Facebook paid up to $65m to founder Mark Zuckerberg's ex-classmates

Facebook paid up to $65m - $20m cash and a 1.25m shares – to end a lawsuit in which Mark Zuckerberg, now its chief executive, was accused of stealing the idea for the social networking site from a company called ConnectU.

The case, brought against Zuckerberg by three former classmates, Divya Narendra and the brothers Tyler and Cameron Winklevoss, had threatened to derail Facebook.

But though both sides had promised to keep the details of the settlement secret, the law firm representing ConnectU proclaimed the amount in a newsletter it sent out in January. The detail was picked up by the Recorder, a San Francisco-based legal publication.

Until yesterday, the details of the outcome had been kept secret. Lawyers on both sides went as far as asking the judge to clear the courtroom of reporters. But the law firm Quinn Emanuel Urquhart Oliver & Hedges then trumpeted "WON $65 million settlement against Facebook" in its newsletter. ConnectU fired the law firm last year, and the two sides are now disputing fees payable: Quinn is seeking $13m as part of a "no win, no fee" arrangement.

The case came to court in July, and it seemed that the court judge would dismiss the case by ConnectU. Its owners alleged that Zuckerberg, who helped set up Facebook, stole the idea, technology, design and business plan while they were students at Harvard.

Facebook launched in February 2004; ConnectU, three months later. But it has struggled, and now has fewer than 100,000 members, while Facebook boasts more than 150 million. ConnectU launched its lawsuit in 2004.

The basis of the settlement was Facebook's notional value following an investment by Microsoft, which paid $240m for a 1.6% stake in October 2007, narrowly beating Yahoo and Google.

That valued the site at around $15bn - but the documents used in the court suggest that internally, Facebook has never regarded itself as worth that much - and instead uses the much lower figure of $3.7bn, equivalent to $8.80 per share. Microsoft's investment would imply a value of $35.90 per share – and it was the Microsoft valuation that was used in the settlement of the case. Under their settlement, Facebook agreed to pay ConnectU $20 million in cash and 1,253,326 shares of common stock. The stock was worth $45 million, based on the Microsoft valuation, but only $11 million under Facebook's own appraisal.

Chris Scott Graham, an intellectual property litigator based in Mountain View, California, told the Recorder: "$65m is a significant sum — it's certainly more than the cost of the defence."

He added: "It's a very small percentage of [Facebook's] valuation and therefore could be argued by Facebook to be a payment based on considerations other than the merits of the claims."

• Charles Arthur
  
• guardian.co.uk,
  
• Thursday 12 February 2009 13.10 GMT