The Facebook Effect Read online

  The following morning, he did call Graham. “Don, I haven’t talked to you since we agreed on terms, and since then I’ve had a much higher offer from a venture capital firm out here. And I feel I have a moral dilemma,” Zuckerberg began.

  Graham had already talked to Breyer, so he was disappointed but not surprised. But he was also impressed. “I just thought to myself, ‘Wow, for twenty years old that is impressive—he’s not calling to tell me he’s taking the other guy’s money. He’s calling me to talk it out.’” Graham knew that even his first offer was very high for a company so tiny and so young. He felt he had no context in which to go higher. And he assumed that no matter what he said, Accel would go even higher.

  “Mark, does the money matter to you?” Graham asked. Zuckerberg said that it did. It could, he went on, be the one thing that could prevent Thefacebook from going into the red or having to borrow money.

  “You know that taking their money will be different from taking our money, don’t you?” Graham replied. “They will have an end in mind for you, and they will try to move you toward that result. And while we don’t have the network they do, and we don’t have the sophistication they do, we’re not going to try to tell you how to run the company.” Graham says now that “if it never went to an IPO I would have been happy. But Mark said he had thought through the disadvantages of dealing with a VC, and it was clear he preferred to do it.”

  “Mark, I’ll release you from your moral dilemma,” said Graham after a twenty-minute conversation. “Go ahead and take their money and develop the company, and all the best.” For Zuckerberg it was a huge relief. And it further increased his respect and admiration for Graham.

  Zuckerberg had already emailed Breyer saying he would like to meet with him one-on-one at Accel’s office.

  Later that morning—Wednesday, April 6—Zuckerberg walked alone over to Accel on University Avenue and sat down in Jim Breyer’s small conference room. He’d come to like the affable Breyer by now, even if he hadn’t been able to share his expensive wine. But Parker had been schooling Zuckerberg on the details of such investments. Turning tough, Zuckerberg told Breyer he wanted some improvements. He said if Accel raised its “pre-money” valuation to at least $75 million and if Breyer agreed to join Thefacebook’s board, then he was ready to sign a deal. Efrusy was a good guy and everything, but he was junior and inexperienced. “It hurt my feelings,” says Efrusy, “but I understood.” Zuckerberg said firmly that if Breyer would not join the board Thefacebook would simply conclude its deal with the Post instead. For Zuckerberg, the ability to place a seasoned veteran Silicon Valley investor like Breyer by his side was the determining factor.

  Breyer’s priority was gaining more ownership. Accel tries to own at least 15 percent of companies it invests in. But Zuckerberg and Parker didn’t feel the company needed any more money. This had come up at dinner the preceding evening, and they came up with a partial solution. Accel could invest $2.7 million more, and Zuckerberg, Parker, and Moskovitz would each take a special bonus of $1 million.

  In venture capital deals like these, the investor usually forces the existing holders to dilute their ownership prior to the investment by adding a “pool” of shares that will remain unallocated, on the assumption that future employees will get some of their pay in stock options. The way it’s calculated is complicated, but it has the effect of giving the VC more of the company and the entrepreneurs less. VCs typically insist that the existing shareholders of a company accept a pool of about 20 percent.

  But Parker had prepared Zuckerberg for this gambit, and it was clear at dinner the night before how badly Breyer wanted to invest. So Zuckerberg refused to accept a 20 percent dilution. The two agreed on a 10 percent option pool instead. In addition, Zuckerberg would only accept half of that being applied to existing shareholders’ ownership. So some of the dilution applied to Accel’s money as well. “Mark negotiated really hard,” concedes Breyer.

  They finally agreed on a deal that would value Thefacebook at slightly less than $98 million post-investment. Accel would invest about $12.7 million—a stunning sum for such a small company. It would own about 15 percent of the company. “I knew the price was just way too high,” Breyer says now, “but sometimes that’s what it takes to do the deal.” Breyer agreed to go on the board but asked if he could invest $1 million of his own money. The twenty-year-old and the VC shook hands. Zuckerberg left his office, and Breyer was elated.

  Before they shook hands, Zuckerberg explained that there might still be a small additional investment coming, either from Graham and the Post or from Edgar Bronfman, the scion of the Seagram liquor fortune and the CEO of Warner Music. Bronfman had met Parker and Zuckerberg when they’d visited Warner Music in Los Angeles the previous fall, and despite the earlier animosity dating from Napster days, he and Parker had become friendly. Bronfman decided not to invest, though. (Had he in fact done so, his $300,000 in stock would be worth at least $20 million today.) The potential Viacom purchase offer was also still vaguely in the air, though Parker and Zuckerberg made no move to pursue it.

  It took a few weeks before it was all finalized. Parker tweaked several key points. He further solidified the corporate structure that guaranteed that Zuckerberg controlled one unfilled board seat in addition to his own, and Parker occupied another. That meant that even with Breyer joining Thiel on the board, the two employees would command three out of the five board seats—a majority of votes. A complicated arrangement tied their stock ownership to their board seats. There would thus be little likelihood that Zuckerberg could lose control of his company. That Accel agreed to this is further testimony to how badly Breyer wanted this deal. It also attests to his faith in Zuckerberg. By now Breyer had become a believer in the young CEO, whom he says he already thought of as “a product genius.” Some of his colleagues thought Zuckerberg might ask his father to take the empty seat. He had often instant-messaged him for advice during the funding process. But for now, the seat stayed empty.

  Several aspects of the financing of Thefacebook were unusual. First, the sheer size of the valuation was unprecedented for an Internet start-up. Even Google’s first big investment valued the company at less than $75 million. The bonus payments to the three young men at Thefacebook were kept quiet, partly because it’s generally considered best in such situations if the company gets all the funds for its own purposes. In fact, so rare is such a bonus for company founders that Silicon Valley veterans cannot recall another one. As for the bet with lender WTI, “I won,” chortles Parker. WTI’s warrants ended up costing ten times as much as they would have if WTI’s Werdegar had won the bet. But he remained a fan of Parker and the company. In July Werdegar extended yet another loan to Thefacebook, this time for $3 million, again exclusively to cover the cost of computers and other hard assets.

  When Eduardo Saverin, Zuckerberg’s erstwhile partner in founding Thefacebook, heard the terms of the Accel deal, he hit the roof. His share in the company, which in the summer had been 34.4 percent, had now been diluted by the additional investments and restructuring to below 10 percent. He claimed he hadn’t realized this was going to happen, threatened to sue, and so forth. But since the reorganization he didn’t have much leverage. Ezra Callahan had by now learned how to do all Saverin’s advertising work. An outraged Saverin stopped doing any work for Thefacebook (though he kept his stock). Zuckerberg turned off his email, and Y2M was instructed to have no more to do with him.

  Zuckerberg, Cohler, and Moskovitz were in awe at Parker’s prowess as a negotiator. It had been a textbook case of fund-raising success. Looking back, Cohler says, “Parker was absolutely the lead on those negotiations. People now don’t realize how important he was to the company. He did an outstanding job.” Zuckerberg has told friends he has never seen a more amazing sales job than the one Parker did with Accel.

  The day of the biggest deal in Mark Zuckerberg’s young life ended in frightening anticlimax. He had signed the papers to close the Accel investment. He wa
s now a millionaire. But late that night his impulse to keep celebrations to a minimum was almost absurdly reinforced.

  Zuckerberg’s girlfriend at the time was a student at Berkeley. In the wee hours he headed there to see her. On the way he stopped in East Palo Alto to get gasoline for “the Warthog,” his shiny new black Infiniti. This neighborhood was much poorer than the rest of Palo Alto. The gas station was desolate. As he filled his tank a young man approached him, holding a gun. But he was so drunk or drugged he could barely stand. He had trouble speaking clearly enough to demand money. A terrified Zuckerberg took a calculated risk. He just got into his car and drove away. Nothing happened. “I feel like I’m pretty lucky,” he says. Though he referred to his escape from the gunman, it’s a good general observation about creating Thefacebook, and his new funding.

  Finally Thefacebook had plenty of money. Now it could build a real staff. No longer would the servers be strung together with baling wire. The real growth was about to begin.

  6

  Becoming a Company

  “Being CEO in a company is a lot different than being college roommates with someone.”

  Suddenly there seemed no limit to what Thefacebook could achieve. Money had been removed as an obstacle. The service continued to grow rapidly among students. Any lingering doubts Zuckerberg had about Thefacebook had been vanquished. Now was the time to make it into a real company! But wait—how do you make a company?

  Mark Zuckerberg and Dustin Moskovitz were still only twenty-one years old. For all their vision, creativity, and commitment, they retained the mind-set of college kids. They knew next to nothing about how to organize a business. Sean Parker, twenty-five, had been in several start-ups but detested their restrictions and was an instinctive rebel. His willful disregard for business conventions was as thorough as Zuckerberg’s ignorance of them. That left Yale graduate Matt Cohler, twenty-eight, by default the old man and official level head of Thefacebook’s inner circle. He had been a McKinsey consultant and a jack-of-all-trades at LinkedIn for veteran entrepreneur Reid Hoffman, so he had a pretty good idea of what start-ups were supposed to do. But this was not an ordinary company. It did not face ordinary challenges.

  Facebook’s first priority was hiring more people. Now there was money for it. But people weren’t sure they wanted to work at Thefacebook. Most in Silicon Valley in early 2005 still saw social networks as faddish, despite the success of MySpace. It was unclear if they could ever be businesses. What seemed hot for Internet companies around this time was blogging and podcasting. And since Thefacebook was a closed network, any adult that Thefacebook wanted to hire couldn’t easily get on the site to check it out.

  Compounding these problems, the still-nascent company already had a reputation for rambunctiousness. Cohler, who quickly turned his attention primarily to hiring, tried to convince a well-known recruiter for start-ups named Robin Reed to help the company find a vice president of engineering. Reed, middle-aged with short blond hair framing a round face and a New Age propensity to wear wooden beads wrapped around her wrist, wasn’t interested. “I had heard wild stories about them. It was too woolly for me,” she says. “Sean Parker was quite notorious at the time.” Parker’s reputation for partying and his forced departure from Plaxo had stereotyped him in the Valley as a bad boy. Reed talked to friends who had already tried and failed to help Thefacebook with recruiting. “It’s Lord of the Flies over there,” one told her.

  While that—whatever it meant—was an exaggeration, a bunch of college kids was definitely in control. Zuckerberg had to be careful which business card he handed out at business meetings. He had two sets. One simply read “CEO.” The other: “I’m CEO…bitch!” Not only were college administrations all over the country up in arms over the planned national beer pong competition, but closer to home, Tricia Black refused to join the company if it wasn’t canceled. Black, the saleswoman from the Y2M advertising firm, had been begging Eduardo Saverin to hire her since mid-2004. She finally got her offer to join Thefacebook and set up an in-house advertising department. As for the office art, Parker’s girlfriend’s painting of the naked women and bulldog in the ladies’ room got painted over soon after Accel invested its $12.7 million.

  Recruiting tactics weren’t very professional. The main method initially was a wooden figure of an Italian chef out on the sidewalk. He held a chalkboard that displayed, rather than varieties of pizza, a list of job openings like “VP of Engineering.”

  Cohler’s first hire was Steve Chen, a former PayPal programmer. But after only a few weeks Chen decided to leave to start a new company with two PayPal friends. It was to be a video start-up, and Cohler tried to dissuade him. “You’re making a huge mistake,” Cohler said. “You’re going to regret this for the rest of your life. Thefacebook is going to be huge! And there’s already a hundred video sites!” Chen went ahead and left to start a company called YouTube.

  It quickly became apparent to Zuckerberg that Google, at the top of the Silicon Valley food chain, was Thefacebook’s primary competition for talent. After all, that was where just about every great software engineer aspired to work. Those were the people Thefacebook should be hiring. Simply learning that someone was interviewing at Google made Zuckerberg want him more.

  Cohler visited his younger brother at Princeton and heard about a Google recruiting meeting there. He printed out a bunch of flyers about Thefacebook and stood by the door handing them out. Not long afterward Zuckerberg set up a card table in a Stanford computer science department building with a sign reading WHY WORK AT GOOGLE? COME TO THEFACEBOOK. Even Adam D’Angelo had to be convinced not to take a summer internship at Google he’d been offered. Parker persuaded him to rejoin Thefacebook instead.

  After Accel made its big investment, Kevin Efrusy, who had spearheaded the deal, began visiting regularly to advise Zuckerberg. He proposed bringing on a part-time consultant named Jeff Rothschild, who had co-founded the big business-software company Veritas. Rothschild had both a deep knowledge of data centers and the maturity of a fifty-year-old. Zuckerberg realized that Rothschild could help Thefacebook prevent a Friendster-like breakdown. Efrusy suggested offering him some stock in exchange for a day a week. “Would he work full-time?” Zuckerberg asked. “No, never. He’s retired,” Efrusy replied. The next time the two got together, Zuckerberg proudly announced, “I got him full-time.” Telling him something couldn’t be done was like holding up a red flag to a bull. “I thought these guys had created a dating site,” Rothschild says, recalling how fascinated with Thefacebook he quickly became. “But once I understood Mark’s vision, I realized this wasn’t like MySpace. It had nothing to do with meeting people. It was the most efficient way to stay in touch with your friends.” Getting veteran Rothschild on board helped legitimize the company.

  Rothschild’s acceptance of Thefacebook helped Cohler persuade Robin Reed to help with the recruiting. She finally agreed to come see Zuckerberg. When she walked up the graffittied stairs to Thefacebook’s Palo Alto offices at the appointed hour of 11 A.M., she found the door open and the place deserted. After a while she left. Cohler spotted her on the street and brought her back. It turned out Zuckerberg had been there all along—on the roof. If you stood on a table in a room they called the dorm room (it also had an Xbox and a futon), then shimmied out a window, you arrived at a big flat area on the roof covered with gravel. Beach chairs were set up. It was a favorite spot on sunny days and a place to get a little privacy for phone calls or meetings. Reed climbed out. Zuckerberg pleaded with her to undertake the engineering job search. She found the whole scene quite charming and finally agreed.

  But Thefacebook had its own unique criteria for hiring. For one thing, there was a strong bias toward youth. Leaving school was considered a virtue among this crew of dropouts, iconoclasts, and autodidacts. “Why would you study it when you could be doing it?” Zuckerberg would ask graduate students he was trying to recruit. He even began to guarantee that the company would pay someone’s tuition if they
quit school to come to Thefacebook and later decided to go back. Cohler advertised for summer interns, then sometimes told promising applicants when they came for an interview that Thefacebook was only hiring full-timers. That forced people to consider dropping out. That’s how he got Scott Marlette, a top early hire, to quit Stanford graduate studies in electrical engineering.

  Adam D’Angelo, tall and soft-spoken with mussed-up hair and the concave posture of an introvert, remained the house egghead and programmer par excellence. He had long since stopped focusing on Wirehog. Now he was Thefacebook’s top engineer. No matter who else they’d spoken with first, Zuckerberg always wanted candidates for important tech jobs to interview with D’Angelo. If he thought they were smart, they’d get hired.

  When somebody did get hired, their first responsibility was to go buy their own laptop. There wasn’t enough furniture, either. Scott Marlette sat on the floor his entire first week. Only two small tables stood in the middle of the main room, already tightly packed with other people’s stuff. Later Marlette visited Ikea to buy his own desk and chair.

  The site went from 3 million users in June to 5 million by October 2005. This was unbelievable growth, but even as they celebrated it, the growing Facebook staff had to work hard to keep it from destroying them. Their technology had to grow as quickly as their membership. Fighting the Friendster curse was a constant obsession. Adam D’Angelo became consumed with daily crises. He remembers what it was like: “This database is getting overloaded. We need to fix that. You can’t send email. Fix that. This week we came this close to the edge. Next week it’s going to hit the edge and the site’s not going to work. We have to raise capacity.” There were frequent drives down to the data center in Santa Clara to plug in more servers. By year-end Facebook had spent $4.4 million on servers and networking equipment in its data centers.