Court says Winklevoss twins must accept Facebook deal
reuters.com
reuters.com
In fact, the securities-fraud claim was merely some legal legerdemain by which the Winklevoss brothers sought to set aside the $65 million settlement they had struck with Facebook in their quest to obtain more. It is basically absurd to say that a party settling a legal case must comply with the disclosure laws for making a private placement in offering a stock component as part of a settlement package in a mediation context.
The Ninth Circuit panel here obviously agreed, and the writing was on the wall on this issue even after the oral argument held three months ago (see my comment here: http://news.ycombinator.com/item?id=2096370).
The case is not necessarily dead, at least in theory, since the Winklevoss brothers might petition to have it reconsidered en banc by the full Ninth Circuit and can file for a writ to the Supreme Court. At this stage, though, such options are long-shot options at best.
I note one irony in passing. The ratio of the stock value to cash payment that made up the original settlement was not coincidental. The $65 million value consisted of 1.2 million Facebook shares originally valued at $45 million plus $20 million in cash. Receipt of such stock is a taxable transaction and, indeed, would constitute ordinary income to the Winklevoss brothers. Thus, they were to have received $65 million in taxable income, including $20 million in cash to help cover the tax. But that was then. Having chosen to fight the issue, they would not have realized any form of taxable income on this deal until they actually received the stock. As a result, when they now receive the cash/stock package, they will realize an estimated $170 million in taxable income (the cash plus FB stock worth $150 million), with only $20 million to help defray taxes. That stock will not be immediately marketable, even on the secondary exchanges and will require FB's permission to be sold there. The net result, unless I mis-analyze, is that the Winklevoss brothers have by their choosing to fight managed to convert over $100 million in stock value from what would have been a long-term capital gain into ordinary income, will have to pay much higher taxes accordingly, and will (I would assume) be faced with a serious logistical problem in the form of a short-term cash squeeze in raising funds to cover the taxes. I am not a tax specialist and may be wrong on this, but I don't think so.
FB dodged a bullet on this one. Had the settlement been set aside, the liability overhang would very likely have messed up its IPO, among other serious consequences. That was the gamble apparently made by the Winklevoss brothers - that they would be able to exact a much larger settlement as a result of their leverage obtained from having the issues re-opened. It appears, though, that they gambled and lost and not without detriment to themselves. For its part, FB now seems to be in the clear.
Why is it absurd? In particular, is it legal to lie about the value of the stock in a negotiation? I'm genuinely curious.
Then, when the deal came through - the sale price was effectively 20% of the price that was previously told all the employees, and that any employees that joined the company in the last 12 months would receive nothing for their shares.
They additionally, gave executive stock bonuses to the C-level team to compensate for the difference between the original stated price and the ultimate selling price.
Further, they didn't allow any ESPP and gave no lockheed stock to any employees (except the C-Level).
Had the employees been allowed to exchange their stock options dividends for money to buy Lockheed stock for street value - the employees would have made out ok - lockheeds stock tripled in the next 12 months due to the war on terror.
Instead - they sold into Lockheed and had no incentive package for any new employees, fucked over existing employees and any employees who were there for <12 months got nothing.
Employees pretty much left after that - and HR had no answer as to how they were incentivising any new hires with anything more than a paycheck.
Suppose, for example, an employee negotiates a package with a company, and part of that negotiation is for a stock package that the company estimates is worth X. Now, it seems to me that the estimate has to be a good-faith estimate in order for the negotiation to be valid. If the employee signs an NDA or a non-compete, it would seem like finding out that the company lied should invalidate the contracts signed as a result of that negotiation (the NDA or NC).
It's one thing if something truly unforeseeable arises which destroys the value of the stock. It's something else if it's done in bad faith.
But, I'm not a lawyer, and there's probably a reason that I am not one.
That's where you have gone wrong. No private company (unless they are insane) will ever state a future value for a stock package - they will merely offer units of stock (and maybe state it in terms of a percentage of the company). The employee might try and calculate that value, and the company might state things like "based on our last funding valuation these shares are valued at $X", but that is very different to claiming they will be worth anything at any date in the future.
In startup companies, share options are usually granted using a vesting arrangement, which assigns a low value to the share options but doesn't allow the employee to buy them until some point in the future (where presumably the share will be worth more than the option). If that point arrives, and the shares are worth less than the options then bad luck! (This situation isn't uncommon, and is known as "being underwater". It occurs in public companies, too. For example, Google revalued the options of its employees in 2008 after the Google share price fell substantially and a majority of its employees were underwater)
The situation is different for publicly listed companies of course, because there the stock actually is worth something. In that case the company really can give a value to the shares at that point in time.
It's also worth remembering that the value (which is always changing) is based on factors beyond FB's knowledge or control. Given the opacity of GS, no one outside of that firm really knows what related transactions they may be a part of that are also contributing to the value they place on FB. So even if the Winkelvi did have all the information that GS had, that still doesn't mean they'd be able to value the company in the same way. In other words, they're just saying "well, if GS sees more value than we do, and for reasons we don't begin to understand, we want a piece of THAT action - even though we'd already settled for a different price before they got involved."
It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd.
I like that analogy. Probably a little rough- a better one would be if a guy built a house on your property and wouldn't leave, but gave you a sum negotiated based on what he said it was worth. But you weren't allowed to look inside. Then he flipped it.
Sure, you COULD have that uptick provision included (maybe), but only if you'd taken the risk of holding out instead of settling for the $65 million. As soon as you accept the money, you accept all the conditions under which it was given. Provided that FB held up its end of the settlement deal (which it seems to have done), there was no reasonable basis for the Winkelvi to revisit the case.
This is what I was looking for. In these situations, misrepresenting the value is not considered fraud. Thank you for the warning. I was unaware of this.
Isn't this similar in form to a restricted stock grant (in the sense that there wasn't just a substantial risk of forfeiture, they were claiming that their interest had been wrongly forfeited)? Could the Winklevoss's exercise the share withholding option in this case?
In this context, the "substantial risk of forfeiture" analysis is not relevant. The idea of "risk of forfeiture" applies only when someone already owns stock and can lose it. Here, the Winklevoss brothers never owned the FB stock (nor were they receiving it in exchange for any services they were performing and so neither 83(a) nor 83(b) applies).
The irony you point out is very telling, but would be less ironic if Facebook's stock value had not risen since the settlement day?
(That is, of course, assuming that MZ owes them anything for the idea.)
There is a difference between posting on CL with an idea. and having an idea/site and plan laid out - recruiting a developer who decides to work with you who obviously would add value to the design/plan - and then him turning around after agreeing to work with you and implementing his own version of it.
If, for example, he had read an ad on CL - which the ad alone ignited something inside him and he went and implemented it on his own - then I could agree. He was recruited and agreed to work on the project for/with them.
Then, he fucked them over in the negotiations as well.
Anyway this is looked at, Zuckerberg is a complete douchebag.
Successful? Yes. Within legal rights? Sure - but an amoral untrustworthy douchebag none-the-less.
I am not saying the twins should receive [whatever it was they were seeking] - but I am tired of people defending mark zuckerberg.
(This is why I make a distinction for Linked-in. Linked-in serves my professional needs and I can financially/professionally benefit from it - but my personal relationships are just that - personal. If I must have a suite of digital tools to manage the personal relationships, then maybe there is something wrong.)
Though, in conclusion, I agree too that the court system should be done with the case when justice is served, not because its a tired story - or that the twins are just as douchey as mark.
I am in no position to make a judgment on what is just, however.
Its pretty easy for anyone to say if they were worth X Billions of dollars to donate some fractional percentage.
We are talking about how he got these gains -- not what he is doing with them.
There is a difference.
Also, he just because he is worth a lot doesn't mean he has $10+ billion in liquid assets either.
Donations, particularly ones which smell an awful lot like quid pro quo, don't count for much in my book unless they truly hurt. When Zuckerberg donates all but $100 million, I'll believe he's doing something other than buying his way out of hell. And when he donates all but $5 million, ideally anonymously, then I'll be impressed.
Maybe he already has :)
More interestingly, in hindsight, if the twins had the choice of hiring MZ or Joe PHP, who do you think they would've chosen?
"Go ahead Mark, we'll get our pound of flesh from you whatever you do" is the vexatious vibe I'm getting. Maybe the film portrayal is adding to their greed. Self-entitled douchebags. What websites or businesses have they built since Harvard Connection? http://www.connectu.com is down, surprised?
Further he was depicted as having a certain level of jealousy for his buddies getting tapped by the social group he was interested in, in addition to already holding the fraternity the twins belonged to with reverence.
So, assuming these factors were true - there i no indication that he made any attempt to determine what sort of value the twins really could have provided to the site.
Clearly, history has shown that he was able to pull it off without them - yet at the same time you could guess that the twins would have been able to easily back the creation and provide high-level connections for the site.
So, it would seem apparent that truly this was a greed/control play on marks part.
There is no way he would have believed that any material resources the site would have needed could not have been provided for - but rather that any control of the idea and company he would have to give up was unacceptable.
This is understandable, but it further just proves out the fact that he agreed to help them upon the first meeting, had a clear spark of inspiration on what needed to be done to create it and only dragged the twins along to keep them at bay while he executed on the idea. Pretty slimy.
I agree. I'm not defending Zuckerberg's character, I'm merely pointing out that Z actually made something whereas the W brothers haven't made anything and certainly haven't created $65 million of value for others.
If I had been the judge I would have awarded the W brothers nothing but required Z to pay $65 million to charity.
This coupled with the recent Supreme Court ruling that prosecutors effectively can't be held accountable for hiding evidence that would exonerate a defendent -- seems to be saying that your best strategy in the legal system is to illegally withhold information, because the legal system will eventually not care, even if the actors in the case still do.
You mean once justice has taken its cut, right?
When purchasing private securities via any mechanism the purchasing party should to due diligence to ensure they are receiving fair value for it. I think they have a latin phrase for this something like 'caveat emptor'.
That the Winklevosses have this much money, that many connections, and manage to get themselves duped by the same guy is impressive.
If so, then justice has been served. Again, I don't know the details, so if that's the case, I'd hope the judge would actually state that even in the light of any new evidence their damages have already been covered in full. Exclaiming that there's simply an end to litigation seems to imply that justice hasn't been served, but we don't want to bother with it anymore.
Also, IIRC Facebook didn't withhold information from the court, they withheld information during a settlement negotiation. When purchasing private securities via any mechanism the purchasing party should to due diligence to ensure they are receiving fair value for it. I think they have a latin phrase for this something like 'caveat emptor'.
There are laws around disclosure of information for private securities. Maybe none of those laws were broken or didn't apply. But that seems like a reasonable question for the courts. I hope the judge actually weighed this and didn't simply toss it because he thought he had more pressing matters.
Judges don't like being appealed against, so as a rule they will treat every argument made before them when rendering judgement. Otherwise they leave an opening for an appeal on the basis that certain arguments weren't settled.
And indeed this is the entire point of the common law: to provide independent decisions, according to rules, in order to settle disputes without violence.
Endless appeals don't always work either -- you actually need a legal reason to appeal beyond "I disliked the decision". You need something like "The judge was wrong on points of law X, Y and Z" and you need the appellate court to agree that there might be something to review.
Most appellate courts look pretty dimly on appealing for the sake of appealing. Plus their time is limited, so they will tend to pick cases with broader legal consequences that will impact more than the disputants.