The Facebook Effect Part 4

In those days the Crimson Crimson kept several large ruled ledger books on a shelf in its newsroom. Articles from each day's paper were pasted into the books, and staffers wrote comments about them right there. In another book they wrote anything that was on their minds. "I vividly remembered that every time any of us would walk into that room we would read every word written in those ledgers and write our own comments," says Graham. "I have often thought about the power of those comment books and wondered whether there was some way to replicate them in a place like this." (At his newspaper, that is.) "When I heard Mark describe the idea of Thefacebook, I thought 'Oh my G.o.d, I see exactly what he is shooting for.'" Graham was then deeply immersed in efforts to build the Post's own Web businesses. kept several large ruled ledger books on a shelf in its newsroom. Articles from each day's paper were pasted into the books, and staffers wrote comments about them right there. In another book they wrote anything that was on their minds. "I vividly remembered that every time any of us would walk into that room we would read every word written in those ledgers and write our own comments," says Graham. "I have often thought about the power of those comment books and wondered whether there was some way to replicate them in a place like this." (At his newspaper, that is.) "When I heard Mark describe the idea of Thefacebook, I thought 'Oh my G.o.d, I see exactly what he is shooting for.'" Graham was then deeply immersed in efforts to build the Post's own Web businesses.

He was amazed to hear how many hours users were spending each day on Thefacebook. He was also somewhat amazed by Mark Zuckerberg. "Mark was ever so slightly more awkward than he is now," continues Graham. "If you said something he would pause and think about it before he'd comment or react. But every single thing he said in the course of that conversation made a lot of sense. It was remarkably impressive for a twenty-year-old."

Graham began recounting a bit of the company's history, and Parker remembers him saying something like "... and then a man named Warren Buffett came into our lives." Neither Zuckerberg nor Parker knew much about the Graham family before their visit, but they had heard of Buffett, the legendary investor and one of the world's richest men. The Berkshire Hathaway company, run by Buffett, has been a large investor in the Post since the 1970s. "He said the arrival of Buffett was a transformative moment in the life of the company," says Parker. Graham explained that the Post was able to take a very long-term view of its corporate strategy, both because the Graham family controls a huge portion of its voting stock and because Buffett has made clear he intends to hold his shares for the long term.

At some point in their conversation, Graham made an offer more spontaneous than any he says he had ever made before or has made since. He recounts it: "I said, 'Mark, in the end you will not do this, but if you wanted an investor who wasn't a venture capitalist and wouldn't pressure you in any of the ways VCs normally do'-he had talked a little about how he did not want to go that route-'we'd probably be willing to invest.'"

Zuckerberg was deeply impressed with how Graham thought about business. He explains: "A lot of VC firms had approached us, but I didn't want to play this whole Silicon Valley game of-take VC money, try to go public or sell the company really quickly, bring in professional management on an accelerated time scale-things like that. But the Washington Post is a completely different kind of company than these technology companies. I was just blown away by the difference in culture, that it's just such a long-term focus there, and that they're so focused on the brand of the Washington Post and the trust it has. I was just like 'Wow. I want to be more like this guy.' And that's when I seriously started thinking about doing another [investment] round. And I was looking forward to doing it with them. Don was a guy I could work with." Graham stayed ninety minutes, far longer than he had planned. When he finally had to get up to go, Zuckerberg rose as well. The twenty-year-old looked Graham in the eyes. "You're cool," he said. Graham smiled broadly.

Things began moving quickly after that. The Post Company sent another, larger delegation out to Palo Alto. The top managers of the Post's online division joined the trip-including newly named CEO Caroline Little, along with the vice presidents for finance and business development. Little says Thefacebook seemed like a potential gold mine. "Mark was kind of against ads, as far as we could tell," she says. "But I just sat there salivating and thinking how easy it would be to monetize this. I had to bite my tongue because Don didn't want to hear it."

Sean Parker interpreted the turn in Zuckerberg's att.i.tude toward investment as a license to more aggressively beat the bushes and see what else was out there. "I thought we should be valued at half a billion dollars even then," Parker says now, a bit bombastically. "It was pretty obvious to us that we were taking over the world." But in reality, at this point even Parker was talking about a relatively low valuation. His friend Seth Sternberg (now CEO of messaging company Meebo) recalls Parker asking for valuation advice. Though Sternberg was only twenty-six, he had worked in corporate development at IBM, so his opinion counted. Sternberg recommended shooting for a valuation of at least $40 million. So Parker raised his expectations to a target range of $4060 million, company doc.u.ments show. Anything like that would be phenomenal for a year-old company led by a twenty-year-old with seven employees and annualized revenues of less than $1 million. But Parker was wrong. He got more.

As soon as word got out that Thefacebook was contemplating an investment, the Silicon Valley greed machine kicked into high gear. Inquiries started pouring in. Cell phones at Thefacebook rang incessantly. Ron Conway, one of the most connected men in Silicon Valley and a veteran angel investor, was giving Parker advice about who to talk to and what to say. He was also making email introductions to established Silicon Valley companies and key venture capital firms. (Zuckerberg now says he didn't know about most of this activity at the time.) Investor interest was further heightened when the when the Los Angeles Times Los Angeles Times wrote a front-page story about Thefacebook on January 23, the first big story ever about the company in a major media publication. wrote a front-page story about Thefacebook on January 23, the first big story ever about the company in a major media publication. SITE INTRIGUES COLLEGIANS ACROSS U.S., SITE INTRIGUES COLLEGIANS ACROSS U.S., read a headline. "Clever, goofy, or profane, the website has a powerful hold on its members," Rebecca Trounson wrote, "most of whom log on to it almost every day." read a headline. "Clever, goofy, or profane, the website has a powerful hold on its members," Rebecca Trounson wrote, "most of whom log on to it almost every day."

Parker got his friend Sittig, now Thefacebook's design guru, to design a few PowerPoint slides and started meeting with potential investors. The six-page presentation was modest but compelling. It claimed Thefacebook had 2 million active users (this was mid-February) and was deployed at 370 schools. But what got investors' attention was the data about how engaged users were. An amazing 65 percent of them were returning to the site daily, and 90 percent came back at least once a week. Growth was so torrid that it occasionally hit 3 percent per day.

What most wowed those who saw the presentation was a simple growth chart. Parker and Sittig had designed it to afford a little drama. At first Parker would put up a chart showing colleges where the service had opened. It looked like a staircase, because Thefacebook opened schools in batches and then didn't add new ones for a while. Then another slide would overlay on top of the school chart. It showed the trend in total users. Vividly apparent was a correlation between opening schools and growth in users. After each step in the staircase of schools, the number of users leapt upward with minimal delay. That implied the possibility of near-guaranteed growth, at least until Thefacebook saturated the available population of 16 million American college students.

The simple business plan Parker presented explicitly avoided mentioning conventional Internet banner ads, even though they had been the primary source of the little income Thefacebook had gotten thus far. Page four of the PowerPoint was t.i.tled "Local Advertising." It projected that on-campus text-based "flyers"-used by campus organizations to announce events-would yield net sales of $3.65 million a year if Thefacebook was at 400 schools. But the separate, yet-unlaunched local advertising product-the one Parker had hired Ezra Callahan to spearhead-was projected to be much bigger, yielding annual sales of $36.6 million. That a.s.sumed sixty businesses would advertise at each of 400 schools, offering students discounts, coupons, etc.

Then there was a page of sheer marketing chutzpah. The presentation touted what it called "AdSeed," defined as "Google AdSense for social networks." Google's AdSense is a program that gives websites revenue in exchange for allowing the search company to place textual advertising on their pages based on the content there. At the time it was beginning to take off. With the AdSeed name Thefacebook was trying to feed off Google's buzz. The slide explained: "Products, brands, and media properties (movies, books, music) receive a 'home' in social-s.p.a.ce." At the time, Thefacebook was just beginning its lucrative arrangement for Apple's sponsored page, and that was the model. The slide claimed Thefacebook was at that time making $40,000 a month from pilot customers for AdSeed. The name, by the way, was never actually used.

By February 9, twelve venture capital firms, four major technology companies, and the Post were actively pursuing Thefacebook for some kind of deal, according to a company doc.u.ment. Parker had decided not even to pursue investors who needed convincing. A few well-known outfits were out of the running. Kleiner Perkins and Benchmark, two of the Valley's most eminent firms, were both already up to their ears in social networks thanks to their troubled investments in Friendster. Neither wanted anything to do with Thefacebook.

For all the impressiveness of the PowerPoint data, there remained significant skepticism toward Thefacebook. After all, the only way any potential investor could even log on and take a look was with an alumni email address from their alma mater. A limited-access consumer website was something new. Then there was the personnel matter-an inexperienced twenty-year-old CEO and a partner with a profligate reputation.

But even as the talks with the Post and others were heating up, Thefacebook needed money right away. Parker decided to borrow some more from his friend Maurice Werdegar at WTI. The initial $300,000 credit line had been used up after less than two months, even though it was expected to last for eight months. Parker wanted to borrow another $300,000. But he and Werdegar couldn't agree on how to value the accompanying warrants that would give WTI the right to purchase Thefacebook's stock. WTI typically only invests following a financing by venture capitalist firms, and the prices of its warrants are typically pegged to what the VCs have already paid. It had stretched its practice somewhat by putting money in alongside an angel investor like Thiel.

Werdegar thought WTI was taking a significant risk, because after this loan its total outlay for Thefacebook would be $625,000, counting both loans and the $25,000 equity investment. He wanted the warrants attached to this new loan to be priced at the same level as the ones for the first one only months earlier-the price that Thiel had paid for Thefacebook's stock.

Parker started talking about how great the company's next fund-raising round was likely to be, which meant that WTI would be very likely to be repaid with little difficulty. If that was true, the risk was small. Parker wanted the warrants to be priced based on the upcoming venture capital round. Parker said the valuation was likely to be at least $50 million, which Werdegar found ridiculous. Parker also a.s.serted that an investment was imminent. Werdegar didn't believe him.

So they made a bet. Written into the loan's terms was a provision that if Thefacebook closed a venture round of $2 million or more by May 15, 2005 (about three months later), WTI's warrants would enable it to purchase a fixed number of shares of stock at a slightly lower price than whatever the venture capitalists paid in the new round. However, if Thefacebook failed to make the deadline. WTI's warrants would enable it to pay much less-something much closer to what Peter Thiel (and WTI itself) had paid in the earlier investment round. The $300,000 Parker borrowed this way paid for most of the servers the company bought that spring as membership burgeoned.

In late March, as talks with the Post continued, Viacom entered the picture out of the blue. It expressed interest in buying the entire company for around $75 million. It wanted to combine Thefacebook with MTV.com. That was a complete surprise to everyone at Facebook. The overture was testimony to how much buzz was starting to surround Thefacebook. If Zuckerberg accepted such an offer, he would have put about $35 million in his pocket for a year's work. But that didn't matter to him. He had no interest in selling. Nonetheless, the existence of such an offer took a while to digest. At least one company adviser urged Parker to take it. He and Moskovitz would have gotten close to $10 million each He and Moskovitz would have gotten close to $10 million each.

After some back-and-forth, the Post in late March sent Thefacebook a term sheet for a very rich deal. It would invest $6 million for 10 percent ownership, after which Thefacebook would carry a value of $60 million. That's what's called in VC lingo "$54 million pre"-or before the investment: $60 million minus $6 million. Parker was thrilled. This was better than he'd hoped for. He called up adviser Conway in San Francisco. "My G.o.d! $54 million pre?" the excitable Conway shouted into the phone. "Take it! Close that sucker!" But Parker and Zuckerberg weren't in any rush. Zuckerberg's well-connected new aide Matt Cohler was urging his colleagues to keep talking to venture capitalists. Many started calling him at all hours seeking a chance to invest as soon as they heard he'd joined Thefacebook.

In any case, there was still haggling to be done with the Post. Its negotiators wanted a board seat, but Zuckerberg and Parker didn't want to give it to them unless it would be held by Graham himself. Graham thought that would be inappropriate given that his newspaper, with which he was then closely involved, might be covering Thefacebook. Zuckerberg talked it out with him by phone and they pretty much wrapped up a deal that didn't include a board seat.

The Accel Partners venture capital firm in Palo Alto was looking for a big new score. It had done a number of hugely successful investments in the previous decade. It had made its mark in the 1990s with a series of big telecommunications and software investments that paid off, like UUnet, Macromedia, RealNetworks, and Veritas. Now Internet opportunities were reemerging, but it didn't have a major consumer Net play. Some in Silicon Valley were muttering that Accel had lost its mojo.

In the aftermath of the dot-com crash of 20012002, Accel had reduced the size of its funds, returning money to investors unused. But by the end of 2004 it was again raising money-a new fund of $400 million. Yet some of its longtime investors were unhappy that Accel was continuing to charge more for its services than most VCs-a 2.5 percent management fee and 30 percent of any profits. Among those who decided not to continue with this latest fund was the endowment fund of Harvard University. As things turned out later, Harvard would thus end up without a stake in the creation of one of its most entrepreneurial former students.

Jim Breyer, Accel's co-managing partner, was eager to prove the firm's mettle to its latest investors. Optimism was returning to Silicon Valley, and now was the time to start taking risks again. With thick black hair, a back slapping sense of good cheer, and piercing blue eyes with which he often wryly yields a sort of knowing wink, Breyer is by nature upbeat. He likes to laugh and to share a confidence. He is a lover of music ("from Bach to Nirvana," he likes to say) and art (he collects paintings by everyone from Pica.s.so to Gerhard Richter). And his bona fides as a master of the universe are impeccable. He is deeply embedded in the elite of American businesss-a member of the board of directors of Wal-Mart, no less. Breyer, the largest investor in Accel, knew the Internet was turning around.

Kevin Efrusy was a princ.i.p.al at Accel, not yet a partner-a venture capitalist in training. His mandate from Breyer: get out there and find Internet companies that could grow huge. The firm's latest interest was social networking. Accel methodically identifies the central trends at any given time, and creates a short list, which it calls its "prepared mind initiatives." One of the three at this point was "social and new media applications." But the problems with Friendster and other networks made the entire business seems risky. "Social networks sort of had this dirty name," says Efrusy, referring to a reputation for s.e.xual material and rambunctious members. "But we'd talked about whether it was possible to keep one clean and relevant to certain demographics." He's a big, balding guy with the friendly but intense and slightly aggressive manner not uncommon among venture capitalists.

Breyer had gotten Accel close to an investment in a company called Tickle, which had been shifting its business from offering clever quizzes like "What breed of dog are you?" to becoming a true social network. By early 2004 Tickle had become By early 2004 Tickle had become the second-largest social network after Friendster, with two million members actively connected to others and exchanging messages. Accel prepared a term sheet, but Tickle's board decided to sell it to job-hunt website Monster.com instead in May 2004. An Accel partner named Peter Fenton had tried to get Accel to invest in Flickr, a photo-sharing site with some social networking features. Again, it agreed on a term sheet for the deal. But before Accel could complete that deal, Yahoo swept in and bought Flickr. Then in December 2004 Chi-Hua Chien, a Stanford graduate student doing contract research for Accel, told Efrusy about Thefacebook. the second-largest social network after Friendster, with two million members actively connected to others and exchanging messages. Accel prepared a term sheet, but Tickle's board decided to sell it to job-hunt website Monster.com instead in May 2004. An Accel partner named Peter Fenton had tried to get Accel to invest in Flickr, a photo-sharing site with some social networking features. Again, it agreed on a term sheet for the deal. But before Accel could complete that deal, Yahoo swept in and bought Flickr. Then in December 2004 Chi-Hua Chien, a Stanford graduate student doing contract research for Accel, told Efrusy about Thefacebook.

The two did a little research and Efrusy got hold of an alumni email address from Stanford, his alma mater. When he got on Thefacebook he was impressed. "They essentially had the rope outside the nightclub," he explains. "The context was there for you. It was in your college. It was Facebook Stanford, not Facebook worldwide." But Efrusy saw a problem-what kind of business would it be to run a social network for people who had no money? Then a former business school cla.s.smate explained that college students were a precious demographic for marketers. It's there that critical lifelong buying habits are formed-your first car, bank account, credit card. "But at college there was no way to reach you," says Efrusy of what he learned as he continued his research. "College was a black hole. You stopped watching TV. You stopped reading the newspaper." Thefacebook might be a way around that.

Efrusy heard how quickly Thefacebook was growing. Through a friend who had interviewed for a job at Thefacebook he got an appointment to talk by phone with Parker. Parker canceled. Then Efrusy heard Matt Cohler had joined Thefacebook. He had met Cohler at LinkedIn. Efrusy called, asking for an introduction to Parker. Cohler replied politely that the company wasn't interested in talking to venture capitalists. Then a month or so later one of Accel's partners, Theresia Ranzetta, heard that Thefacebook was talking to other VCs about raising money. Efrusy decided he had to meet these guys. After all, they were right in the neighborhood. He emailed. No response. He called. Sean Parker wouldn't return his calls.

Efrusy isn't easily deterred. He learned Reid Hoffman was an investor in Thefacebook. So he asked Accel partner Peter Fenton, who was close to Hoffman, to call and ask Hoffman for an introduction. Hoffman also demurred. He said that Thefacebook guys thought dealing with venture capitalists would waste their time because they wouldn't really understand Thefacebook and wouldn't be willing to pay what it was worth. Of course, by that point Parker was already talking seriously to several VCs. He was just deliberately avoiding Efrusy. He'd heard that Accel had lost its mojo and didn't want to deal with them. Zuckerberg, for his part, was focused on the potential Post investment. He was only half aware of how much time Parker was by now spending courting VCs.

Efrusy asked Fenton to go back again to Hoffman. This time Hoffman relented and agreed to arrange a meeting with Parker and Cohler, who was doing much of the day-to-day managerial and organizational work for the financing. However, Hoffman insisted Fenton promise that Accel wouldn't try to come in with a lowball offer. Thefacebook was pretty far down the road with a possible strategic investor, he said.

Typically the entrepreneur goes to the office of the VC, deferentially seeking funds. Efrusy spoke again with Cohler, Hoffman's former employee, and invited him to bring his partners to Accel's offices. But even then the guys of Thefacebook put Efrusy off. "He was hounding us," Cohler recalls. Efrusy had been at Accel for less than two years. He hadn't yet done a major deal of his own. He needed to prove himself.

Finally, on Friday, April 1, 2005-April Fool's Day-Efrusy decided to just go to their office. Parker had said he'd be there. Efrusy didn't realize it, but his timing was superb. The Post talks had not quite concluded because of haggling over the board seat. Efrusy walked four blocks down Palo Alto's University Avenue to an office Thefacebook had just rented on Emerson Street, about a mile from Stanford. He brought along Arthur Patterson, the tall, gray-haired, patrician co-founder of Accel, who was curious to learn why Efrusy was so excited about this little start-up. They walked up a long stairway, newly spray-painted with graffiti art. At the top was a giant, suggestive image in Day-Glo colors of a woman riding a giant dog. In the large open loft s.p.a.ce, the company hadn't finished moving in. There was more in-your-face multicolored graffiti art all over the walls, including a few nudes. The furniture was in various states of a.s.sembly. A couple of days earlier, Thefacebook had inaugurated the s.p.a.ce with a blowout party for Cohler's twenty-eighth birthday. Half-filled liquor bottles were scattered everywhere.

Parker had said he'd be there, but he wasn't. And Cohler and Moskovitz, who were, were hardly ready for a serious financial meeting. They were struggling to a.s.semble do-it-yourself furniture they'd bought at Ikea. Moskovitz had hit his head on a piece of furniture and his forehead was bleeding. Cohler, usually well put together, had caught his jeans on a nail. His left pant leg was hanging open and his boxer shorts were sticking out. "Hey Kevin," Cohler greeted Efrusy.

The chaos didn't deter Efrusy. He was a man on a mission. "Our meeting was just with Matt initially," he recalls. "Sean and Mark were unavailable or sick or something. So Matt took us through the business. He was very articulate about the statistics and the repeat usage rate. I already kind of knew it, but Arthur was pretty excited. Then Sean and Mark showed up-not sick, eating burritos.

"I knew they thought we'd take too long asking questions. I said 'Hey, here's the deal. I get how valuable this could be. Come to our partnership meeting on Monday, and I promise I'll either give you a term sheet by the end of the day Monday, or you'll never hear from me again. I will not drag this process out. We can move quickly.'"

Before they left, Parker did get excited about one thing. He proudly led Efrusy and Patterson into the girls' bathroom. There he pointed to another mural, this one done by his girlfriend. It showed one naked woman embracing the legs of another. Up in a tree a French bulldog puppy looked down on them. Efrusy was nonplussed. "Sean, won't this make women uncomfortable? Aren't you worried about hara.s.sment or something?" he asked. "Look," Parker replied. "I'm not going to worry about that." Then Efrusy convinced Parker to meet him for a beer the following evening, a Sat.u.r.day.

As Efrusy and Patterson were walking back to their office, Patterson slapped him on the back and said, "That was great fun. Really interesting. We have to do this." Patterson was known inside the firm for his tough-minded skepticism. This wasn't like him at all.

Over the weekend Efrusy's research went into high gear. Midday Sat.u.r.day he and his wife went to Stanford and hung around Tresidder Memorial Union, the campus student center. Efrusy collared students to ask them what they knew about Thefacebook. Did they use it? How ubiquitous was it, really? The answers were what he'd hoped for. "Have I heard of it? I can't get off of it." "I don't study. I'm addicted." "Everyone's on it. You stay in touch with friends at other schools. Then all the professors get on there. It's become sort of the hub of my life."

Efrusy called the younger sister of Accel's CFO, a soph.o.m.ore at Duquesne University in Pittsburgh. "She's like 'Oh yeah, Thefacebook. It came here on October twenty-third.' I was like 'You know the exact date?' She's like 'Of course. We were on the waiting list for months. We were number seven on the waiting list.' I'd never heard of anything like this. She remembers the date it was turned on. There was this rabid, pent-up demand. I talked to my wife and said, 'I've got to invest in this company.'"

That night he met Parker and his girlfriend as well as Cohler at the Dutch Goose, a grungy Stanford student dive. The talk quickly turned to money. "Kevin," Parker began, "we think this is a really valuable company. You're not going to want to pay the valuation." Efrusy begged just to be given a chance. That was exactly the reaction Parker had hoped for. Efrusy again urged Parker to come Monday morning, and to bring Zuckerberg. He was not at all sure they would show up.

But on Monday at 10A.M., Zuckerberg, Parker, and Cohler appeared. Zuckerberg wore a T-shirt, shorts, and his Adidas flip-flops. Parker and Cohler opted for the T-shirt-under-sports-jacket look. They didn't bother showing the slides they'd displayed at other VC firms. Parker did most of the talking. It was a masterfully self-conscious display of reticence, aiming to hook Accel hard. Zuckerberg himself said very little. Then they left.

"So what do you guys think?" Efrusy asked his partners. One of the senior ones piped up. "It sounds like you've got a lot of convincing to do," he said. "Okay, but let's put that aside for a second. Do you like the business?" Efrusy asked. The room was unanimous. They did. There wasn't any debate. Patterson was enthusiastic. So was Jim Breyer. But while, as usual, Parker had presented Thefacebook's pitch, Breyer had made a critical discovery while watching the boys demonstrate Thefacebook's site. "First page of the website," Breyer wrote in a note to himself, "this is a Mark Zuckerberg company. Mark Zuckerberg is the guy." Until that moment, it had not been clear to Accel-or to any of the company's prospective investors aside from Don Graham-that Zuckerberg was the decisionmaker upon whose opinion a deal would rise or fall. Efrusy had barely met Zuckerberg. During the presentation Breyer had asked Zuckerberg to talk a bit about his background and his vision for the company, and Zuckerberg talked for only about two minutes. Since the founder's presentation is usually the most compelling part of any pitch to VCs, this reticence was noteworthy and confusing.

The Accel partners' meeting quickly turned to a strategy-how could Efrusy get Thefacebook to take Accel's money? Parker had told them that Thefacebook just about had a deal with the Post, and he roughly outlined the Post's deal terms. They decided to get a deal proposal over there fast. Efrusy and Breyer had Accel's lawyer draw terms up for an investment valuing the company at the same price as the Post had but putting in slightly more money. Efrusy got it to Thefacebook that evening. Late that night Efrusy got an email from Cohler saying thank you, we're sticking with the Post. But separately, and unbeknownst to Parker and Cohler, Breyer that evening began an email dialogue directly with Zuckerberg. The VC suggested they try to get together again the following day, Tuesday.

In reality, Parker was glad Accel was so interested. It enabled him to test the waters with the other venture firms that were still in the game. Maybe Thefacebook shouldn't do the Post deal after all. The next morning he spoke with Tim Draper of Draper Fisher Jurvetson, who said he was willing to match Accel. Parker told Efrusy that when he called a few minutes later. Efrusy suggested he might go higher and threw out a few numbers. Parker is a good negotiator, shameless. And he was excited. "No way!" shouted Parker, he recalls. "There's no way we're considering that. We want one hundred pre!" Then he hung up on Efrusy. The boys, all listening in by speakerphone, giggled.

Back at Accel, Efrusy was huddling with Jim Breyer, who wanted this deal as badly as Efrusy did. Breyer had come to see Thefacebook as something unique-a company with a kind of potential that he'd rarely felt before. They really wanted this deal to happen, and they were willing to pay to get it. But if Thefacebook wanted to go with the Post, maybe there was a way to get in on it. Breyer knew the Post's Don Graham-they'd served on a company's board together. He was sitting at lunch at his favorite restaurant, the Village Pub in Woodside, talking to one of Accel's largest investors, when his a.s.sistant finally succeeded in connecting with Graham. Breyer excused himself and stepped outside.

"Don, I understand you are talking to Thefacebook about an investment. They've also come and presented to us. We'd love to figure out a way to work with you, and split the investment 5050," said Breyer.

"I don't think I'm authorized to do that, Jim," responded Graham. "These are the terms Mark asked for. I think we already have a deal."

"I know you have an offer on the table, but I don't think you have a deal yet," replied Breyer. "We would be happy to invest together with you if you chose to do that."

As he was leaving after lunch, Breyer made a 7 P.M. P.M. reservation at the same restaurant for dinner that night. After he got back to the office, he and his partners huddled and decided to take Accel's bid considerably higher. Tuesday afternoon, Efrusy and Accel partners Theresia Ranzetta and Ping Li walked back down University Avenue and barged uninvited into Thefacebook's office, where everybody was in the middle of a meeting. Efrusy just walked in and interrupted. "He slapped the term sheet down on the table. It showed an offer for $70 million pre, with a $10 million investment. That would make the postinvestment valuation for Thefacebook $80 million. "You've got to do this," Efrusy implored. "We get this. We have full conviction about it. We will move heaven and earth to make this a successful company." A slightly stunned Parker replied, "Okay, this is worth considering." Before he left, Efrusy noticed that the office's murals had seen some slight editing. On all the most strategic spots, someone had laid the tiniest pieces of masking tape. reservation at the same restaurant for dinner that night. After he got back to the office, he and his partners huddled and decided to take Accel's bid considerably higher. Tuesday afternoon, Efrusy and Accel partners Theresia Ranzetta and Ping Li walked back down University Avenue and barged uninvited into Thefacebook's office, where everybody was in the middle of a meeting. Efrusy just walked in and interrupted. "He slapped the term sheet down on the table. It showed an offer for $70 million pre, with a $10 million investment. That would make the postinvestment valuation for Thefacebook $80 million. "You've got to do this," Efrusy implored. "We get this. We have full conviction about it. We will move heaven and earth to make this a successful company." A slightly stunned Parker replied, "Okay, this is worth considering." Before he left, Efrusy noticed that the office's murals had seen some slight editing. On all the most strategic spots, someone had laid the tiniest pieces of masking tape.

After Efrusy left, the young entrepreneurs looked at one another in jubilation. Eighty million? Amazing! "But what about the Post?" Zuckerberg asked. n.o.body had a good answer, but they were being offered a deal that valued Thefacebook at $80 million!

But it wasn't a clear-cut decision. On one hand Graham was a believer in the company and would let Zuckerberg and Parker do what they wanted. Though nothing had been signed, Zuckerberg had come to an oral agreement with Graham for a deal at the lower valuation. If Accel invested it would be very intimately involved, which might mean less freedom. Its offices were only three blocks away. But it also might mean more Valley wisdom and connections. Parker had no attachment to doing a deal with the Post, and Matt Cohler, the most experienced of them all, felt strongly they should raise as much money as possible. The tide was shifting toward Accel. The VC firm's term sheet explicitly provided for the possibility that the Post might invest alongside them, but there was little interest at Thefacebook in that, partly because it would have involved selling too much of the company.

With a few calls Parker determined that neither Tim Draper nor any of the other remaining VCs were willing to follow Accel to this level. It was down to Accel and the Post.

That night, Jim Breyer hosted a dinner for Thefacebook's leaders at the elegant and expensive Village Pub near Breyer's home in tony Woodside, north of Palo Alto. At the table were Zuckerberg, Parker, Cohler, and Efrusy. The Pub is known for its wine list, and Breyer, a wine connoisseur, ordered a $400 bottle of Quilceda Creek Cabernet. Zuckerberg, still only twenty and below drinking age, ordered a Sprite. The point of the dinner was in part for Efrusy and Breyer to get better acquainted with Zuckerberg, who had been mostly quiet in their meetings up until then.

Breyer by now had made known his own Harvard connection-he'd gotten his MBA there. He was even on the board of trustees of the Harvard Business School. Breyer was doing everything he could to loosen Zuckerberg up. There was some serious talk about strategy, and Breyer and Efrusy reiterated in the strongest terms how much they wanted to invest and work with Zuckerberg and his team. Breyer was starting to admire the young CEO's clearheaded way of thinking about strategy and his absolute devotion to the quality and usefulness of Thefacebook's product. Yet it was clear Zuckerberg remained uncomfortable about something. Then he started to tune out.

People often think Mark Zuckerberg isn't listening to them. He has a way of saying nothing and appearing uninterested. He does not offer the body language or nods or other conventional conversational signals that tell someone he's listening. However, that usually doesn't mean he isn't listening. He's just unemotive and quietly pensive. On the other hand, there are times when he really doesn't listen. It happens when he's either bored or very uncomfortable. On those occasions, he will repeatedly, at fairly random times in the conversation, simply mutter, "Yeah." This distinction is only apparent to people who know him well. In the middle of the dinner at the Village Pub, Zuckerberg went into nonlistening mode. Matt Cohler noticed.

Zuckerberg went to the bathroom and didn't return for a surprisingly long time. Cohler got up to see if everything was okay. There, on the floor of the men's room, sitting cross-legged with his head down, was Zuckerberg. And he was crying. "Through his tears he was saying, 'This is wrong. I can't do this. I gave my word!'" recollects Cohler. "He was just crying his eyes out, bawling. So I said, 'Why don't you just call Don up and ask him what he thinks?'" Zuckerberg took a while to compose himself and returned to the table.

The following morning, he did call Graham. "Don, I haven't talked to you since we agreed on terms, and since then I've had a much higher offer from a venture capital firm out here. And I feel I have a moral dilemma," Zuckerberg began.

Graham had already talked to Breyer, so he was disappointed but not surprised. But he was also impressed. "I just thought to myself, 'Wow, for twenty years old that is impressive-he's not calling to tell me he's taking the other guy's money. He's calling me to talk it out.'" Graham knew that even his first offer was very high for a company so tiny and so young. He felt he had no context in which to go higher. And he a.s.sumed that no matter what he said, Accel would go even higher.

"Mark, does the money matter to you?" Graham asked. Zuckerberg said that it did. It could, he went on, be the one thing that could prevent Thefacebook from going into the red or having to borrow money.

"You know that taking their money will be different from taking our money, don't you?" Graham replied. "They will have an end in mind for you, and they will try to move you toward that result. And while we don't have the network they do, and we don't have the sophistication they do, we're not going to try to tell you how to run the company." Graham says now that "if it never went to an IPO I would have been happy. But Mark said he had thought through the disadvantages of dealing with a VC, and it was clear he preferred to do it."

"Mark, I'll release you from your moral dilemma," said Graham after a twenty-minute conversation. "Go ahead and take their money and develop the company, and all the best." For Zuckerberg it was a huge relief. And it further increased his respect and admiration for Graham.

Zuckerberg had already emailed Breyer saying he would like to meet with him one-on-one at Accel's office.

Later that morning-Wednesday, April 6-Zuckerberg walked alone over to Accel on University Avenue and sat down in Jim Breyer's small conference room. He'd come to like the affable Breyer by now, even if he hadn't been able to share his expensive wine. But Parker had been schooling Zuckerberg on the details of such investments. Turning tough, Zuckerberg told Breyer he wanted some improvements. He said if Accel raised its "pre-money" valuation to at least $75 million and if Breyer agreed to join Thefacebook's board, then he was ready to sign a deal. Efrusy was a good guy and everything, but he was junior and inexperienced. "It hurt my feelings," says Efrusy, "but I understood." Zuckerberg said firmly that if Breyer would not join the board Thefacebook would simply conclude its deal with the Post instead. For Zuckerberg, the ability to place a seasoned veteran Silicon Valley investor like Breyer by his side was the determining factor.

Breyer's priority was gaining more ownership. Accel tries to own at least 15 percent of companies it invests in. But Zuckerberg and Parker didn't feel the company needed any more money. This had come up at dinner the preceding evening, and they came up with a partial solution. Accel could invest $2.7 million more, and Zuckerberg, Parker, and Moskovitz would each take a special bonus of $1 million.

In venture capital deals like these, the investor usually forces the existing holders to dilute their ownership prior to the investment by adding a "pool" of shares that will remain unallocated, on the a.s.sumption that future employees will get some of their pay in stock options. The way it's calculated is complicated, but it has the effect of giving the VC more of the company and the entrepreneurs less. VCs typically insist that the existing shareholders of a company accept a pool of about 20 percent.

But Parker had prepared Zuckerberg for this gambit, and it was clear at dinner the night before how badly Breyer wanted to invest. So Zuckerberg refused to accept a 20 percent dilution. The two agreed on a 10 percent option pool instead. In addition, Zuckerberg would only accept half of that being applied to existing shareholders' ownership. So some of the dilution applied to Accel's money as well. "Mark negotiated really hard," concedes Breyer.

They finally agreed on a deal that would value Thefacebook at slightly less than $98 million post-investment. Accel would invest about $12.7 million-a stunning sum for such a small company. It would own about 15 percent of the company. "I knew the price was just way too high," Breyer says now, "but sometimes that's what it takes to do the deal." Breyer agreed to go on the board but asked if he could invest $1 million of his own money. The twenty-year-old and the VC shook hands. Zuckerberg left his office, and Breyer was elated.

Before they shook hands, Zuckerberg explained that there might still be a small additional investment coming, either from Graham and the Post or from Edgar Bronfman, the scion of the Seagram liquor fortune and the CEO of Warner Music. Bronfman had met Parker and Zuckerberg when they'd visited Warner Music in Los Angeles the previous fall, and despite the earlier animosity dating from Napster days, he and Parker had become friendly. Bronfman decided not to invest, though. (Had he in fact done so, his $300,000 in stock would be worth at least $20 million today.) The potential Viacom purchase offer was also still vaguely in the air, though Parker and Zuckerberg made no move to pursue it.

It took a few weeks before it was all finalized. Parker tweaked several key points. He further solidified the corporate structure that guaranteed that Zuckerberg controlled one unfilled board seat in addition to his own, and Parker occupied another. That meant that even with Breyer joining Thiel on the board, the two employees would command three out of the five board seats-a majority of votes. A complicated arrangement tied their stock ownership to their board seats. There would thus be little likelihood that Zuckerberg could lose control of his company. That Accel agreed to this is further testimony to how badly Breyer wanted this deal. It also attests to his faith in Zuckerberg. By now Breyer had become a believer in the young CEO, whom he says he already thought of as "a product genius." Some of his colleagues thought Zuckerberg might ask his father to take the empty seat. He had often instant-messaged him for advice during the funding process. But for now, the seat stayed empty.

Several aspects of the financing of Thefacebook were unusual. First, the sheer size of the valuation was unprecedented for an Internet start-up. Even Google's first big investment valued the company at less than $75 million. The bonus payments to the three young men at Thefacebook were kept quiet, partly because it's generally considered best in such situations if the company gets all the funds for its own purposes. In fact, so rare is such a bonus for company founders that Silicon Valley veterans cannot recall another one. As for the bet with lender WTI, "I won," chortles Parker. WTI's warrants ended up costing ten times as much as they would have if WTI's Werdegar had won the bet. But he remained a fan of Parker and the company. In July Werdegar extended yet another loan to Thefacebook, this time for $3 million, again exclusively to cover the cost of computers and other hard a.s.sets.

When Eduardo Saverin, Zuckerberg's erstwhile partner in founding Thefacebook, heard the terms of the Accel deal, he hit the roof. His share in the company, which in the summer had been 34.4 percent, had now been diluted by the additional investments and restructuring to below 10 percent. He claimed he hadn't realized this was going to happen, threatened to sue, and so forth. But since the reorganization he didn't have much leverage. Ezra Callahan had by now learned how to do all Saverin's advertising work. An outraged Saverin stopped doing any work for Thefacebook (though he kept his stock). Zuckerberg turned off his email, and Y2M was instructed to have no more to do with him.

Zuckerberg, Cohler, and Moskovitz were in awe at Parker's prowess as a negotiator. It had been a textbook case of fund-raising success. Looking back, Cohler says, "Parker was absolutely the lead on those negotiations. People now don't realize how important he was to the company. He did an outstanding job." Zuckerberg has told friends he has never seen a more amazing sales job than the one Parker did with Accel.

The day of the biggest deal in Mark Zuckerberg's young life ended in frightening anticlimax. He had signed the papers to close the Accel investment. He was now a millionaire. But late that night his impulse to keep celebrations to a minimum was almost absurdly reinforced.

Zuckerberg's girlfriend at the time was a student at Berkeley. In the wee hours he headed there to see her. On the way he stopped in East Palo Alto to get gasoline for "the Warthog," his shiny new black Infiniti. This neighborhood was much poorer than the rest of Palo Alto. The gas station was desolate. As he filled his tank a young man approached him, holding a gun. But he was so drunk or drugged he could barely stand. He had trouble speaking clearly enough to demand money. A terrified Zuckerberg took a calculated risk. He just got into his car and drove away. Nothing happened. "I feel like I'm pretty lucky," he says. Though he referred to his escape from the gunman, it's a good general observation about creating Thefacebook, and his new funding.

Finally Thefacebook had plenty of money. Now it could build a real staff. No longer would the servers be strung together with baling wire. The real growth was about to begin.

6.

Becoming a Company.

"Being CEO in a company is a lot different than being college roommates with someone."

Suddenly there seemed no limit to what Thefacebook could achieve. Money had been removed as an obstacle. The service continued to grow rapidly among students. Any lingering doubts Zuckerberg had about Thefacebook had been vanquished. Now was the time to make it into a real company! But wait-how do you make a company?

Mark Zuckerberg and Dustin Moskovitz were still only twenty-one years old. For all their vision, creativity, and commitment, they retained the mind-set of college kids. They knew next to nothing about how to organize a business. Sean Parker, twenty-five, had been in several start-ups but detested their restrictions and was an instinctive rebel. His willful disregard for business conventions was as thorough as Zuckerberg's ignorance of them. That left Yale graduate Matt Cohler, twenty-eight, by default the old man and official level head of Thefacebook's inner circle. He had been a McKinsey consultant and a jack-of-all-trades at LinkedIn for veteran entrepreneur Reid Hoffman, so he had a pretty good idea of what start-ups were supposed to do. But this was not an ordinary company. It did not face ordinary challenges.

Facebook's first priority was hiring more people. Now there was money for it. But people weren't sure they wanted to work at Thefacebook. Most in Silicon Valley in early 2005 still saw social networks as faddish, despite the success of Mys.p.a.ce. It was unclear if they could ever be businesses. What seemed hot for Internet companies around this time was blogging and podcasting. And since Thefacebook was a closed network, any adult that Thefacebook wanted to hire couldn't easily get on the site to check it out.

Compounding these problems, the still-nascent company already had a reputation for rambunctiousness. Cohler, who quickly turned his attention primarily to hiring, tried to convince a well-known recruiter for start-ups named Robin Reed to help the company find a vice president of engineering. Reed, middle-aged with short blond hair framing a round face and a New Age propensity to wear wooden beads wrapped around her wrist, wasn't interested. "I had heard wild stories about them. It was too woolly for me," she says. "Sean Parker was quite notorious at the time." Parker's reputation for partying and his forced departure from Plaxo had stereotyped him in the Valley as a bad boy. Reed talked to friends who had already tried and failed to help Thefacebook with recruiting. "It's Lord of the Flies Lord of the Flies over there," one told her. over there," one told her.

While that-whatever it meant-was an exaggeration, a bunch of college kids was definitely in control. Zuckerberg had to be careful which business card Zuckerberg had to be careful which business card he handed out at business meetings. He had two sets. One simply read "CEO." The other: "I'm CEO...b.i.t.c.h!" Not only were college administrations all over the country up in arms over the planned national beer pong compet.i.tion, but closer to home, Tricia Black refused to join the company if it wasn't canceled. Black, the saleswoman from the Y2M advertising firm, had been begging Eduardo Saverin to hire her since mid-2004. She finally got her offer to join Thefacebook and set up an in-house advertising department. As for the office art, Parker's girlfriend's painting of the naked women and bulldog in the ladies' room got painted over soon after Accel invested its $12.7 million. he handed out at business meetings. He had two sets. One simply read "CEO." The other: "I'm CEO...b.i.t.c.h!" Not only were college administrations all over the country up in arms over the planned national beer pong compet.i.tion, but closer to home, Tricia Black refused to join the company if it wasn't canceled. Black, the saleswoman from the Y2M advertising firm, had been begging Eduardo Saverin to hire her since mid-2004. She finally got her offer to join Thefacebook and set up an in-house advertising department. As for the office art, Parker's girlfriend's painting of the naked women and bulldog in the ladies' room got painted over soon after Accel invested its $12.7 million.

Recruiting tactics weren't very professional. The main method initially was a wooden figure of an Italian chef The main method initially was a wooden figure of an Italian chef out on the sidewalk. He held a chalkboard that displayed, rather than varieties of pizza, a list of job openings like "VP of Engineering." out on the sidewalk. He held a chalkboard that displayed, rather than varieties of pizza, a list of job openings like "VP of Engineering."

Cohler's first hire was Steve Chen, a former PayPal programmer. But after only a few weeks Chen decided to leave to start a new company with two PayPal friends. It was to be a video start-up, and Cohler tried to dissuade him. "You're making a huge mistake," Cohler said. "You're going to regret this for the rest of your life. Thefacebook is going to be huge! And there's already a hundred video sites!" Chen went ahead and left to start a company called YouTube.

It quickly became apparent to Zuckerberg that Google, at the top of the Silicon Valley food chain, was Thefacebook's primary compet.i.tion for talent. After all, that was where just about every great software engineer aspired to work. Those were the people Thefacebook should be hiring. Simply learning that someone was interviewing at Google made Zuckerberg want him more.

Cohler visited his younger brother at Princeton and heard about a Google recruiting meeting there. He printed out a bunch of flyers about Thefacebook and stood by the door handing them out. Not long afterward Zuckerberg set up a card table in a Stanford computer science department building with a sign reading WHY WORK AT GOOGLE? COME TO THEFACEBOOK. WHY WORK AT GOOGLE? COME TO THEFACEBOOK. Even Adam D'Angelo had to be convinced not to take a summer internship at Google he'd been offered. Parker persuaded him to rejoin Thefacebook instead. Even Adam D'Angelo had to be convinced not to take a summer internship at Google he'd been offered. Parker persuaded him to rejoin Thefacebook instead.

After Accel made its big investment, Kevin Efrusy, who had spearheaded the deal, began visiting regularly to advise Zuckerberg. He proposed bringing on a part-time consultant named Jeff Rothschild, who had co-founded the big business-software company Veritas. Rothschild had both a deep knowledge of data centers and the maturity of a fifty-year-old. Zuckerberg realized that Rothschild could help Thefacebook prevent a Friendster-like breakdown. Efrusy suggested offering him some stock in exchange for a day a week. "Would he work full-time?" Zuckerberg asked. "No, never. He's retired," Efrusy replied. The next time the two got together, Zuckerberg proudly announced, "I got him full-time." Telling him something couldn't be done was like holding up a red flag to a bull. "I thought these guys had created a dating site," Rothschild says, recalling how fascinated with Thefacebook he quickly became. "But once I understood Mark's vision, I realized this wasn't like Mys.p.a.ce. It had nothing to do with meeting people. It was the most efficient way to stay in touch with your friends." Getting veteran Rothschild on board helped legitimize the company.

Rothschild's acceptance of Thefacebook helped Cohler persuade Robin Reed to help with the recruiting. She finally agreed to come see Zuckerberg. When she walked up the graffittied stairs to Thefacebook's Palo Alto offices at the appointed hour of 11 A.M A.M., she found the door open and the place deserted. After a while she left. Cohler spotted her on the street and brought her back. It turned out Zuckerberg had been there all along-on the roof the roof. If you stood on a table in a room they called the dorm room (it also had an Xbox and a futon), then shimmied out a window, you arrived at a big flat area on the roof covered with gravel. Beach chairs were set up. It was a favorite spot on sunny days and a place to get a little privacy for phone calls or meetings. Reed climbed out. Zuckerberg pleaded with her to undertake the engineering job search. She found the whole scene quite charming and finally agreed.

But Thefacebook had its own unique criteria for hiring. For one thing, there was a strong bias toward youth. Leaving school was considered a virtue among this crew of dropouts, iconoclasts, and autodidacts. "Why would you study it when you could be doing it?" Zuckerberg would ask graduate students he was trying to recruit. He even began to guarantee that the company would pay someone's tuition if they quit school to come to Thefacebook and later decided to go back. Cohler advertised for summer interns, then sometimes told promising applicants when they came for an interview that Thefacebook was only hiring full-timers. That forced people to consider dropping out. That's how he got Scott Marlette, a top early hire, to quit Stanford graduate studies in electrical engineering.

Adam D'Angelo, tall and soft-spoken with mussed-up hair and the concave posture of an introvert, remained the house egghead and programmer par excellence. He had long since stopped focusing on Wirehog. Now he was Thefacebook's top engineer. No matter who else they'd spoken with first, Zuckerberg always wanted candidates for important tech jobs to interview with D'Angelo. If he thought they were smart, they'd get hired.

When somebody did get hired, their first responsibility was to go buy their own laptop. There wasn't enough furniture, either. Scott Marlette sat on the floor his entire first week. Only two small tables stood in the middle of the main room, already tightly packed with other people's stuff. Later Marlette visited Ikea to buy his own desk and chair.

The site went from 3 million users in June to 5 million by October 2005. This was unbelievable growth, but even as they celebrated it, the growing Facebook staff had to work hard to keep it from destroying them. Their technology had to grow as quickly as their membership. Fighting the Friendster curse was a constant obsession. Adam D'Angelo became consumed with daily crises. He remembers what it was like: "This database is getting overloaded. We need to fix that. You can't send email. Fix that. This week we came this close to the edge. Next week it's going to hit the edge and the site's not going to work. We have to raise capacity." There were frequent drives down to the data center in Santa Clara to plug in more servers. By year-end Facebook had spent $4.4 million on servers and networking equipment in its data centers.

In the hectic efforts to keep everything operating despite all the rapid growth, many of the young engineers made serious errors. Some risked bringing down the entire site, since its underlying software code consisted of one very long file of instructions, violating elementary design protocols for such a project. (Marlette and D'Angelo later broke the code up into a more conventional segmented structure.) At one point, source code-the company's elementary intellectual property-was streaming onto student profiles. One engineer accidentally introduced a bug that briefly enabled any user to log into any account. On another occasion a summer intern made a coding error that meant that no matter which ad on the site you clicked, you were directed to only one advertiser-Allposters.com.

Dustin Moskovitz was responsible for keeping things running smoothly day to day, so anytime one of these disasters. .h.i.t it was his job to remedy it, even if doing so took all night. When confronted with a particularly stupid error he sometimes lost his cool, banging angrily on his desk and throwing things. But he always got things fixed. He commanded universal respect for his dedication and work ethic. "Dustin was always the rock," says Ruchi Sanghvi, a beatific Carnegie-Mellon computer engineering graduate with a round face and long black hair. She was the first female engineer hired by Thefacebook and for years the only one in the company's inner core.

Rothschild, trying to figure out who was doing what, discovered that all of Thefacebook's customer support was being done by a student at Berkeley working part-time from home. The student had a backlog of 75,000 customer support requests. Rothschild advertised on Thefacebook for a customer support representative and hired a recent Stanford grad named Paul Janzer. The two quickly concluded they needed a larger staff. They rustled up six more applicants. Rothschild then held a group job interview and hired them all. Even still, the queue of unanswered requests grew to 150,000 before it started dropping. People had questions about everything from how to change their profile picture to whether they could change their name once they got married.

Efrusy tried to play the role of company conscience. In return Zuckerberg gave him a business card with the t.i.tle "Chief Worry Officer." But he had cause to worry. New features weren't tested before they were inaugurated. He found it nerve-racking to sit casually conversing with Zuckerberg while he typed away on his laptop making live changes to the site.