payment terms:
Buyer agrees to pay the seller the sum of $1,000 a piece for the work to be performed for StreetFax and $1,000 for the work to be performed for "The Face Book"...
The agreed upon completion for the expanded project with working title "The Face Book" shall be January 1 2004 and an additional 1% interest in the business will be due the buyer for each day the website is delayed from that date.
Additional funds may be provided for either project on an as needed basis at the sole discretion of the Buyer.
And, later, there is another reference that makes crystal clear that the payment is an investment in the project and that the ownership of "The Face Book" is to be at least shared (if not majority controlled by Paul Ceglia):
For "The Face Book" Seller [Mark Zuckerberg] agrees to act as the sites webmaster and to pay for all domain and hosting expenses from the funds received under this contract, and the Seller [Mark Zuckerberg] agrees that he will maintain control of these services at all times.
Analysis:
This contract does not seem as though it could have been "doctored" to include the extensive language about "The Face Book" above (and elsewhere). Thus, the contract is either likely genuine or has been entirely forged.
Second, having now seen the contract, we now understand something that confused us about the early details...which is how Mark might have signed away interest in his own project while doing development work on an unrelated project. And the simple answer is...because $1,000 was probably a meaningful (if not impressive) sum to a college sop****re, and while bonding with Ceglia over the excitement of his own project, he might well have agreed to share it--especially in exchange for $1,000 of cash that would allow him to transform it from a fun idea into an actual working web site.
Third, if Facebook can't get the lawsuit dismissed on a statute of limitations claim or easily prove the document was forged, there is no way the company can take the risk of litigating the validity of the contract. God forbid a judge or jury eventually concludes that Paul Ceglia owned 50%+ of Facebook back in 2004--the impact on Mark Zuckerberg personally, and every investor in the company (including every employee who has a stock option), would be devastating. This suggests that Facebook will want to settle the claim quickly if it can't get it dismissed.
BOTTOM LINE: Unless Facebook can easily prove that this contract is a forgery or get the lawsuit dismissed on a technicality, it will likely lead to a settlement that will make Paul Ceglia a very rich man. The Winklevoss brothers never had a piece of paper showing any agreement with Mark, and they got $65 million. It's not inconceivable that Paul Ceglia could walk away with a lot more than that.
Henry Blodget | Jul. 23, 2010, 11:33 AM |
50 Image: All Things D
See Also:
Now that we've seen the full alleged "contract" that Mark Zuckerberg signed in 2003 with upstate New York wood-pellet vendor Paul Ceglia (read it here), two things seem clear:
* First, if the contract is legit, Ceglia has a much stronger case than most people think (Ceglia claims the contract gives him 84% ownership of Facebook)
* Two, unless Facebook can easily prove that the contract is a forgery--or, alternatively, have the case dismissed on a statute-of-limitations technicality--Mr. Ceglia will soon be a very rich man.
To begin with, here's what the contract says. It covers TWO (2) transactions between Mark and Paul (let's call him Paul, shall we?), which involved TWO (2) payments of $1,000 from Paul to Mark.
The first transaction, which appears undisputed at this point, covers web-development work Mark was to perform for a Paul Ceglia company called StreetFax. No issue there.
The SECOND transaction (and this is the key part) calls for Paul to PURCHASE (yes, it says "purchase") a 50% interest in a project that Mark is already working on--an online yearbook for Harvard students known as "The Face Book". There are also penalties for late completion that increase this ownership percentage over time.
The reference to "The Face Book" transaction is repeated many times, in separate sections of the contract.
Here is some of the exact language:
The contract between the Purchaser and Seller as Purchase agreement and "work made for hire" reflects two separate business ventures, the first being for the work to be performed for the StreetFax Database and the Programming language to be provided by Seller.
Second, it is for the continued development of the Software, program and for the purchase and design of a suitable website for the project Seller has already initiated that is designed to offer the students of Harvard university access to a wesite [sic] similar to a live-functioning yearbook with the working title of "The Face Book."
It is agreed that Purchaser will own a half interest (50%) in the Software, programming language and business Interests derived from the expansion of the service to a larger audience.
(Emphasis ours.) The next section of the contract covers the payment terms:
Buyer agrees to pay the seller the sum of $1,000 a piece for the work to be performed for StreetFax and $1,000 for the work to be performed for "The Face Book"...
The agreed upon completion for the expanded project with working title "The Face Book" shall be January 1 2004 and an additional 1% interest in the business will be due the buyer for each day the website is delayed from that date.
Additional funds may be provided for either project on an as needed basis at the sole discretion of the Buyer.
And, later, there is another reference that makes crystal clear that the payment is an investment in the project and that the ownership of "The Face Book" is to be at least shared (if not majority controlled by Paul Ceglia):
For "The Face Book" Seller [Mark Zuckerberg] agrees to act as the sites webmaster and to pay for all domain and hosting expenses from the funds received under this contract, and the Seller [Mark Zuckerberg] agrees that he will maintain control of these services at all times.
Analysis:
This contract does not seem as though it could have been "doctored" to include the extensive language about "The Face Book" above (and elsewhere). Thus, the contract is either likely genuine or has been entirely forged.
Second, having now seen the contract, we now understand something that confused us about the early details...which is how Mark might have signed away interest in his own project while doing development work on an unrelated project. And the simple answer is...because $1,000 was probably a meaningful (if not impressive) sum to a college sop****re, and while bonding with Ceglia over the excitement of his own project, he might well have agreed to share it--especially in exchange for $1,000 of cash that would allow him to transform it from a fun idea into an actual working web site.
Third, if Facebook can't get the lawsuit dismissed on a statute of limitations claim or easily prove the document was forged, there is no way the company can take the risk of litigating the validity of the contract. God forbid a judge or jury eventually concludes that Paul Ceglia owned 50%+ of Facebook back in 2004--the impact on Mark Zuckerberg personally, and every investor in the company (including every employee who has a stock option), would be devastating. This suggests that Facebook will want to settle the claim quickly if it can't get it dismissed.
BOTTOM LINE: Unless Facebook can easily prove that this contract is a forgery or get the lawsuit dismissed on a technicality, it will likely lead to a settlement that will make Paul Ceglia a very rich man. The Winklevoss brothers never had a piece of paper showing any agreement with Mark, and they got $65 million. It's not inconceivable that Paul Ceglia could walk away with a lot more than that.
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