The movie The Social Network is centered around a lawsuit that three founders of ConnectU, a social network in the making, mount against Mark Zuckerberg, the founder of competing social network, Facebook.
If you look at at the movie via proper lenses, it can be a lesson about software startup business mistakes. Mistakes that ConnectU founders made managing their project. Mistakes that you can avoid in your own startup.
The relevant facts are:
- three Harvard students start working on an idea for social networking website exclusive to Harvard students in December 2002
- neither of them is a programmer, so they hire fellow Harvard student to work on it in January 2003. He leaves the project in spring 2003 after graduating and getting a job at Google
- they hire another Harvard student to continue coding. He works during summer and fall, gets paid $400 for the work but leaves the project for personal reasons. He recommends Zuckerberg, also a Harvard student, for his replacement
- they talk to Zuckerberg on November 30, 2003 and he agrees to continue the project for equity stake. No formal contract is signed
- for the next 2 months (December 2003 and January 2004) Zuckerberg pretends to work on ConnectU website but in reality he’s working on his own similar website instead. He registers the original thefacebook.com domain name on January 14 and launches the website on February 4th, 2004
- ConnectU website finally launches 4 months later, on May 21, 2004
There are several mistakes that ConnectU founders made managing their startup.
Not using written contracts when hiring people.
The agreement between ConnectU founders and Zuckerberg was oral. If you hire people to work on your idea on a contract basis, write a contract. It should spell what the contractor is supposed to do and how much he will be paid for it. It’s business 101.
You can even add a reasonable non-compete clause so that they can’t just learn everything about your business and start a competing one, like Zuckerberg did.
Underestimating the value of good programmers
It took ConnectU 17 months to launch their website. At least 3 programmers worked on it (2 programmers before Zuckerberg and at least one after) and the 3 founders presumably did something productive as well.
Zuckerberg launched his website in 2 months, with code written all by himself (although he did have a non-technical co-founder). He was 8x as effective as ConnectU programmers.
Not growing fast enough
There are some businesses that can grow slowly and organically. There are some that have to grow fast at any price. The wisdom is to know what kind of a business you’re in.
Social networking websites are in the “grow fast at any price” category but ConnectU founders didn’t act like they understood that. Facebook was launched in 2 months which demonstrates Zuckerberg’s urgency and dedication to the idea at the exclusivity of other things. As soon as he secured funding, Zuckerberg started to aggressively hire more people to work on it, which is exactly what you need to do in such a situation.
ConnectU founders pursued other time-consuming activities during that time (they were training as rowers for Olympics) and dragged their feet hiring talent necessary to implement their idea.
Not supervising the work and not firing ineffective employees
Zuckerberg was able to string them along for 2 months by making excuses via e-mail. During that time he didn’t deliver any code.
Sure, Zuckerberg won’t win Gentlemen Of The Year award but if you’re mis-managing your employees so badly, you only have yourself to blame. After a month of no results they should have just fired Zuckerberg and hire a more dependable programmer.
Not paying your programmers well
We don’t have enough facts to say why ConnectU had such a hard time finding effective programmers for their project but it’s telling that they paid the second programmer $400 for several months of work.
A fair market rate would be more like $5000 per month. If you’re serious about your idea, you need to be realistic about how much you need to pay your crucial employees.
Treating programmers as replaceable cogs
In rare cases you can but programming is hard, good programmers are rare and good code is crucial element of software startups. The visible product might be a website, but what software startups really produce is code behind those html pages.
ConnectU founders seemingly treated programmers as hired guns that can be replaced at any time.
What Facebook and other technology companies do is hiring the best and retaining them for as long as they can.
Paying in equity
It’s unclear if ConnectU founders had funds to pay in cash for programmers but from the point of view of the startup founder, paying in equity should be done only if you have no other options.
It didn’t bite ConnectU founders because they failed but if they were successful, they would pay disproportional amount of money for the initial work.
In all fairness, this is one mistake that Zuckerberg also made. He founded Facebook with his friend Eduardo, with 70-30 split, with no vesting provision.
Eduardo put a minuscule amount of money ($1000 initially and later added $18000) but other than that he doesn’t seem to have done much work on Facebook. The idea was Zuckerberg’s. The code was Zuckerberg’s. Eduardo was a business guy at a time when there was no business to do. He wasn’t interested in the project enough to work on it during a crucial time after launch, in summer 2004, when he opted to do an internship in New York instead of working with Zuckerberg on Facebook in California.
Despite contributing very little, Eduardo ended up with 5% of Facebook (worth more than $billion). Good for Eduardo but sucks for Zuckerberg.
Zuckerberg could have done it all by himself but at the very least there should be a clause stipulating vesting schedule of, say, 4 years, saying that if a person stops working on the startup, like Eduardo did, he’s only entitled to the vested part. Since Eduardo stopped working about 6 months in, he would only get 1/8 of 30% (3.75%) and the rest would go to other founders.
What you don’t know you don’t know will hurt you
It all shows that even Harvard hot-shots are not immune to youthful business naiveté. The above mistakes are pretty basic but they still might bite inexperienced people, regardless of how intelligent they are in general.