Facebook vs ConnectU Lawsuit: $65 Million Won, Then Lost

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Facebook and ConnectU have been going through an incredibly futile legal over the last few years. The classic scenario: ConnectU’s founders claim that Facebook CEO Mark Zuckerberg stole their idea and turned it into “The Facebook” in 2004.

facebook Hat-tip to Valleywag’s Owen Thomas for nailing this situation. HIs facts are clear and there’s no fluff. In a nutshell, ConnectU’s founders come from a large pile of money, have the funds to keep this case going, and out of the $65 Million they’ve one, have about $2.7 million left. Ouch.

Valleywag: Lawyers for ConnectU are bragging about winning a $65 million settlement for their clients from Facebook. But what did Divya Narendra and Cameron and Tyler Winklevoss really get from Mark Zuckerberg? Almost nothing.

The Winklevosses and Narendra, Harvard classmates of Zuckerberg, sued him after he launched Facebook, claiming he had done work for their project and then stolen code from it to start Facebook. They reached a settlement last summer in which Facebook agreed to acquire ConnectU for cash and stock — $20 million in cash and 1.25 million shares of Facebook. But then they fired their former lawyers, Quinn Emanuel, amid a contest over legal fees, the value of the settelement, and new evidence they said they’d discovered.

Based on the price Microsoft paid for its 1.6 percent stake in Facebook in the fall of 2007, the stock component of that settlement was worth $45 million. Quinn Emanuel is seeking $13 million in a contingency fee — 20 percent of the total take, which is $65 million as far as ConnectU’s former lawyers are concerned.

But the appraised value of the stock last summer was far less — $11 million, based on a valuation Facebook sought for its own stock-option plan. That’s $34 million of $65 million gone.

Even on that lower value for the stock, plus the cash, ConnectU’s founders owed taxes. (We hear the deal was structured as a taxable acquisition.) Assuming a capital gains rate of 15 percent and a negligible cost basis for the startup, 15 percent of $31 million. That rounds up to $4.7 million.

Their lawyers want $13 million, leaving them with $2.7 million from the cash component — which they have likely already spent in legal fees.

What about those 1.25 million shares of Facebook? They are essentially worthless. If they could sell them, they would likely get $2.50 to $3 a share. But Facebook recently changed its bylaws to forbid private transfers of its stock without board approval. ConnectU’s founders cannot sell them, nor can they give them to their lawyers in lieu of cash, without Facebook’s okay. And it is hard to imagine a board of directors essentially controlled by Zuckerberg voting to make life easy for his college rivals. Unless Facebook sells or goes public — both unlikely prospects in the short term — ConnectU’s founders have no way of realizing value from their stake. So we can discount their $11 million in notional value from the ConnectU take.

What’s left: $2.7 million.

Which explains why the Winklevosses are dragging this thing out. After years of fighting in court, they have essentially nothing to show for their troubles. They come from a wealthy family. Their father, Howard, has a fortune from his company, Winklevoss Technologies, which makes software for analyzing pension plans. So they can afford to fight, and it’s not like they need Mark Zuckerberg’s money. But how else do the rich keep score?

In my personal opinion, the bigger Facebook gets, the more it reminds me of Microsoft. I’d rather like to see Google take Gmail social, while Facebook becomes completely obsolete.

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