Opinion

Felix Salmon

The Winklevoss delusion

By Felix Salmon
December 31, 2010

Jay Yarow is absolutely right when it comes to the Winklevoss twins: they’re arrogant, delusional hypocrites. According to this morning’s NYT piece, they want to relitigate their $65 million Facebook settlement because the $45 million in Facebook shares that they received are now worth only $120 million rather than somewhere north of $500 million.

They can easily afford to do this, of course, because they were always rich to begin with, and because they also got $20 million in cash as part of the deal. But the argument at the core of their case is bonkers:

According to court documents, the parties agreed to settle for a sum of $65 million. The Winklevosses then asked whether they could receive part of it in Facebook shares and agreed to a price of $35.90 for each share, based on an investment Microsoft made nearly five months earlier that pegged Facebook’s total value at $15 billion. Under that valuation, they received 1.25 million shares, putting the stock portion of the agreement at $45 million.

Yet days before the settlement, Facebook’s board signed off on an expert’s valuation that put a price of $8.88 on its shares. Facebook did not disclose that valuation, which would have given the shares a worth of $11 million. The ConnectU founders contend that Facebook’s omission was deceptive and amounted to securities fraud.

They refuse to say how much they would ask for in a new negotiation, but they said that based on the lower valuation, they should have received roughly four times the number of shares…

In its brief, the company says it was under no obligation to disclose the $8.88 valuation, which was available in public filings. Facebook describes it as one of many that it received…

“There was no chance that that one valuation would have affected the decision of these sophisticated investors and their entourage of advisers,” Facebook wrote in its brief.

The fundamental point here is that the two sides agreed to settle for $65 million, and the brothers decided they would rather have $20 million in cash and 1.25 million Facebook shares than $65 million in cash. That decision turns out to have been a very good one, since those 1.25 million shares are now worth somewhere north of $120 million.

When Facebook handed over the shares, it might have thought they were worth $11 million, or it might have thought they were worth $1 billion: it doesn’t matter what Facebook thought. The brothers clearly thought the shares were worth more than $45 million, or they would have accepted cash instead. And they were right.

With the benefit of hindsight, Microsoft managed to buy in to Facebook at an attractive price, and so did the twins. It was always in their interest to argue for the lowest possible valuation and to get as many shares as possible out of the deal. And if they got $45 million in Facebook shares today, they would never get a price remotely as attractive as the one they got in 2008. They were smart to settle when they did, rather than dragging negotiations on longer. And they’re being really stupid to keep on fighting a battle they’ve already won.

Comments
18 comments so far | RSS Comments RSS

Disagree.

“When Facebook handed over the shares, it might have thought they were worth $11 million, or it might have thought they were worth $1 billion: it doesn’t matter what Facebook thought. The brothers clearly thought the shares were worth more than $45 million, or they would have accepted cash instead.”

The Winklevii relied on the valuation provided by Facebook correct? Were they allowed to do their own valuations?

They wanted shares equal to $45 million, based on the value of Facebook shares at the time. However, according to the $8.88 valuation, the Winklevii did not receive shares equal to $45 million; they received shares equal to $11 million, making the total received only $31 million, not $65 million. It does not matter what the shares would rise to in the future, or what Facebook or Winklevii believed Facebook would be worth in the future. Anything could have gone wrong at any time, or another site could have started up (just like what happened to myspace). At the time, Facebook was not as engrained in culture as it is now. It’s easy to say, of course the value would go up but we don’t know that. So the Winklevoss twins had to go on the present valuation of the shares. However, I can’t imagine that they wouldn’t have reviewed all public filings when negotiating such a large settlement, so it sounds a bit fishy.

Posted by cannon234 | Report as abusive
 

As somebody who for a job attempts to abjudicate within my firm on valuations of private holdings the $8.88 expert valuation is simply indicative and not the fair value that a buyer and seller would trade at.

I’m sure Microsoft would have come up with a range of valuations when deciding to invest and determined that $35.90 was worth paying. The fact that cash actually changed hands at this level makes it a stronger data point than the indicative expert opinion.

And if the expert opinion was already publicly available then why should they have to specially highlight it, surely their legal army should have noticed it?

Looking at the amount at stake I can understand them taking a shot here but if I were Facebook I wouldn’t be too concerned.

Posted by vk9141 | Report as abusive
 

I also understand them taking a flyer but I imagine Facebook will be less willing to pay more F off money to people who already failed to honour the original one.

It must be sad to have near to ultra-fame and fortune and not quite make it and I assume this is what is really driving them because by all accounts 65m is more than fair pay for their time and effort invested.

Posted by Danny_Black | Report as abusive
 

It would be poetic if the Winklevoss’s wound up with nothing. The concept of Facebook in and of itself wasn’t especially novel (e.g. Friendster and MySpace beat it to the market) — the execution of the idea is where the real novelty came into play.

Posted by Franklin010 | Report as abusive
 

Franklin010, they already got 20m in cash for vaguely having an idea close to what lot of other people did successfully.

Posted by Danny_Black | Report as abusive
 

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