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Facebook Ownership Challenge – Fact or Fiction?

July 25, 2010

Facebook has made a lot of news lately.  It recently acquired 500 Million members, making it the third largest nation in the worldThe Social Network, a film based on the alleged deceit and subversion during the site’s formation, is set to release October 1, and the studio has already started marketing.  I recently rejoined the site.  The most interesting bit of news, however, is a lawsuit filed by Paul Ceglia alleging he is entitled to 84% ownership of Facebook.

The claim may have some merit.  Ceglia’s allegation is based on a contract in which he agrees to give Mark Zuckerberg, Facebook’s founder, $1,000 in exchange for 50% ownership.  The contract also grants Ceglia an additional 1% for each day the software is delayed.  Based on the completion date, Ceglia is alleging he now owns 84%.

Although Facebook’s attorney said she was unsure whether the contract was authentic, Zuckerberg, in an interview with ABC’s Diane Sawyer, denied the allegation.  He said “…we did not sign a contract that says that they have any right to ownership over Facebook.” (embedded after the jump).

The lawsuit was filed in local court, where the judge issued a bizzare injunction freezing the assets of the company.  Facebook quickly rightly removed the action to Federal District Court, and got the order reversed.

In my opinion, the story seems plausible, but the timeline makes it less believable.  A college sophomore is offered a cool grand for a half-ownership project he plans to work on anyway and which he sees as a simple yearbook for fellow Harvard students.  If someone had offered me a thousand dollars when I was a sophomore, I would have given them almost anything in my possession.  Zuckerberg was probably like any other student: cash strapped and eager. 

Conversely, Facebook has 500 million members.  It was formed in 2004.  It seems like the type of thing that if you had a contract entitling you to half of the company, you’d bring it to someone’s attention instead of sitting on it for 6 years.

Assuming there is no way to quickly and conclusively prove this contract is forged, it is probably just an exercise in settlement fishing.  It wouldn’t be the first time Facebook bought it’s way out of a sticky situation.  Divya Narendra, Cameron Winklevoss and Tyler Winklevoss made a similar allegation and made out with a $65 million settlement.  Their story is roughly the story of the upcoming film, the Social Network (trailer embedded below).  They are also alleging securities fraud in an ongoing suit.

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