Last week on Methods of Prosperity:

Mark Zuckerberg was a child prodigy. He learned to code and ship useful software. This included CourseMatch, which helped students choose their classes. That predated Facemash, the hot-or-not game. He co-founded Facebook at Harvard University in 2004. Eduardo Saverin contributed significant financial support. Facebook grew in popularity. This motivated Zuckerberg and co-founder Dustin Moskovitz to move operations to Silicon Valley.

Sean Parker was co-founder of Napster. He played a crucial role in Facebook’s early development. He became its first president and helped secure essential investments. This included a pivotal $500,001 angel investment from Peter Thiel.

As Facebook evolved, tensions arose between Zuckerberg and Saverin. Zuckerberg arranged the dilution of Saverin’s shares. This restructuring removed Saverin from the company. Facebook began turning into a major social media platform. This transition enabled further investments and set the stage for its global dominance. But the lawsuits were about to intensify.

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The following is Methods of Prosperity newsletter number 40. It was originally deployed March 21, 2024. As of November 28, 2024, original subscribers have received up to issue number 76: Sam Zell (continued).

Part 40:

Mark Zuckerberg (continued)

How Facebook became the biggest social media platform in the world.

Legal battles, cognitive bias and tribalism.

TL;DR

A series of disputes and lawsuits make up the legal and business history of Facebook. It starts with the Winklevoss twins and Divya Narendra suing Mark Zuckerberg in 2004. They accused him of stealing their ConnectU idea to create Facebook. Zuckerberg faced another lawsuit from co-founder Eduardo Saverin over share dilution. Saverin received $5 billion in shares. Facebook’s rapid growth attracted major investments. This included a $240 million stake from Microsoft in 2007, valuing the company at $15 billion. Zuckerberg achieved billionaire status by 2008. Facebook acquired Instagram in 2012 for around $1 billion. Zuckerberg attempted to buy Snapchat in 2013. Facebook’s rise also led to concerns over its role in spreading disinformation. This was particularly evident in the political unrest in Southeast Asia in 2015. Facebook’s business model evolved into surveillance-driven advertising. Facebook’s influence expanded. Peter Thiel was an early investor. He believes in the value of monopolies for progress and innovation. Facebook fits his investment criteria. The downside to the phenomenon of Facebook is this. It tends to reinforce confirmation bias and tribalism.

Key lessons:

• Execute ideas so well that haters accuse you of stealing theirs.

• Be selective with whom you do business with.

• Understand human behavior.

• Hire a good lawyer.

• Build a monopoly.

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In last week’s Methods of Prosperity 39, my concluding statement needs clarification. It was that “Severin went on the offensive, teaming up with them”. Eduardo Saverin, the Winklevoss twins and Divya Narendra joined forces against Mark Zuckerberg. They did so in separate lawsuits.

The sequence of events shows that Winklevoss twins and Divya Narendra filed lawsuits in September 2004. Facebook filed a lawsuit against Saverin in 2005. Followed by Saverin suing Zuckerberg.

The Winklevoss twins and Narendra sued Zuckerberg for stealing their idea. They alleged that Zuckerberg made slight changes, and became rich off of it. “Unjust enrichment” was the term used in the lawsuit. Zuckerberg argued against their version of events. He asserted that Facebook was a separate venture. He didn’t use their idea or code from ConnectU (FKA Harvard Connect).

In 2004, the first lawsuit filed against Mark Zuckerberg was by the founders of ConnectU Inc. They alleged that Zuckerberg stole their ideas as a student at Harvard University. Zuckerberg had a verbal agreement with them which he broke, and used their source code. The court rejected this case twice. Facebook countersued in regards to Social Butterfly. That was the name of a project of The Winklevoss Chang Group. It was an alleged partnership between ConnectU and i2hub.

Microsoft paid $240 million in October 2007 for a 1.6% stake in Facebook. Valuation of the young company was now at $15 billion. Mark Zuckerberg appeared on the cover of Forbes. It was the 2008 edition of the World’s Billionaire List. His net worth was $1.5 billion. This made him the youngest billionaire among 1,125 billionaires that year.

ConnectU filed another lawsuit against Facebook on March 11, 2008.

CONNECTU LLC v. ZUCKERBERG (2008)

The seeds of the global controversy were sown in a Harvard College dormitory room. Tyler Winklevoss, Cameron Winklevoss, and Divya Narendra (the Founders), then Harvard undergraduates, hatched the idea of creating a social networking website for college students. Lacking the programming expertise necessary to bring this idea to fruition, the Founders asked defendant Mark Zuckerberg to help them complete the proposed website's source code and aid in the development of their embryonic website.   The request, which was made and accepted in November of 2003, yielded an horrific harvest.

According to the Founders, Zuckerberg not only failed to carry out the assignment but also stole their idea, business plan, and rudimentary (unfinished) source code in order to launch a competing social networking website. Zuckerberg acted in secret. By the time that the Founders learned of his perfidy, completed the source code through other means, and inaugurated their own social networking website (originally called harvardconnection.com and later renamed connectU.com), Zuckerberg's venture (originally called thefacebook.com and later abbreviated facebook.com) had gotten an unbeatable head start in user traffic.

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Fraud, copyright infringement, and misappropriation of trade secrets. Those were the claims of the main argument against him in court. They sought an injunction to shut down Facebook and transfer its assets to them. They also claimed unspecified damages. Zuckerberg’s attorneys denied these claims. There was no evidence of a contract with the ConnectU founders.

For Divya Narendra and the Winklevoss twins, the legal battle took more than seven years. It ended in discreet settlements. The final resolution occurred after a prolonged legal process. That process involved multiple iterations and even reached the Supreme Court. In 2009, Facebook settled out of court to the tune of $65 million. That included $20 million in cash and 1.25 million shares, to the Winklevoss twins and Narendra. They filed again in 2011.

As for Eduardo Saverin, this is Mark Zuckerberg’s side of the story. “He was supposed to set up the company, get funding, and make a business model. He failed at all three.” Sean Parker more or less replaced Eduardo Saverin. Sean did the job that Eduardo failed to do. That was to secure funding by introducing Mark Zuckerberg to Peter Thiel.

According to Business Insider,

In an IM exchange with Parker after a meeting with Peter Thiel, who would soon become Facebook’s first outside investor, Mark and Sean discussed the Saverin problem. Zuckerberg hinted at a hardball solution, one based on some “dirty tricks” used by Peter Thiel.

Thiel had learned these tricks, Parker said, from one of the most legendary venture capitalists in the Valley, Michael Moritz of Sequoia. Sequoia has funded Google, Yahoo, PayPal, Zappos, and many other massive tech companies. 

Zuckerberg’s lawyer advised against diluting Saverin’s shares. His lawyer warned of a lawsuit against Facebook for breach of fiduciary duty. Willing to take the hit in order to remove Saverin from the company, Zuckerberg went ahead with it. He ousted his co-founder. Saverin failed to realize how much Zuckerberg diluted his shares. From ~24% to 10% – until April 2005.

In September 2005, Facebook filed a lawsuit against Saverin. Zuckerberg argued that the stock-purchase agreements he had signed in October were invalid. Saverin sued Zuckerberg. He was reportedly awarded $5 billion in shares as part of the settlement.

A popular photo sharing app was encroaching on Facebook’s dominant position. Instagram began gaining significant market share soon after its launch in October 2010. It attracted 25,000 users on its first day and reached 1 million users within three months. Rapid growth continued. Instagram reached 30 million users by April 2012 when Facebook acquired it for $1 billion. But there was more competition. Facebook tried to acquire Snapchat in 2013. Snapchat founder and CEO Evan Spiegel turned down Mark Zuckerberg’s $3 billion offer.

Political unrest in 2015 Southeast Asia had unintended consequences for Facebook. Legacy media outlets blamed Facebook for spreading disinformation. They blamed Facebook for its role in inciting violence and exacerbating communal conflicts. This was due to its lack of moderation and the proliferation of rumors and falsehoods. Southeast Asia lacked strong educational systems, well-developed legal frameworks, and independent media.

The general narrative was that Facebook allowed disinformation to spread unchecked. Legacy media blamed Facebook for the manipulation of individuals’ behavior and decision-making processes. Facebook’s personalization features limited users’ exposure to diverse viewpoints.

This resulted in echo chambers. Echo chambers reinforced existing beliefs and isolated individuals from differing perspectives. This environment facilitated the acceleration of information flows. It challenged individuals’ ability to discern truth from misinformation. This resulted in social polarization and unrest within fragile democracies in Southeast Asia.

Mark Zuckerberg wants to connect the whole world. The unintended consequence of that is tribalism. Individuals tend to form strong group identities and loyalties. This is often based on shared interests or characteristics. Advocating for tribes or tribal lifestyles can manifest in various forms. We form tribes around social, ethnic, or political factions. Small hunter-gatherer groups shaped human evolution. Tribalism played a crucial role in social bonding and group cohesion. The benefit of tribalism is that it can have adaptive effects. It keeps individuals committed to the group. Belonging to the same tribe fosters specialized interactions. The trade off is that it can also lead to discriminatory behavior towards out-groups. That’s the dark side of in-group loyalty. In a political context, tribalism can involve discriminatory attitudes.

Social media amplifies confirmation bias. If we’re not careful, we end up in echo chambers. We filter out dissenting opinions. We limit exposure to information that contradicts our existing beliefs and viewpoints. Algorithms on social media platforms prioritize content based on users’ past interactions. This can lead to a reinforcement of preexisting beliefs and preferences. Selective exposure to information confirms one’s views. If we limit our exposure to diverse perspectives, that hinders critical thinking. Limiting exposure to disconfirming evidence fosters polarization within online communities. The ease of unfollowing or blocking dissenting voices further exacerbates this effect. This creates a self-reinforcing cycle. Individuals are less likely to encounter challenging ideas. We fail to seek out information that contradicts our beliefs. As a result, we’re more likely to seek out and share content that aligns with our existing views. This contributes to the amplification of confirmation bias. Beware of isolated online environments that reinforce preconceived notions.

By 2010, Facebook’s business model evolved. It became a form of surveillance-driven advertising in which users pay with data. The FTC forced Facebook to pay for sharing data to third parties. That didn’t slow Facebook down much. Facebook’s IPO in 2012 propelled Mark Zuckerberg’s net worth around $15 billion. Everything was great, until Russian operatives planted misinformation in 2014. Facebook had become the world’s biggest social media platform. Soon the unintended consequences would be out of control.

To be continued…

I like you,

– Sean Allen Fenn

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Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.