Why did founders who sold their companies to Facebook leave?

Facebook was launched on February 4, 2004 by Mark Zuckerberg along with fellow Harvard College students and roommates. Over the years, Facebook rapidly expanded and most recently had more than 2.2 billion monthly active users as of January 2018. With that massive success, Facebook went on to acquire a variety of companies, most notably, Instagram, Oculus and WhatsApp. Each of these companies achieved a lucrative exit - Instagram was sold for 1 billion, Oculus for 3 billion and WhatsApp for 19 billion. Yet, in the past year, founders from all 3 respective companies left the social media giant. Why?

Instagram
Kevin Systrom and co-founder Mike Krieger worked to create a social photo-sharing app named Instagram. It launched in 2010 and, less than two years later, was sold to Facebook for 1 billion. Yet, in September of 2018, both co-founders had announced their departure and resignation from Facebook. The duo, with a heavy dose of diplomacy, explained their resignation by stating that they required some, “time off to explore our curiosity and creativity again…” Publicly it seems that they had a friendly and mutual separation, but there have been reports about a brewing tension leading up to the founders' decision. A report by Bloomberg states that they had a disagreement about the direction the app would take, particularly around the time of Instagram Stories. If this were true, it could explain the substantial tension that led to the departure of the two original founders. I am sure that Kevin Systrom and Mike Krieger were aware that with the sale they’d lose control and direction of Instagram. It must’ve been difficult for them to make that decision but with a successful exit, Systrom and Krieger will no doubt be fine.

Oculus
Brendan Iribe was a co-founder and former CEO of Oculus – a company that focuses on virtual reality (VR). Recently, Iribe announced that he was also leaving Facebook due to “fundamental different views on the future…” Much like the Instagram founders before the acquisition, Iribe had consistent controlon over the future of his company. However, after an acquisition by Facebook, he lost that control over the direction and future of Oculus. As a side note, both the founders from Instagram and Oculus have similar resignation statements like, “recharge, reflect and be creative.” Do they have the same publicist? This is just a side note, but it goes to show that many internal disagreements are not privy to the public eye. As with the founders of Instagram, Brendan Iribe will be fine and will no doubt come up with something new in the future.

WhatsApp
The separation between Co-founder and CEO Jan Koum of WhatsApp and Facebook have been the most animated. Per the Washington Post, Koum left Facebook amid an argument over data privacy and the direction of the app’s business model. However, Koum suggested through his own press release that he took issue with Facebook’s approach to data as Koum is a devout privacy advocate. This point of contention seems to be one of the reasons why Koum decided to leave. Again, as per the other Founders, he had limited control over the direction of WhatsApp after selling to Facebook. Furthermore, the most notable point of their contention is when Koum tweeted, “it's time” along with the hashtag “#deletefacebook.” Koum out of all the previous Founders provided a little insight on the degree of conflict between the two parties.

Conclusion
The commonality between the founders of each respective company is that they had a substantial disagreement with the direction Facebook had with their original platform. Each left with a statement expressing their irrevocable differences with a diplomatic and filtered response. Though, with Koum, we could witness and extract the degree of conflict through his tweet. Furthermore, with the number of founders leaving in a relatively short period, it could indicate a possible issue with Facebook. Why aren’t they able to keep these founders? Is Mark Zuckerberg difficult to work with? Is Facebook struggling and in a desperation mode? All these questions are beyond the scope of this post, but they are valid questions for considerations by shareholders and the public. The purpose of this blog was to highlight the reasons why a founder may leave a conglomerate like Facebook after achieving a successful exit and acquisition.

Vikas Chadha is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.

Sources:
https://thenextweb.com/facebook/2018/09/25/instagrams-co-founders-are-leaving-facebook/
https://techcrunch.com/2018/10/22/oculus-co-founder-is-leaving-facebook-after-cancellation-of-rift-2-headset/
https://www.theverge.com/2018/4/30/17304792/whatsapp-jan-koum-facebook-data-privacy-encryption
https://www.entrepreneur.com/article/320792

Breakdown of the Legal Services that a Growth Start-Up Requires – A Case Study: Carbon Engineering Ltd.
In July of 2018, Carbon Engineering Ltd. (CE) announced that it had raised $11M to commercialize its technology that creates fuel from air. This was the 4th round of financing in the company’s history dating back to 2012[1] and comes just after they were able to demonstrate proof of concept at scale. The company published research showing conversion of atmospheric carbon into transportation fuel for less than USD$100 per ton with their pilot-plant in Squamish, British Columbia.[2]
CE has found significant success, as start-ups go, so far and is clearly a technology driven business. According to their website, CE owns 10 patents and patent pending applications as well as fully licenses 3 more.[3] However many hopeful entrepreneurs may be surprised to learn just how much of a start-ups legal resources – time and therefore money – relates to the area of intellectual property law. According to Professor Tingle, Bryce C. Tingle, LL.B, LL.M, Associate Professor and N. Murray Edwards Chair in Business Law at the University of Calgary, a growth start-up will generally end up with a legal budget allocated as follows:

• 60 per cent towards corporate finance;
• Only 5 to 10 per cent on intellectual property; and
• The rest to general solicitor work such as employment and contract matters.

Corporate Finance
For a growth start-up, it is a race against the clock to secure the next round of financing before the current one runs out. In this regard, CE is no exception since it has existed for approximately 6 years and is only now entering the phase where it will commercialize its technology. Therefore it safe to assume that the company has not been generating any significant sales or positive cash flows so far and has only been spending money. In this situation, the work to seek and secure the next round of financing begins immediately after the last round has closed. Even for CE, this $11M of financing structured as a convertible loan bridge was “raised in anticipation of an equity financing, which is expected to be completed as soon as possible.”[4] As much as the development of the technology and the business around it is the primary focus of the start-up, none of that can happen without the resources necessary to do it. Therefore financing is antecedent and its importance is reflected in the legal budget of a growth start-up, taking up the major share.
General Solicitor Work
For CE, partnerships continue to be crucial to the development of their technology as they’ve designed it to incorporate existing industrial equipment and practices to deliver a product that is both cost effective and scalable.[5] Examples of this include:

• CE’s air contactor structure is modelled on commercial cooling tower technology, and the design has benefited from close collaboration with SPX Cooling Technologies, a leading vendor in the industry;
• The design for CE’s pellet reactor was adapted from Royal HaskoningDHV’s Crystalactor water treatment technology, which was developed for water treatment plants;
• CE’s calciner design has been developed in collaboration with TechnipFMC, a leading provider of fluid bed systems; and
• The ability to synthesize of clean transportation fuels was enabled through a partnership with Greyrock Energy, whose gas-to-liquids platform was integrated into CE’s process.[6]

These partnerships illustrate the nature and complexity of the agreements that a novel technology may need to enter into in order to find success. Each one of these agreements must be represented with a tailor-made legal contract. And this is aside from the basic agreements made with suppliers and eventually customers.
With the success CE has had, the company has also experienced increases in its headcount. Within the last six months, they have seen a 33 per cent rise in full-time staff with new positions in virtually every department and the company plans to continue building its employee base in 2018 as it accelerates towards commercial deployment.[7] One can therefore understand how the general solicitor type work for a startup grows at a rate equal to the company overall and dictates a significant share of their legal budget.
Intellectual Property
For many growth start-ups, the technology lies at the heart of the business and is a critical component in need of protection. However intellectual property matters tend not to carry the fully repetitive nature of other legal matters. There may be an ongoing need to defend the company’s intellectual property from numerous challenges or repeated infringement. However, patent applications only need to be filed once and the company will not produce patent worthy ideas at the same rate it grows in terms of size measured in dollars spent or headcount. Therefore the weight that intellectual property law matters impose on the legal budget of a growth start-up generally pales in comparison to the other types. However, that is not to imply that they are less important.
CE may actually be exceptional in this regard. It would not be unreasonable to estimate that 20 per cent of its legal resources would be needed for intellectual property law matters, given the large number of patents related to the technology. The company also provides a topical Canadian example to examine the breakdown of the legal services that a growth start-up generally requires.

Protecting the Name of Your Business
There are basically three ways to protect your business’ name:

1. Operate your business as a sole proprietor with a trade-name, the common law will protect your right to use a trade-name that has not previously been incorporated.  However, it is then up to you to protect this name if another business starts to operate with the same name;
   
2. Incorporate in Alberta to protect your trade-name provincially and incorporate federally to protect your trade-name across Canada; and
3. Register the trade-name as a trademark in Canada for 15 years of protection.

Common law protection of a trade-name and a logo
Passing-off is the common law action that can be used in court to enforce the right to operate under a particular trade-name without unfair competition. By common-law one also possesses copyright and moral rights to the logo they created for the business. The government of Canada allows concurrent copyright and trade-mark protection. In order to be successful, the business that wishes to retain the right to operate under a trade-name and/or logo is the plaintiff in court and has the burden of proof, on a balance of probabilities, that:

1. There is the existence of goodwill or a reputation in the trade-name or the logo;
2. The public has been deceived due to a misrepresentation by a different company using the same name or logo; and
3. There has been actual or potential damage to the plaintiff.

To protect your trade-name, start by proving that you have acquired a reputation in the geographical area where you seek to enforce your rights.  Unregistered trade-names are enforceable only in the geographical area where the mark has become known. The goodwill extends only to the specific wares or services associated with that trade-name.
Confusion arises if the consumer believes the businesses using the same trade-name are affiliated. The court will consider:

1. The inherent distinctiveness of the trade-marks or trade-names and the extent to which they have become known;
2.  The length of time the trade-marks or trade-names have been in use;
3. The nature of the goods, services or business;
4. The nature of the trade; and
5. The degree of resemblance between the trade-marks or trade-names in appearance or sound or in the ideas suggested by them.

Proving damage means that one must prove lost profits, customers, or market share.  Damages can arise from an attempt to mislead the public and potential damage to reputation or goodwill. The common-law provides trade-name and logo protection in Canada, but the business must pursue that protection in court.
Another company can incorporate with the exact same name as your trade-name, the statutory laws of Alberta and Canada only protect an incorporated company’s name from being copied. Another sole proprietor may operate with the exact same name as your trade-name.
Incorporating the business provincially or federally and extra-provincially
Incorporating federally will protect the corporation’s name across Canada.  This protection is not as broad as registering a trademark federally.  If you choose to incorporate federally as a Canadian corporation then you must follow by registering extra-provincially as a provincial corporation in Alberta. There will be annual renewal fees for both the federal and the provincial registration. If you register exclusively as a corporation in Alberta and subsequently someone else registers the exact same name as a federal corporation you will still be allowed to preserve your corporation’s name in the province of Alberta.  Incorporating a business does not protect your logo.
Once a business is incorporated it is a separate legal entity and as such must file a corporation income tax (T2) every year with the Canada Revenue Agency even if there is no tax payable. Depending on whether you seek an accountant’s services, this may be expensive.
Register a trade-mark
A trade-name can be registered if it is used to distinguish your goods or services from those of others.
Trade-marks are registered federally and they will protect the name and logo across Canada for 15 years. The cost in 2018 is $250 for a filing fee, then another $200 for the trademark registration.  When registering a trademark you can hire a trademark agent or a lawyer, or your can read through the Nice List of Classes to decide which classes of goods and services you wish to trademark your business under. Canada follows the World Intellectual Property Organization’s system. The same trade-name can be trademarked by different people under different Nice classifications.
The website http://www.wipo.int/classifications/nice/en/ has NCL (11-2019) available to download. This is a document that provides each of the Nice classifications and explanatory notes that will help you decide which Nice Classes best describe your work.  A trademark agent may also be consulted.
Use the Canadian Trademarks Database to search if your name has already been trademarked in the classes that you wish to use.  If the name is available, the next step is to file for the trademark, note this filing fee is non-refundable. The name that you file will be published in the Trade-marks Journal for two months so others could oppose your trademark. This journal is published every week in compliance with the Trade-marks Regulations (Canada). An opposition costs $750. The government of Canada’s webpage is very informative for registering a trademark.  Call Canada’s Intellectual Property Office if you have any questions, 1-866-997-1936.  If your name is protected by trademark, one of the corporate registries in Alberta may still allow a company to incorporate with that same name according to a specialist available at 310-000.

Additional information can be found at:
Government of Canada: Canadian Intellectual Property Office
Government of Alberta: Corporate Registry Service Alberta

Shannon Peddlesden was the 2018 summer law intern at the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.