Facebook's '$65m settliement' might be worth a lot less

A settlement by Facebook's founder to college classmates, pegged by lawyers at $65 million, contained only $20 million in cash, according to an AP report this week which also revives the issue of Facebook's real stock value.

Facebook founder Mark Zuckerberg paid the controversial settlement to former Harvard classmates who claimed he stole their idea for a social networking site. The classmates later started their own social network, ConnectU.

As previously reported in Betanews, while the amount of the settlement to ConnectU was supposed to be kept secret, Facebook's law firm recently pinpointed the figure at $65 million in a company newsletter.
But in taking a new look at the Facebook settlement this week, the AP has suggested that the value of the legal deal might actually have turned out to be a whole lot less than $65 million.

According to Michael Liedtke, an AP technology writer, Facebook fought hard to keep the details of both its own stock valuation and the legal settlement private, convincing a judge to remove reporters from a June 2008 hearing. But although large portions of the hearing were redacted in a court transcript, the AP managed to read the blacked out text by cutting and pasting that portion into another document.

In his article this week, Liedtke said results of the cut-and-paste showed that Facebook agreed to pay the plaintiffs in the suit $20 million in cash and 1,253,326 shares of common stock.

"That means ConnectU received anywhere from $31 million and $65 million for settling the suit, depending on which stock valuation is used," according to Liedtke.

In what's becoming known as the "Microsoft valuation" of Facebook's stock, Facebook had agreed in October 2007 to sell a 1.6% stake in Facebook to Microsoft to $240 million as part of a broader advertising pact. The investment by Microsoft implied that Facebook's stock was worth $35.90 a share, and this is the figure used in settling the suit last February.

However, in information that came to light last summer, the transcript of the same court hearing in June has shown that Facebook's own appraisal had valued the privately held stock at merely $8.88 per share.

"The stock was worth $45 million, based on the Microsoft valuation, but only $11 million under Facebook's own appraisal," Liedtke wrote this week.

The plaintiffs in the case -- Zuckerberg's former classmates Tyler and Cameron Winklevoss and Divya Narendra -- had begun resisting settling the case in March, upon discovering that Facebook valued its own stock at only about one-fourth as much as Microsoft's investment indicated. But US District Judge James Ware ruled to enforce the settlement despite ConnectU's argument that it had been misled about the real value of Facebook's stock.

In any event, the value of Facebook's stock is likely to have taken a beating since last June with the world economic crisis that first flared up in the fall.

AP's cut-and-paste sleuthing now makes it evident that the Facebook settlement included $20 million in cash, too. However, the plaintiffs also apparently incurred legal fees to the law firm representing them in the case, Quinn Emanuel Urquhart Oliver & Hedges. So how much did ConnectU really get?