Investors

One of Chris Hughes's friends at Harvard's Kirkland House was Olivia
Ma, whose father, Chris, was a senior manager for acquisitions and investments
at the Washington Post Company. Ma's daughter urged him
to take a look at Thefacebook, and between Christmas and New Year's
of 2004 he took Zuckerberg to a Sunday lunch in Menlo Park, near
Facebook's offices in Palo Alto.
The Post was already an investor in Tribe.net, and Ma found Thefacebook
enticing because of its focus on a promising demographic —
college students. He also immediately found himself impressed with
Zuckerberg. "I concluded in that first lunch that the key to Mark is
that he is a psychologist," says Ma. "His central thought was that kids
have a deep-seated desire to have certain kinds of social interactions
in college and that what drives them is their extreme interest in their
friends—what they are doing, what they are thinking, and where they
are going. He had some simple but deep insights." Ma talked a little
about the Post's hands-off aproach to its investments and suggested that
the company would be interested in putting money into Thefacebook.
Zuckerberg said he would think about it. He and Ma formed a bit of a
bond not only because of Olivia, but because Chris had attended Exeter
Academy, Zuckerberg's prep school. Two weeks later Zuckerberg
called and told Ma he wanted to come to Washington to discuss the
possibility of an investment.
Sean Parker, whose family lived near Washington, joined Zuckerberg
for the trip, and when they arrived at the Post, they found not only
Ma and another investment executive, but Post CEO Don Graham
crowded into a tiny conference room. The Post's offices were in the
midst of a renovation. Ma had asked Graham to join them briefly to
meet this impressive young entrepreneur. The ruddy-faced Graham is
a renowned leader of American business and a member of the family
that has controlled the Washington Post since the 1930s. Zuckerberg
explained Thefacebook to Graham, who recalls being immediately
taken. "I thought it was a simply stunning business idea/' he says. Hearing
about Thefacebook's success at Harvard elicited an oddly relevant
recollection in Graham, then fifty-nine. He too was a Harvard man and
was taken back to his days as a reporter and president of the Harvard
Crimson in the mid-1960s.
In those days the Crimson kept several large ruled ledger books
on a shelf in its newsroom. Articles from each day's paper were pasted
into the books, and staffers wrote comments about them right there. In
another book they wrote anything that was on their minds. "I vividly
remembered that every time any of us would walk into that room we
would read every word written in those ledgers and write our own comments,"
says Graham. "I have often thought about the power of those
comment books and wondered whether there was some way to replicate
them in a place like this." (At his newspaper, that is.) "When I heard
Mark describe the idea of Thefacebook, I thought 'Oh my God, I see
exactly what he is shooting for/" Graham was then deeply immersed in
efforts to build the Post's own Web businesses.
He was amazed to hear how many hours users were spending each
day on Thefacebook. He was also somewhat amazed by Mark Zuckerberg.
"Mark was ever so slightly more awkward than he is now," continues
Graham. "If you said something he would pause and think about
it before he'd comment or react. But every single thing he said in the
course of that conversation made a lot of sense. It was remarkably impressive
for a twenty-year-old."
Graham began recounting a bit of the company's history, and
Parker remembers him saying something like ". . . and then a man
named Warren Buffett came into our lives." Neither Zuckerberg nor
Parker knew much about the Graham family before their visit, but they
had heard of Buffett, the legendary investor and one of the world's richest
men. The Berkshire Hathaway company, run by Buffett, has been a
large investor in the Post since the 1970s. "He said the arrival of Buffett
was a transformative moment in the life of the company/' says Parker.
Graham explained that the Post was able to take a very long-term view
of its corporate strategy, both because the Graham family controls a
huge portion of its voting stock and because Buffett has made clear he
intends to hold his shares for the long term.
At some point in their conversation, Graham made an offer more
spontaneous than any he says he had ever made before or has made
since. He recounts it: "I said, 'Mark, in the end you will not do this, but
if you wanted an investor who wasn't a venture capitalist and wouldn't
pressure you in any of the ways VCs normally do' —he had talked a little
about how he did not want to go that route —'we'd probably be willing
to invest.'"
Zuckerberg was deeply impressed with how Graham thought about
business. He explains: "A lot of VC firms had approached us, but I
didn't want to play this whole Silicon Valley game of—take VC money,
try to go public or sell the company really quickly, bring in professional
management on an accelerated time scale—things like that. But the
Washington Post is a completely different kind of company than these
technology companies. I was just blown away by the difference in culture,
that it's just such a long-term focus there, and that they're so focused
on the brand of the Washington Post and the trust it has. I was
just like Wow. I want to be more like this guy.' And that's when I seriously
started thinking about doing another [investment] round. And
I was looking forward to doing it with them. Don was a guy I could
work with." Graham stayed ninety minutes, far longer than he had
planned. When he finally had to get up to go, Zuckerberg rose as well.
The twenty-year-old looked Graham in the eyes. "You're cool," he said.
Graham smiled broadly.
Things began moving quickly after that. The Post Company sent
another, larger delegation out to Palo Alto. The top managers of the
Post's online division joined the trip —including newly named CEO
Caroline Little, along with the vice presidents for finance and business
development. Little says Thefacebook seemed like a potential
gold mine. "Mark was kind of against ads, as far as we could tell," she
says. "But I just sat there salivating and thinking how easy it would be
to monetize this. I had to bite my tongue because Don didn't want to
hear it."
Sean Parker interpreted the turn in Zuckerberg's attitude toward
investment as a license to more aggressively beat the bushes and see
what else was out there. "I thought we should be valued at half a billion
dollars even then/7 Parker says now, a bit bombastically. "It was
pretty obvious to us that we were taking over the world." But in reality,
at this point even Parker was talking about a relatively low valuation.
His friend Seth Sternberg (now CEO of messaging company Meebo)
recalls Parker asking for valuation advice. Though Sternberg was only
twenty-six, he had worked in corporate development at IBM, so his
opinion counted. Sternberg recommended shooting for a valuation of
at least $40 million. So Parker raised his expectations to a target range
of $40-60 million, company documents show. Anything like that would
be phenomenal for a year-old company led by a twenty-year-old with
seven employees and annualized revenues of less than $1 million. But
Parker was wrong. He got more.
As soon as word got out that Thefacebook was contemplating an
investment, the Silicon Valley greed machine kicked into high gear.
Inquiries started pouring in. Cell phones at Thefacebook rang incessantly.
Ron Conway, one of the most connected men in Silicon Valley
and a veteran angel investor, was giving Parker advice about who to talk
to and what to say. He was also making email introductions to established
Silicon Valley companies and key venture capital firms. (Zuckerberg
now says he didn't know about most of this activity at the time.)
Investor interest was further heightened when the Los Angeles
Times wrote a front-page story about Thefacebook on January 23, the
first big story ever about the company in a major media publication.
SITE INTRIGUES COLLEGIANS ACROSS U.S., read a headline. "Clever,
goofy, or profane, the website has a powerful hold on its members,"
Rebecca Trounson wrote, "most of whom log on to it almost every day."
Parker got his friend Sittig, now Thefacebook's design guru, to design
a few PowerPoint slides and started meeting with potential investors.
The six-page presentation was modest but compelling. It claimed
Thefacebook had 2 million active users (this was mid-February) and
was deployed at 370 schools. But what got investors' attention was the
data about how engaged users were. An amazing 65 percent of them
were returning to the site daily, and 90 percent came back at least once
a week. Growth was so torrid that it occasionally hit 3 percent per day.
What most wowed those who saw the presentation was a simple
growth chart. Parker and Sittig had designed it to afford a little drama.
At first Parker would put up a chart showing colleges where the service
had opened. It looked like a staircase, because Thefacebook opened
schools in batches and then didn't add new ones for a while. Then
another slide would overlay on top of the school chart. It showed the
trend in total users. Vividly apparent was a correlation between opening
schools and growth in users. After each step in the staircase of
schools, the number of users leapt upward with minimal delay. That
implied the possibility of near-guaranteed growth, at least until Thefacebook
saturated the available population of 16 million American
college students.
The simple business plan Parker presented explicitly avoided mentioning
conventional Internet banner ads, even though they had been
the primary source of the little income Thefacebook had gotten thus
far. Page four of the PowerPoint was titled "Local Advertising." It projected
that on-campus text-based "flyers" —used by campus organizations
to announce events—would yield net sales of $3.65 million a year
if Thefacebook was at 400 schools. But the separate, yet-unlaunched
local advertising product—the one Parker had hired Ezra Callahan to
spearhead—was projected to be much bigger, yielding annual sales of
$36.6 million. That assumed sixty businesses would advertise at each of
400 schools, offering students discounts, coupons, etc.
Then there was a page of sheer marketing chutzpah. The presentation
touted what it called "AdSeed," defined as "Google AdSense for
social networks." Google's AdSense is a program that gives websites
revenue in exchange for allowing the search company to place textual
advertising on their pages based on the content there. At the time it was
beginning to take off. With the AdSeed name Thefacebook was trying
to feed off Google's buzz. The slide explained: "Products, brands,
and media properties (movies, books, music) receive a 'home' in socialthe
facebook effect
space." At the time, Thefacebook was just beginning its lucrative arrangement
for Apple's sponsored page, and that was the model. The
slide claimed Thefacebook was at that time making $40,000 a month
from pilot customers for AdSeed. The name, by the way, was never
actually used.
By February 9, twelve venture capital firms, four major technology
companies, and the Post were actively pursuing Thefacebook for some
kind of deal, according to a company document. Parker had decided
not even to pursue investors who needed convincing. A few well-known
outfits were out of the running. Kleiner Perkins and Benchmark, two
of the Valley's most eminent firms, were both already up to their ears
in social networks thanks to their troubled investments in Friendster.
Neither wanted anything to do with Thefacebook.
For all the impressiveness of the PowerPoint data, there remained
significant skepticism toward Thefacebook. After all, the only way any
potential investor could even log on and take a look was with an alumni
email address from their alma mater. A limited-access consumer website
was something new. Then there was the personnel matter—an
inexperienced twenty-year-old CEO and a partner with a profligate
reputation.
But even as the talks with the Post and others were heating up,
Thefacebook needed money right away. Parker decided to borrow some
more from his friend Maurice Werdegar at WTI. The initial $300,000
credit line had been used up after less than two months, even though
it was expected to last for eight months. Parker wanted to borrow another
$300,000. But he and Werdegar couldn't agree on how to value
the accompanying warrants that would give WTI the right to purchase
Thefacebook's stock. WTI typically only invests following a financing
by venture capitalist firms, and the prices of its warrants are typically
pegged to what the VCs have already paid. It had stretched its practice
somewhat by putting money in alongside an angel investor like Thiel.
Werdegar thought WTI was taking a significant risk, because after
this loan its total outlay for Thefacebook would be $625,000, counting
both loans and the $25,000 equity investment. He wanted the warrants
attached to this new loan to be priced at the same level as the ones for
the first one only months earlier—the price that Thiel had paid for
Thefacebook's stock.
Parker started talking about how great the company's next fundraising
round was likely to be, which meant that WTI would be very
likely to be repaid with little difficulty. If that was true, the risk was
small. Parker wanted the warrants to be priced based on the upcoming
venture capital round. Parker said the valuation was likely to be at least
$50 million, which Werdegar found ridiculous. Parker also asserted
that an investment was imminent. Werdegar didn't believe him.
So they made a bet. Written into the loan's terms was a provision
that if Thefacebook closed a venture round of $2 million or more by
May 15, 2005 (about three months later), WTFs warrants would enable
it to purchase a fixed number of shares of stock at a slightly lower price
than whatever the venture capitalists paid in the new round. However, if
Thefacebook failed to make the deadline. WTFs warrants would enable
it to pay much less—something much closer to what Peter Thiel (and
WTI itself) had paid in the earlier investment round. The $300,000
Parker borrowed this way paid for most of the servers the company
bought that spring as membership burgeoned.
In late March, as talks with the Post continued, Viacom entered the picture
out of the blue. It expressed interest in buying the entire company
for around $75 million. It wanted to combine Thefacebook with MTV.
com. That was a complete surprise to everyone at Facebook. The overture
was testimony to how much buzz was starting to surround Thefacebook.
If Zuckerberg accepted such an offer, he would have put about
$35 million in his pocket for a year's work. But that didn't matter to him.
He had no interest in selling. Nonetheless, the existence of such an
offer took a while to digest. At least one company adviser urged Parker to
take it. He and Moskovitz would have gotten close to $10 million each.
After some back-and-forth, the Post in late March sent Thefacebook
a term sheet for a very rich deal. It would invest $6 million for 10 percent
ownership, after which Thefacebook would carry a value of $60
million. That's what's called in VC lingo "$54 million pre"—or before
the investment: $60 million minus $6 million. Parker was thrilled. This
was better than he'd hoped for. He called up adviser Conway in San
Francisco. "My God! $54 million pre?" the excitable Conway shouted
into the phone. "Take it! Close that sucker!" But Parker and Zuckerberg
weren't in any rush. Zuckerberg's well-connected new aide Matt
Cohler was urging his colleagues to keep talking to venture capitalists.
Many started calling him at all hours seeking a chance to invest as soon
as they heard he'd joined Thefacebook.
In any case, there was still haggling to be done with the Post. Its
negotiators wanted a board seat, but Zuckerberg and Parker didn't want
to give it to them unless it would be held by Graham himself. Graham
thought that would be inappropriate given that his newspaper,
with which he was then closely involved, might be covering Thefacebook.
Zuckerberg talked it out with him by phone and they pretty much
wrapped up a deal that didn't include a board seat.
The Accel Partners venture capital firm in Palo Alto was looking for a
big new score. It had done a number of hugely successful investments
in the previous decade. It had made its mark in the 1990s with a series
of big telecommunications and software investments that paid off,
like UUnet, Macromedia, RealNetworks, and Veritas. Now Internet
opportunities were reemerging, but it didn't have a major consumer
Net play. Some in Silicon Valley were muttering that Accel had lost
its mojo.
In the aftermath of the dot-corn crash of 2001-2002, Accel had reduced
the size of its funds, returning money to investors unused. But
by the end of 2004 it was again raising money—a new fund of $400
million. Yet some of its longtime investors were unhappy that Accel was
continuing to charge more for its services than most VCs—a 2.5 percent
management fee and 30 percent of any profits. Among those who
decided not to continue with this latest fund was the endowment fund
of Harvard University. As things turned out later, Harvard would thus
end up without a stake in the creation of one of its most entrepreneurial
former students.
Jim Breyer, Accel's co-managing partner, was eager to prove the
firm's mettle to its latest investors. Optimism was returning to Silicon
Valley, and now was the time to start taking risks again. With thick black
hair, a back slapping sense of good cheer, and piercing blue eyes with
which he often wryly yields a sort of knowing wink, Breyer is by nature
upbeat. He likes to laugh and to share a confidence. He is a lover of
music ("from Bach to Nirvana," he likes to say) and art (he collects
paintings by everyone from Picasso to Gerhard Richter). And his bona
fides as a master of the universe are impeccable. He is deeply embedded
in the elite of American businesss—a member of the board of directors
of Wal-Mart, no less. Breyer, the largest investor in Accel, knew the
Internet was turning around.
Kevin Efrusy was a principal at Accel, not yet a partner—a venture
capitalist in training. His mandate from Breyer: get out there and find
Internet companies that could grow huge. The firm's latest interest was
social networking. Accel methodically identifies the central trends at
any given time, and creates a short list, which it calls its "prepared mind
initiatives." One of the three at this point was "social and new media applications."
But the problems with Friendster and other networks made
the entire business seems risky. "Social networks sort of had this dirty
name," says Efrusy, referring to a reputation for sexual material and
rambunctious members. "But we'd talked about whether it was possible
to keep one clean and relevant to certain demographics." He's a big,
balding guy with the friendly but intense and slightly aggressive manner
not uncommon among venture capitalists.
Breyer had gotten Accel close to an investment in a company called
Tickle, which had been shifting its business from offering clever quizzes
like "What breed of dog are you?" to becoming a true social network. By
early 2004 Tickle had become the second-largest social network after
Friendster, with two million members actively connected to others and
exchanging messages. Accel prepared a term sheet, but Tickle's board
decided to sell it to job-hunt website Monster.com instead in May 2004.
An Accel partner named Peter Fenton had tried to get Accel to invest in
Flickr, a photo-sharing site with some social networking features. Again,
it agreed on a term sheet for the deal. But before Accel could complete
that deal, Yahoo swept in and bought Flickr. Then in December 2004
Chi-Hua Chien, a Stanford graduate student doing contract research
for Accel, told Efrusy about Thefacebook.
The two did a little research and Efrusy got hold of an alumni email
address from Stanford, his alma mater. When he got on Thefacebook he
was impressed. "They essentially had the rope outside the nightclub,"
he explains. "The context was there for you. It was in your college. It
was Facebook Stanford, not Facebook worldwide/' But Efrusy saw a
problem—what kind of business would it be to run a social network for
people who had no money? Then a former business school classmate
explained that college students were a precious demographic for marketers.
It's there that critical lifelong buying habits are formed—your
first car, bank account, credit card. "But at college there was no way to
reach you," says Efrusy of what he learned as he continued his research.
"College was a black hole. You stopped watching TV. You stopped reading
the newspaper." Thefacebook might be a way around that.
Efrusy heard how quickly Thefacebook was growing. Through a
friend who had interviewed for a job at Thefacebook he got an appointment
to talk by phone with Parker. Parker canceled. Then Efrusy heard
Matt Cohler had joined Thefacebook. He had met Cohler at Linkedln.
Efrusy called, asking for an introduction to Parker. Cohler replied politely
that the company wasn't interested in talking to venture capitalists.
Then a month or so later one of Accel's partners, Theresia Ranzetta,
heard that Thefacebook was talking to other VCs about raising money.
Efrusy decided he had to meet these guys. After all, they were right in
the neighborhood. He emailed. No response. He called. Sean Parker
wouldn't return his calls.
Efrusy isn't easily deterred. He learned Reid Hoffman was an investor
in Thefacebook. So he asked Accel partner Peter Fenton, who was
close to Hoffman, to call and ask Hoffman for an introduction. Hoffman
also demurred. He said that Thefacebook guys thought dealing with venture
capitalists would waste their time because they wouldn't really understand
Thefacebook and wouldn't be willing to pay what it was worth.
Of course, by that point Parker was already talking seriously to several
VCs. He was just deliberately avoiding Efrusy. He'd heard that Accel had
lost its mojo and didn't want to deal with them. Zuckerberg, for his part,
was focused on the potential Post investment. He was only half aware of
how much time Parker was by now spending courting VCs.
Efrusy asked Fenton to go back again to Hoffman. This time Hoffman
relented and agreed to arrange a meeting with Parker and Cohler,
who was doing much of the day-to-day managerial and organizational
work for the financing. However, Hoffman insisted Fenton promise that
Accel wouldn't try to come in with a lowball offer. Thefacebook was
pretty far down the road with a possible strategic investor, he said.
Typically the entrepreneur goes to the office of the VC, deferentially
seeking funds. Efrusy spoke again with Cohler, Hoffman's former
employee, and invited him to bring his partners to Accel's offices. But
even then the guys of Thefacebook put Efrusy off. "He was hounding
us," Cohler recalls. Efrusy had been at Accel for less than two years. He
hadn't yet done a major deal of his own. He needed to prove himself.
Finally, on Friday, April 1, 2005—April Fool's Day—Efrusy decided
to just go to their office. Parker had said he'd be there. Efrusy
didn't realize it, but his timing was superb. The Post talks had not quite
concluded because of haggling over the board seat. Efrusy walked four
blocks down Palo Alto's University Avenue to an office Thefacebook had
just rented on Emerson Street, about a mile from Stanford. He brought
along Arthur Patterson, the tall, gray-haired, patrician co-founder of
Accel, who was curious to learn why Efrusy was so excited about this
little start-up. They walked up a long stairway, newly spray-painted with
graffiti art. At the top was a giant, suggestive image in Day-Glo colors of
a woman riding a giant dog. In the large open loft space, the company
hadn't finished moving in. There was more in-your-face multicolored
graffiti art all over the walls, including a few nudes. The furniture was
in various states of assembly. A couple of days earlier, Thefacebook had
inaugurated the space with a blowout party for Cohler's twenty-eighth
birthday. Half-filled liquor bottles were scattered everywhere.
Parker had said he'd be there, but he wasn't. And Cohler and Moskovitz,
who were, were hardly ready for a serious financial meeting.
They were struggling to assemble do-it-yourself furniture they'd bought
at Ikea. Moskovitz had hit his head on a piece of furniture and his forethe
facebook effect
head was bleeding. Cohler, usually well put together, had caught his
jeans on a nail. His left pant leg was hanging open and his boxer shorts
were sticking out. "Hey Kevin/' Cohler greeted Efrusy.
The chaos didn't deter Efrusy. He was a man on a mission. "Our
meeting was just with Matt initially/' he recalls. "Sean and Mark were
unavailable or sick or something. So Matt took us through the business.
He was very articulate about the statistics and the repeat usage rate. I
already kind of knew it, but Arthur was pretty excited. Then Sean and
Mark showed up —not sick, eating burritos.
"I knew they thought we'd take too long asking questions. I said
'Hey, here's the deal. I get how valuable this could be. Come to our
partnership meeting on Monday, and I promise I'll either give you a
term sheet by the end of the day Monday, or you'll never hear from me
again. I will not drag this process out. We can move quickly.'"
Before they left, Parker did get excited about one thing. He proudly
led Efrusy and Patterson into the girls' bathroom. There he pointed to
another mural, this one done by his girlfriend. It showed one naked
woman embracing the legs of another. Up in a tree a French bulldog
puppy looked down on them. Efrusy was nonplussed. "Sean, won't this
make women uncomfortable? Aren't you worried about harassment or
something?" he asked. "Look," Parker replied. "I'm not going to worry
about that." Then Efrusy convinced Parker to meet him for a beer the
following evening, a Saturday.
As Efrusy and Patterson were walking back to their office, Patterson
slapped him on the back and said, "That was great fun. Really interesting.
We have to do this." Patterson was known inside the firm for his
tough-minded skepticism. This wasn't like him at all.
Over the weekend Efrusy's research went into high gear. Midday
Saturday he and his wife went to Stanford and hung around Tresidder
Memorial Union, the campus student center. Efrusy collared students
to ask them what they knew about Thefacebook. Did they use it? How
ubiquitous was it, really? The answers were what he'd hoped for. "Have
I heard of it? I can't get off of it." "I don't study. I'm addicted." "Everyone's
on it. You stay in touch with friends at other schools. Then all the
professors get on there. It's become sort of the hub of my life."
Efrusy called the younger sister of Accel's CFO, a sophomore at
Duquesne University in Pittsburgh. "She's like 'Oh yeah, Thefacebook. It
came here on October twenty-third/ I was like Tou know the exact date?'
She's like 'Of course. We were on the waiting list for months. We were
number seven on the waiting list.' I'd never heard of anything like this.
She remembers the date it was turned on. There was this rabid, pent-up
demand. I talked to my wife and said, Tve got to invest in this company.'"
That night he met Parker and his girlfriend as well as Cohler at the
Dutch Goose, a grungy Stanford student dive. The talk quickly turned
to money. "Kevin," Parker began, "we think this is a really valuable
company. You're not going to want to pay the valuation." Efrusy begged
just to be given a chance. That was exactly the reaction Parker had
hoped for. Efrusy again urged Parker to come Monday morning, and to
bring Zuckerberg. He was not at all sure they would show up.
But on Monday at 10 A.M., Zuckerberg, Parker, and Cohler appeared.
Zuckerberg wore a T-shirt, shorts, and his Adidas flip-flops.
Parker and Cohler opted for the T-shirt-under-sports-jacket look. They
didn't bother showing the slides they'd displayed at other VC firms.
Parker did most of the talking. It was a masterfully self-conscious display
of reticence, aiming to hook Accel hard. Zuckerberg himself said very
little. Then they left.
"So what do you guys think?" Efrusy asked his partners. One of the
senior ones piped up. "It sounds like you've got a lot of convincing to
do," he said. "Okay, but let's put that aside for a second. Do you like the
business?" Efrusy asked. The room was unanimous. They did. There
wasn't any debate. Patterson was enthusiastic. So was Jim Breyer. But
while, as usual, Parker had presented Thefacebook's pitch, Breyer had
made a critical discovery while watching the boys demonstrate Thefacebook's
site. "First page of the website," Breyer wrote in a note to
himself, "this is a Mark Zuckerberg company. Mark Zuckerberg is the
guy." Until that moment, it had not been clear to Accel —or to any
of the company's prospective investors aside from Don Graham—that
Zuckerberg was the decisionmaker upon whose opinion a deal would
rise or fall Efrusy had barely met Zuckerberg. During the presentation
Breyer had asked Zuckerberg to talk a bit about his background and his
vision for the company, and Zuckerberg talked for only about two minutes.
Since the founder's presentation is usually the most compelling
part of any pitch to VCs, this reticence was noteworthy and confusing.
The Accel partners' meeting quickly turned to a strategy—how
could Efrusy get Thefacebook to take Accel's money? Parker had told
them that Thefacebook just about had a deal with the Post, and he
roughly outlined the Post's deal terms. They decided to get a deal proposal
over there fast. Efrusy and Breyer had Accel's lawyer draw terms
up for an investment valuing the company at the same price as the
Post had but putting in slightly more money. Efrusy got it to Thefacebook
that evening. Late that night Efrusy got an email from Cohler
saying thank you, we're sticking with the Post. But separately, and unbeknownst
to Parker and Cohler, Breyer that evening began an email
dialogue directly with Zuckerberg. The VC suggested they try to get
together again the following day, Tuesday.
In reality, Parker was glad Accel was so interested. It enabled him to
test the waters with the other venture firms that were still in the game.
Maybe Thefacebook shouldn't do the Post deal after all. The next morning
he spoke with Tim Draper of Draper Fisher Jurvetson, who said he
was willing to match Accel. Parker told Efrusy that when he called a few
minutes later. Efrusy suggested he might go higher and threw out a few
numbers. Parker is a good negotiator, shameless. And he was excited.
"No way!" shouted Parker, he recalls. "There's no way we're considering
that. We want one hundred pre!" Then he hung up on Efrusy. The
boys, all listening in by speakerphone, giggled.
Back at Accel, Efrusy was huddling with Jim Breyer, who wanted
this deal as badly as Efrusy did. Breyer had come to see Thefacebook as
something unique—a company with a kind of potential that he'd rarely
felt before. They really wanted this deal to happen, and they were willing
to pay to get it. But if Thefacebook wanted to go with the Post, maybe
there was a way to get in on it. Breyer knew the Post's Don Graham—
they'd served on a company's board together. He was sitting at lunch at
his favorite restaurant, the Village Pub in Woodside, talking to one of
Accel's largest investors, when his assistant finally succeeded in connecting
with Graham. Breyer excused himself and stepped outside.
"Don, I understand you are talking to Thefacebook about an investment.
They've also come and presented to us. We'd love to figure out
a way to work with you, and split the investment 50-50," said Breyer.
"I don't think I'm authorized to do that, Jim," responded Graham.
"These are the terms Mark asked for. I think we already have a deal."
"I know you have an offer on the table, but I don't think you have
a deal yet," replied Breyer. "We would be happy to invest together with
you if you chose to do that."
As he was leaving after lunch, Breyer made a 7 P.M. reservation at the
same restaurant for dinner that night. After he got back to the office, he
and his partners huddled and decided to take Accel's bid considerably
higher. Tuesday afternoon, Efrusy and Accel partners Theresia Ranzetta
and Ping Li walked back down University Avenue and barged uninvited
into Thefacebook's office, where everybody was in the middle of a meeting.
Efrusy just walked in and interrupted. "He slapped the term sheet
down on the table. It showed an offer for $70 million pre, with a $10
million investment. That would make the postinvestment valuation for
Thefacebook $80 million. "You've got to do this," Efrusy implored. "We
get this. We have full conviction about it. We will move heaven and
earth to make this a successful company." A slightly stunned Parker replied,
"Okay, this is worth considering." Before he left, Efrusy noticed
that the office's murals had seen some slight editing. On all the most
strategic spots, someone had laid the tiniest pieces of masking tape.
After Efrusy left, the young entrepreneurs looked at one another in
jubilation. Eighty million? Amazing! "But what about the Post?" Zuckerberg
asked. Nobody had a good answer, but they were being offered a
deal that valued Thefacebook at $80 million!
But it wasn't a clear-cut decision. On one hand Graham was a believer
in the company and would let Zuckerberg and Parker do what
they wanted. Though nothing had been signed, Zuckerberg had come
to an oral agreement with Graham for a deal at the lower valuation. If
Accel invested it would be very intimately involved, which might mean
less freedom. Its offices were only three blocks away. But it also might
mean more Valley wisdom and connections. Parker had no attachment
to doing a deal with the Post, and Matt Cohler, the most experienced of
them all, felt strongly they should raise as much money as possible. The
tide was shifting toward Accel. The VC firm's term sheet explicitly provided
for the possibility that the Post might invest alongside them, but
there was little interest at Thefacebook in that, partly because it would
have involved selling too much of the company.
With a few calls Parker determined that neither Tim Draper nor
any of the other remaining VCs were willing to follow Accel to this
level. It was down to Accel and the Post.
That night, Jim Breyer hosted a dinner for Thefacebook's leaders
at the elegant and expensive Village Pub near Breyer's home in tony
Woodside, north of Palo Alto. At the table were Zuckerberg, Parker,
Cohler, and Efrusy. The Pub is known for its wine list, and Breyer, a
wine connoisseur, ordered a $400 bottle of Quilceda Creek Cabernet.
Zuckerberg, still only twenty and below drinking age, ordered a Sprite.
The point of the dinner was in part for Efrusy and Breyer to get better
acquainted with Zuckerberg, who had been mostly quiet in their meetings
up until then.
Breyer by now had made known his own Harvard connection —
he'd gotten his MBA there. He was even on the board of trustees of
the Harvard Business School. Breyer was doing everything he could
to loosen Zuckerberg up. There was some serious talk about strategy,
and Breyer and Efrusy reiterated in the strongest terms how much they
wanted to invest and work with Zuckerberg and his team. Breyer was
starting to admire the young CEO's clearheaded way of thinking about
strategy and his absolute devotion to the quality and usefulness of Thefacebook's
product. Yet it was clear Zuckerberg remained uncomfortable
about something. Then he started to tune out.
People often think Mark Zuckerberg isn't listening to them. He has
a way of saying nothing and appearing uninterested. He does not offer
the body language or nods or other conventional conversational signals
that tell someone he's listening. However, that usually doesn't mean he
isn't listening. He's just unemotive and quietly pensive. On the other
hand, there are times when he really doesn't listen. It happens when
he's either bored or very uncomfortable. On those occasions, he will
repeatedly, at fairly random times in the conversation, simply mutter,
"Yeah." This distinction is only apparent to people who know him well.
In the middle of the dinner at the Village Pub, Zuckerberg went into
nonlistening mode. Matt Cohler noticed.
Zuckerberg went to the bathroom and didn't return for a surprisingly
long time. Cohler got up to see if everything was okay. There, on
the floor of the men's room, sitting cross-legged with his head down, was
Zuckerberg. And he was crying. "Through his tears he was saying, This
is wrong. I can't do this. I gave my word!'" recollects Cohler. "He was
just crying his eyes out, bawling. So I said, 'Why don't you just call Don
up and ask him what he thinks?'" Zuckerberg took a while to compose
himself and returned to the table.
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 was 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.