10 legal things I learned from Facebook’s former attorney that you need to know
Remember The Social Network movie? In the movie, as well as in reality, Winklevoss brothers claimed that the idea behind Facebook was theirs, and Facebook’s co-founder Eduardo Saverin claimed that he was purposely induced to sign an agreement that led to significant dilution of his shares. Mark Howitson, attorney at law and former Deputy General Counsel at Facebook, represented Facebook in the famous lawsuits.
Last week I interviewed Mark on my talk show — Valley Talks where I interview startup founders about their real-life stories of running a startup in Silicon Valley. In his special episode I wanted to ask Mark about some typical legal concerns we — startup founders — may have. I feel honored that Mark accepted my invitation, since he doesn’t appear much in the media, and until now he hadn’t publicly commented on Facebook’s cases.
So, here are the main conclusions and lessons from our talk:
Protecting the Idea
- It’s important to carefully think about what you say when sharing your idea.
“Perhaps there are pieces of it that you don’t have to disclose. You’ve got to make a judgement about what are you going to disclose to people you are talking to. Beyond all the circumstances, you should have them form a non-disclosure agreement, and just about any NDA is better than none.”
2. Make sure to keep the NDA. Mark strongly underlined that, as people tend to forget about it and loose it (ouch!).
3. Even after signing the NDA, someone may tweak the information they got and introduce their product / idea / innovation on the market. In such situations, unfortunately it may be hard to tell how much was copied.
“That’s not easy to determine and ultimately sometimes jury has to decide.”
While it usually is more straightforward in terms of a software code, normally what often matters is similarity in functionality.
To my question whether Winklevoss brothers signed NDA with Mark Zuckerberg, Mark said:
“They had no agreement whatsoever to prove that there was an agreement to keep anything undisclosed, quiet or confidential. Above and beyond, whether or not there was any copying of anything. Which, there wasn’t.”
4. When you decided to partner with a co-founder and want to think whether you should get extra shares since it was your idea, it’s worth to look at how much you need the other person to make this business successful.
Proprietary Information
5. When someone is doing some work for a startup (whether free or paid, although Mark says there is no such thing as free work in California), it’s necessary to sign the agreement saying that what they created became owned by the company.
“Like the NDA, the agreement that you often have for people who perform services for you, is a Proprietary Information Agreement. It’s an NDA, but it also adds language related to who owns intellectual property that the person creates while he or she is working for you.”
Otherwise, you may land in a situation where someone who was helping you for free may claim ownership to what they did and threaten you unless you pay them back, especially once the company gets revenue and becomes successful.
“One of the beautiful and problematic things in United States is that people sue each other constantly. I have a roof over my head because of those threats.”
Co-founder agreements
6. When starting working on a startup with a co-founder, always remember to discuss the basic terms before starting any work and put them on paper. Basically, you need to name what is the equity deal, who contributes what, what roles are all of you taking in the company and any other key points in your arrangement.
7. According to Mark, it’s very common that when there are three co-founders, eventually it does not work out for one of them. However, in case the other two co-founders simply start acting against you, you can protect yourself from being fired from the company for unfair reasons.
“It’s not uncommon in an employment arrangement for the Executives or senior people in a startup to have a provision in their employment agreement saying, that they can only be fired for cause.”
Alertness to being diluted
8. One of ways to take away power from a co-founder that has minority of shares is to issue more shares, and allocate them to everyone else but not that co-founder. It is illegal if done intenionally and usually majority shareholders claim that they acted in the best interest of the company.
“As long as everybody is equally and fairly diluted, then that’s ok. But you can’t do it in such a way, that intentionally targets that minority shareholder.”
“That’s just how it works. The person who is the minority shareholder would claim ‘What you did to me was illegal’, and the majority shareholder will say ‘Well, we were just acting in the best interest in the company.’
The allegation by Eduardo Saverin was slightly different:
“Mr. Saverin was saying that he was fraudently induced to sign an agreement, because he wasn’t told about all the different dilutions were going to happen to the company. That issue was never resolved in court about who was right, whether he was right or Facebook was right.”
Do the minority shareholders need to be informed about issuance and allocation of shares? Not necessarily. There need to be made disclosures when there are large transactions to the company, but in case of other stock issuance, where stocks are needed to allocate to new employees, etc., minority shareholders do not need to be notified.
Filing for a patent
9. Filing for a patent in the early stage is financially risky, but it does give extra power when someone else introduces or copies your invention. Therefore, it’s good to file for patents early on. However, when other people introduce small changes to the invention, then they can do it.
“If they could tweak it in such a way that this is just a minor change to how you do it, that is no longer covered by the patent. And that’s where it gets expensive. Then you have to revisit the patent and expand it, modify different things, so that you cover ways of doing the same thing.”
Finally — How much truth is in “The Social Network”?
10. Here is Mark’s answer to the most fun part of the interview!
“My opinion is it was a really funny piece of fiction. I agree with what Mark Zuckerberg said, that they got his clothing right, and just about anything else was fictionalized and amusing. I don’t feel like there is a heck a lot of similarity to the reality that I became aware of. But it was an amusing movie.”
That’s it? They got his clothing right? And how about the information on the internet?
“There is so much information on the Internet that is just bullshit. Mark does not focus on it anymore. His job is to build this company and that takes enormous amount of time and attention. I don’t doubt him at all when he says ‘I don’t really focus on that.’ ”
Thank you for reading this and I hope you find this information useful like I do.
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