Microsoft, Facebook and the common woes faced by startups/ young companies
By Michael Hennigan, Founder and Editor of Finfacts
Apr 3, 2011 - 4:06 PM

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Microsoft's founding employees gathered in 1978 to take a portrait before the company moved to Washington State from Albuquerque, New Mexico. Front row (left to right): Bill Gates, Andrea Lewis, Marla Wood, and Paul Allen. Middle row: Bob O'Rear, Bob Greenberg, Marc McDonald, and Gordon Letwin. Back row: Steve Wood, Bob Wallace, and Jim Lane. Not pictured is Miriam Lubow. Courtesy of Microsoft

Paul Allen, co-founder of Microsoft in 1975, created a stir this week with the publication of excerpts of a memoir due to be published next month. Meanwhile, late last year, the movie, The Social Network, focused attention on the disputed birth of Facebook. These are high profile cases but highlight common woes in startups and young companies.

The bitterness of Paul Allen was a surprise. He left Microsoft in 1983 after being diagnosed with Hodgkin’s disease, which has recurred in recent times and he is reported to be worth $13bn from his Microsoft shareholdings. In the case of Facebook, two twins who were contemporary students of Mark Zuckerberg at Harvard University, say they asked him to produce a social network site for them. He says they wanted him to develop a dating site. They claim he stole their idea.

Social networking of course wasn't a new idea and it was 'stolen' from existing online services as for example, Google improved on existing search engines and succeeded in execution.

Recently, British entrepreneur, Luke Johnson, wrote in his Financial Times column that "in negotiations over shareholdings, most partners think they deserve more than they actually get. If the bartering goes well, everyone is likely to emerge feeling a little disappointed - - but able to live with the consequences. It is a fine line, juggling competing interests and keeping the show on the road - - but it matters."

Entrepreneurship and building a startup is seldom easy; there is a high risk of failure and personal conflict in an environment of stress.

We recently wrote that Twitter co-founder is back at the company after disputes with one of his co-founders.

Professor Noam Wasserman of Harvard Business School wrote in a 2008 Harvard Business Review article : "New ventures are usually labours of love for entrepreneurs, and they become emotionally attached to them, referring to the business as 'my baby'." But from the moment founders bring in outside investors, their jobs are at risk. In an analysis of 212 US start-ups, Professor Wasserman discovered that by the time the ventures were three years old, 50% of the founders were no longer chief executive. By the time of the companies' initial public offerings, only 25% of the founders were still leading them. Most had been forced out.

Paul Allen is bitter that his share split with Bill Gates wasn't on a 50/50 basis and a similar dispute arose with Mark Zuckerberg's Brazilian-born Harvard roommate and friend, Eduardo Saverin, who was a co-founder of Facebook. The latter was forced out and it's believed that his percentage stake in Facebook was cut from 34% to a single digit figure. 

In Vanity Fair, Paul Allen writes that Bill Gates was ambitious to be an entrepreneur from a young age.

He says from the time they started together in Massachusetts, he’d assumed that the partnership would be a 50-50 proposition. But Bill had another idea. “It’s not right for you to get half,” he said. “You had your salary at MITS while I did almost everything on BASIC without one back in Boston. I should get more. I think it should be 60-40.”

Allen said: "Bill’s intensity was nonstop, and when he asked me for a walk-and-talk one day, I knew something was up. We’d gone a block when he cut to the chase: 'I’ve done most of the work on BASIC, and I gave up a lot to leave Harvard,' he said. 'I deserve more than 60%.'

'How much more?'

'I was thinking 64-36.'”

“I find the argument that you were cheated financially difficult to make when you ended up being so wealthy,” said Vern Raburn, who worked at Microsoft from 1978 to 1981 and ran its consumer products division, to The New York Times. Raburn said he was friends with both founders. He added that Allen played an integral role in the company’s early days, and that “Bill has gone out of his way to acknowledge that.”

In 1983, Allen would have sold his stake in Microsoft at $10 per share but Bill Gates was only willing to pay $5. Allen was lucky and he would have had a much, much bigger chip on his shoulder if he had cashed-in his stake.

In a statement, a mellower Bill Gates said: “While my recollection of many of these events may differ from Paul’s, I value his friendship and the important contributions he made to the world of technology and at Microsoft.”

Cameron and Tyler Winklevoss who are now rowers training for the 2012 Olympics got the brush off from then-Harvard President Larry Summers in 2004, after complaining that their idea for Facebook had been stolen. Dr. Summers, until last December President Obama's National Economic Council chairman, said recently that the  scene in 'The Social Network' was a pretty fair rendering.

History of Microsoft

Larry Summers video clip

Microsoft's original employees got together to reshoot the famous 1978 photo in April 2008. Front row (left to right): Bill Gates, Andrea Lewis, Miriam Lubow, Marla Wood, and Paul Allen. Back row: Bob O'Rear, Steve Wood, Bob Greenberg, Marc McDonald, Gordon Letwin, and Jim Lane. Not pictured is Bob Wallace, who had died. Courtesy of Microsoft

In 2008, the twins agreed a $65m settlement with Facebook but they are now looking for more and they insist that the could have executed the Facebook project as good as Zuckerberg has - -  easy indeed to say.

Harvard law professorLawrence Lessig says: "any legal system that would allow these kids to extort $65m from the most successful business this century should be ashamed of itself.

Did Zuckerberg breach his contract? Maybe, for which the damages are more like $650, not $65m. Did he steal a trade secret? Absolutely not. Did he steal any other 'property'? Absolutely not - - the code for Facebook was his, and the 'idea' of a social network is not a patent. It wasn’t justice that gave the twins $65m; it was the fear of a random and inefficient system of law. That system is a tax on innovation and creativity. That tax is the real villain here, not the innovator it burdened."

So, the moral of the stories is that dividing up the cake may trigger decades-long resentment but in the tech sector in the US, only 25% of firms reach their seventh birthday. So more often that not, all the human drama comes to nothing.

As for the value of an idea, the world is full of ideas but it's the rare feat of successfully executing that counts.

SEE: Finfacts 2005 article: Bill Gates becomes knight but who invented the PC operating system?

CNBC's Matt Nesto reports in Aug 2010 on Paul Allen suing eleven companies on patent infringement a very lucrative area for lawyers and what are termed patent trolls :

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