When a new tech startup gets underway, there is lots of optimism and an eagerness to get things moving fast. This means that legal precautions often get short shrift. They are seen as distractions and burdens. Beside, why pay attorneys hefty fees?
Despite this tendency, the legendary founders — such as Larry Ellison from Oracle (Nasdaq:ORCL), Bill Gates of Microsoft (Nasdaq:MSFT) and even Larry Page and Sergey Brin at Google (Nasdaq:GOOG) — were diligent about legal matters. It allows for a solid foundation and shows seriousness about the business.
But unfortunately, in the case of Facebook, things look somewhat different. Despite his social networking genius, the company’s co-founder, Mark Zuckerberg, appears to be a legal dud (couldn’t he have at least talked with some of the folks at the Harvard Law School while he was a student?)
A former business partner of Zuckerberg (and how much of a partner is in dispute) named Paul Ceglia is saying he originally invested $1,000 in Facebook for a 50% stake.
Yes, if true, it would put him in the top ranks of the Forbes list. Not bad for a wood-pellet salesman who is actually a convicted felon (could be material for a sequel to “The Social Network,” huh?)
Ceglia claims that he agreed with Zuckerberg back in 2003 to build a social network, which eventually became Facebook. He has provided emails that he believes prove his allegations.
Facebook’s response? They say it is a downright sham.
But Ceglia was able to retain a top law firm, DLA Piper. It would certainly be risky to take a case that is based on fraudulent claims, right? It could subject the law firm to serious sanctions — and would be a big hit to its reputation.
However, Ceglia claim still looks suspect. Keep in mind that it took him seven years to bring his suit. Why the long wait? Could someone forget something like this? (More material for a sequel).
And, whatever the outcome, there is one thing that is absolutely certain: in the end, the attorneys will win.
Of course, the result has been an expensive distraction for Facebook. With a valuation in excess of $70 billion, even a small slug of shares is a big deal.
There’s another key issue: uncertainly about the ownership could make a Facebook initial public offering a nightmare.
Yet this week, there was some good news for the company. The $65 million settlement from the twins — Cameron and Tyler Winklevoss, who were a big part of The Social Network movie) — was upheld by a federal appeals court. You see, they attempted to get even more money out of the deal because they believed that the valuation was faulty. But this time, Zuckerberg appears to have benefited nicely from the handiwork of savvy attorneys who structured the settlement.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.