CHAPTER 1

Using Facebook, Twitter, and LinkedIn to Explain VC Valuation Gains and Losses

How VCs, Angels, Founders, and Employees Give Up Investment Cash Flow Every Day

“They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss—father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation—also participated.”

—Excerpt United States Court of Appeals for the Ninth Circuit Opinion, Facebook v. ConnectU

How can someone realistically use the words “losses” in the same sentence as the names of three of the most successful venture-backed companies in recent history? Indeed, these three companies, along with three or four others, will likely account for 80% of IRRs reported by all U.S. venture-capital funds started after 9/11. So how could anyone lose on one of these transactions? The obvious answer would be the parties referenced in the quote preceding this chapter, the Plaintiffs in the Facebook ConnectU case. To put a face, or set of faces, with the parties, the ConnectU side includes the twin brothers portrayed in the movie The Social Network.

DID VALUATION IGNORANCE COST CONNECTU (AND THE WINKLEVOSSES) $50MM?

With half a dozen lawyers, and a father who was an “expert in valuation,” how did the ConnectU team miss the obvious fact that it was receiving common shares that are, of course, worth less than preferred shares? ...

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