1. A guy comes out of nowhere and files a lawsuit in a state court in Allegany County, New York (population: about 50,000 - http://quickfacts.census.gov/qfd/states/36/36003.html).
2. The lawsuit is filed on June 30, 2010 and consists of a grand total of 2 pages of allegations, coupled with a request for relief (see http://www.scribd.com/doc/34239119/Ceglia-v-Zuckerberg-compl...).
3. Among the substantive allegations are absurdly wrong ones (from a lawyer standpoint), such as the allegation in paragraph 3 that Facebook is a "domestic corporation" in New York. Facebook is in fact a foreign corporation that is qualified to do business in New York, as is shown by the very attachment the lawyer appends to the complaint itself (Exhibit B). I make this point only to highlight a certain level of sloppiness that attends this whole matter. This is hardly a mark of top-flight lawyering.
4. The contract states that it is entered into as a "Purchase agreement and 'work made for hire' that reflects two separate business ventures," the first for something called StreetFax Database and the second for the "continued development of the software, programs, 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 [sic] access to a website similar to a live functioning yearbook with the working title 'The Face Book'." Mr. Ceglia was to pay to Mr. Zuckerberg $1,000 for the work he did on StreetFax and an additional $1,000 for the work he did on "The Face Book." In turn, Mr. Ceglia was to receive (with respect to the "Face Book" work, the following: "It is agreed that the Purchaser will own a half interest (50%) in the software, programming language and business interests derived from the expansion of that service to a larger audience." The contract then provides that "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."
5. The agreement appears to be a canned document and is poorly drafted. Since its terms appear to be heavily slanted in favor of Mr. Ceglia, it is probably fair to assume that this was his form of contract which he presented to Mr. Zuckerberg (then a student) to sign.
6. The complaint then alleges that the website was completed on February 4, 2004 (paragraph 7) and asserts that Mr. Ceglia is therefore entitled to an extra 34% of "the business," (paragraph 8) or 84% in total.
7. A few comments on the above:
(a) can anyone say "vagueness" and "uncertainty" as serious problems with this contract? with no company formed at the time, this is a guy who essentially hired Mr. Zuckerberg to develop a website that was to be like a "live yearbook" and who claims that he is to have an 84% stake in any future expansion of that idea to be made by Mr. Zuckerberg, no matter what form it took and no matter who else contributed value to build that business; this in essence is a claim by Mr. Ceglia that, at any time and under under any circumstances, he can pull a piece of paper out of his pocket and claim a perpetual non-dilutable stake in somebody's company based on a work-for-hire contract for a small development fee done before that company was even to be formed; thus, every founder who might work in that company, even for years, every investor who might invest in it, and every other stakeholder (including innocent purchasers for value who bought shares in the company in secondary trading), all such persons were to work, sweat, and toil, taking huge risks all the while, and all were to be subject to dilution - except for Mr. Ceglia, who could take his sweet time and come forward at any time with his claim of an 84% non-dilutable interest;
(b) if not vagueness, how about an unenforceable penalty? How would you react to someone who told you he would pay $1,000 for some development work and then take 1% of your company for every day delay in completing the project? Such terms are outrageous to say the least and probably serve to render the entire contract unenforceable, particular when the contract as a whole amounts to an alleged non-dilutable stake in a business no matter what future form it might take;
(c) how about statutes of limitations? New York apparently has a 6-year statute for breach of a written agreement. If the work was done by February 4, 2004, then Mr. Zuckerberg's obligation to perform would have started on that date. The complaint was filed on June 30, 2010, well past the 6-year deadline. Thus, on its face, the claim appears to be time-barred. One can of course allege facts for why the statute did not begin to run until a later date. This complaint fails to do so.
(d) Other equitable defenses would almost certainly apply so as to preclude assertion of any claim for equitable relief after such a long delay (laches being the most obvious - I discussed this in an earlier comment, http://news.ycombinator.com/item?id=1509601).
Thus, all in all, a lawsuit full of holes is built up by sensationalist reporting into a supposed major threat to Facebook and to Mr. Zuckerberg.
This is where the reporting becomes interesting. I think this relates to a strong impulse to see Mr. Zuckerberg get some sort of comeuppance for whatever reason.
The case got major headlines nationwide because a judge in a small state court entered a TRO, with the reports touting the idea that this gave the claim more gravitas because judges do not enter a TRO lightly. Yet this judge did just that. He entered the order even though the defendants had been given no notice of the application and even though the plaintiff made no showing whatever of likelihood of success on the merits and of alleged irreparable harm that he would suffer if the defendants were not enjoined from transferring assets while the TRO was in effect (see the brief filed by Facebook making these points, http://www.scribd.com/doc/34240120/Ceglia-v-Facebook-Motion-...). Without getting into technicalities, this amounts to a court having concluded that the TRO had to be entered to cover a 15-day period in which Mr. Ceglia might otherwise suffer irreparable harm absent a court order barring any transfer of Facebook assets during that period. After a nearly 7-year delay, it is basically absurd that such an order should have been entered. No possible harm could have come to Mr. Ceglia over a 15-day period that would have been any different from whatever risk he had faced for the nearly 7 years pre-dating the order. Thus, the TRO was ill-conceived at best and the federal court to which this case was removed immediately stayed its effect upon getting the case (the parties have since agreed to allow it to expire and die a merciful death).
In this piece, then, we get a subtitle stating or implying that the claims made by Facebook's lawyers (that this lawsuit was frivolous) were in themselves frivolous. Why? Because we now have an admission by Mr. Zuckerberg's lawyers that he did indeed sign the contract. This is then touted as some sort of setback for Facebook's case.
From a lawyer's standpoint, this is all really weird. This case is full of holes and represents at best a wild swing at Facebook and Mr. Zuckerberg. The contract is worded in a flaky manner. The terms themselves are outrageous by any measure (think about you would react if someone claimed a perpetual stake in whatever you did just because he paid you a small fee for a minor development effort). The lawyering in support is slipshod at best. Yet, in spite of all this, the reporting on it is building continual momentum such that it is perceived as a serious problem for the company and all because a judge entered an ill-conceived TRO and because of the basically irrelevant fact that Mr. Zuckerberg's lawyers admit that he signed the contract (a fact never previously denied). Yes, this all makes for high drama, but it also makes for highly inaccurate reporting on the legal merits of what is happening.
At most, in my view, this case represents a nuisance claim against Facebook, as no court in the world is about to prejudice the interests of innocent investors, co-founders, employees and the like for the sake of some guy who comes out of the woodwork after long delays with a wildly worded contract that is of dubious enforceability. While a court might be more open to entertaining a claim against Mr. Zuckerberg personally, even that is so dubious here as to be barely worth considering.
There are obviously many people who want to see Mr. Zuckerberg get what is due to him but this will not be the channel by which that might happen, notwithstanding the reporting on the case. In the end, this will be tried to a federal court and not in the blogs. And, in the courts, this thing is going nowhere.
I am, by the way, no apologist for Mr. Zuckerberg and have been quite critical of his actions in relation to the whole ConnectU mess (which does pose a serious risk for him and for Facebook, as I discussed in an earlier comment, http://news.ycombinator.com/item?id=1362379).
You're thinking like a lawyer, and focusing on the technicalities of the case. Everyone else is taking the contract at face value. If Zuckerberg gets out of this on a legal technicality, it's because he's damned lucky that the contract he signed wasn't written by a better attorney. Frankly, I doubt that most laypeople like the precedent of that outcome.
Really? Perhaps to the sort of layman who's already quite convinced 'shady dealings' took place. If someone got some college kid to sign an unenforceable (and certainly ridiculously unfair, from an ethical, if not legal standpoint) contract, how is that evidence of 'shady dealings', rather than inexperience and naivete?
The whole thing seems completely preposterous, I think to anyone who's entered a contract or two. It's hard to imagine the 'everyone' who would take this contract at face value, at least, not the subset of everyone who's ever signed a lease, mortgage or employment agreement and/or has had the most passing consultation with a lawyer about one. The fact that someone with professional legal expertise feels the whole thing is likely preposterous makes it more, not less likely that is the case. To suggest otherwise is to possess an oddly conspiratorial turn of mind.
Take me for example. I'm working on my own startup. Eventually, I'm probably going to get funding, and sign into some kind of contract. Now the fact is, I'm no legal expert, and I don't have money to hire a legal expert from day one. The fact that the law makes some contracts unenforceable makes me feel much safer about not entering into any kind of mess that will seriously screw me.
Obviously, this only goes so far. And of course I will pay for actual legal counsel before entering a contract. But anything that society can do to make it easier to start a startup, including things like not having to worry about certain legalities, is a Good Thing, since it makes startups more likely.
Firstly the contract is only a couple of pages long and the point about owning 50% of thefacebook is right there in the first paragraph. It might seem ridiculous now that thefacebook was only valued by them at $2000 at that time, but thats only in hindsight. And at a valuation of $2000 1% a day is only $20 a day as a late penalty.
No idea about the timing issues, but if the guy thought the deal was successfully completed (afterall he paid Zuckerberg, we have no idea if he cashed that cheque) then as far as he was concerned all was fine and he owned 84% of the business. I don't see how a problem arose until Zuckerberg incorporated and didn't give this guy his fair share - and that happened in summer 2004 (according to wikipedia).
As for the unreasonableness of it all, Zuckerberg obviously needed the money at the time and thought that's what thefacebook was worth at the time. Arguably facebook wouldn't be in the position it is now without that guy's money. Maybe he's only entitled to 84% of Zuckerberg's personal share, but thats still pretty significant. Who knows, it might all be a forgery, but it doesn't seem that frivolous to me anyway.
1. This contract is outrageous and unconscionable - not one founder among the thousands I have worked with over 25 years in Silicon Valley would even begin to consider giving away half or more of his company (much less 84%) for a $1K investment. If I tried to do this as a lawyer in a client's company, I would be instantly disbarred. This type of money typically gets someone a 1% interest or less, even at the earliest stage.
2. When I pay x dollars for item y, and the other party breaches the contract by failing to deliver y after I have paid my x dollars to him, I have been damaged and am entitled to a remedy. The normal remedy is an award of damages, which means I am normally entitled to the monetary value of y as of the date of breach or, if I rescind the contract for the failure to perform, to a refund of my x dollars. Applying this principle in Mr. Ceglia's case (and assuming he gets the best possible outcome in establishing liability), he would get either the monetary value of 84% of what Facebook was worth in the summer of 2004 (when it was first formed and when he became entitled to his equity interest) or else to a refund of his $1,000 - in each case, with interest accruing since the date of breach. If we assume Facebook is like the typical startup, and was worth at most a few hundred thousands of dollars at inception, Mr. Ceglia's maximum damages would be up to a couple of hundred thousands (plus interest since 2004).
3. For Mr. Ceglia to be get a judgment ordering Mr. Zuckerberg to convey 84% of his stock in Facebook to him, he would need to show that he is entitled to specific performance of the contract. This is an equitable remedy and a court will award it only where the item that was to have been a delivered has a "unique" aspect to it that cannot be compensated by damages (the classic example is a parcel of real property). I would doubt that stock would qualify as "unique" in this respect. Also, because specific performance is an equitable remedy, a court will only use such a remedy to do equity and will therefore not grant it where (just to pick a few items off the list in a Wikipedia piece on this remedy, http://en.wikipedia.org/wiki/Specific_performance) (a) it would cause severe hardship to the defendant, (b) the contract is unconscionable or illegal, (c) the claimant misbehaved (no clean hands), (d) specific performance is impossible, or (e) the contract is too vague to be enforced. As appears from that list (assuming that New York law generally conforms with this approach), Mr. Ceglia has some daunting obstacles to overcome before he can claim a share of Mr. Zuckerberg's holdings, even if he can prove that he was harmed by a breach of contract. Of course, those same equitable factors utterly preclude his being able to get specific performance in any way that would harm Facebook's innocent shareholders generally.
a) It seems to me that the work to be performed is adequately spelled out and vagueness is not an issue. (even by name 'The Facebook') I'd be inclined to agree with you if Mr Ceglia hired Mr. Zuckerberg to develop something totally unrelated and then claimed ownership over a product developed later, but there seems to be little question that the site started there @ Harvard morphed over time into the Facebook we know today.
b) I don't see how this penalty is unenforceable. There is a good chance the whole venture was viewed to be worth 1000->2000 at the time of the contract. Not only was Zuckerberg content to sign this contract, he was sufficiently disinterested in maintaining 50% ownership at the time that he took an additional 34 days to finish the project. A contract isn't invalid just because, years later, it seems one of the parties agreed to a bad deal. At the time, the deal probably seemed quite fair.
c) As far as I know, in America - unlike England - the clock on the statute of limitations starts upon discovery of the breach by Mr. Ceglia. It is very easy for him to claim that he didn't discover a breach until 2005 or 2006.
As an additional point, I believe there is no way the claimant will be able to claw back equity from those who have received it without knowledge of Mr. Zuckerberg's breach. I can't be certain about NYC but in almost all states they are protected. (You seem to know what you are talking about so perhaps you could clarify this?)
I don't understand what is weird about this claim. There is a word for a perpetual stake in a business: Equity. Majority equity holders choose how or when to dilute their stake. Ceglia gave Zuckerberg $1000 and he got equity in return. If I run a lemonade stand and you buy half for a grand and eventually I grow it into a lemonade empire, I don't get to divest you of your stake just because I agreed to a bad deal. I agree the suit is poorly put together, but I don't see anything at all weird about the claims.
Ceglia is definitely acting like a shady character and Zuckerberg is suspect of being a shady character with respect to this contract, but I feel that the interests of everyone involved with Facebook the company hold more weight then the single claim by Ceglia.
Despite the shoddiness of Mr. Ceglia's case against FB, at what point does the price of negative publicity outweigh the price of a cheap settlement for FB?
I have a more interesting theory on why this reporting is happening.
http://www.thesocialnetwork-movie.com/
The movie is based on the book "the accidental billionaires.". A significant part of the plot is around whether zuck cheated some dudes who contracted him to build something Facebook-like.
These news stories are marketing plant items intended to build hype for the movie.
We strongly suspect the contract is forged. We have not seen the original (no one has). Thus, we’re focusing on the things that are not open to interpretation and are indisputable -- Mark could not have given interest in a company that didn’t exist or and idea he had not thought of yet and, even if he could, the statute of limitations has expired.
Bret Taylor, Facebook CTO
If Mr. Ceglia truly wants ownership of Facebook, he is going to have to fight for years. If he wants enough money for a private jet, he just might get it. As will his lawyers.
This could be the most lucrative transaction in the history of Craigslist.
And the twist is if Ceglia truly did have this contract with Zuckerberg, it leaves the ConnectU guys in a particular interesting situation (as the Facebook idea was being worked on way before ConnectU).
Of course, I also don't think Facebook's star is going to exponentially rise over the next three or four years, so I may not be in the majority here.
Facebook paid [ConnectU] $65m to go away.
to be the most interesting. I don't follow the Facebook story very closely, but I had no idea that much money changed hands over the ConnectU thing.
What portion of Facebook does Zuckerberg still own?
Anyway, if Ceglia and his lawyers have half a mind, they're after a tiny (compared to 84%) settlement.
Even though I surely could use the money I'm way too arrogant to give up 50% of something I'm working on. I think the entire planet knows how arrogant Zuck is (not necessarily a bad thing).
For example: You start company A, in market M. Your investors give you 5k in exchange for 50%. You spend your 5k learning about market M and now you're diluted. What's stopping you from creating company B, to attack same market, but from an enhanced perspective?
