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Facebook Conflict of Interests

July 12, 2007

The VCs behind Facebook, Accel, Greylock and Meritech are actively looking to fund companies developing applications within the fast growing social network.  The initial reaction from the blogosphere is positive suggesting,

Cultivating the Facebook application economy is in nobody’s better interest than Accel, Greylock, and Meritech. Owning successful applications is twice is sweet when you own the platform too.

But startups looking for capital should consider the risks involved.  Building a business within another startup’s platform (in this case Facebook) is risky in itself.  Raising money from the owners of that startup is even riskier.  How would Jim Breyer deal with the fiduciary obligations associated with sitting on both boards?  Would he share with your team confidential information from Facebook?  Facebook might allow certain confidential information to be shared with portfolio companies, but I would bet that other information would never be released.

I have specific experience with one VC that sat on the boards of two companies that relied on one another to service their customers (one sold the device another built the key component for the device).  The VC was uncomfortable when the component company worked with competitors of the device company.  Sometimes he would share information about the competitor with the device company at a subsequent board meeting.  The device company would look at an alternative component competitor that provided better features or better pricing, the board member would share that information with the component company.  Soon the CEO’s of both companies didn’t trust their VC, despite the face that he was trying to do what was best for both companies.

Consider the challenges before raising money from a firm with a significant conflict of interest. Of course, the benefit of having Jim on your board (and his firm’s money) might outweigh the risks.  At the very least you should discuss how such issues might be dealt with prior to any deal…

Written by Alexander Muse · Filed Under Blog 

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One Response to “Facebook Conflict of Interests”

  1. dave mcclure Says:
    July 12th, 2007 at 8:40 pm

    yep, agree the conflicts of interest would be huge here… but doesn’t mean they still wouldn’t happen ;)

    nice piece alex.

    - dave mcclure
    http://500hats.typepad.com/

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