The dirty secrets surrounding Facebook’s $1 billion acquisition of Instagram have remained relatively unkown, until now. Many were taken aback by the incredible amount of money Facebook dropped on the photography app, but it turns out that Instagram wanted more than $1 billion. It’s been revealed by The Wall Street Journal that Instagram co-founder Kevin Systrom originally pitched his app to Facebook CEO Mark Zuckerberg with a price tag of $2 billion.
Zuckerberg oversaw the three days of negotiations with Systrom personally in his “$7 million five-bedroom home in Palo Alto.” What’s more, Facebook’s board didn’t even know about the deal until it was basically done. According to the WSJ:
It was a remarkably speedy three-day path to a deal for Facebook—a young company taking pains to portray itself as blue-chip ahead of its initial public offering of stock in a few weeks that could value it at up to $100 billion. Companies generally prefer to bring in ranks of lawyers and bankers to scrutinize a deal before proceeding, a process that can eat up days or weeks.
Mr. Zuckerberg ditched all that. By the time Facebook’s board was brought in, the deal was all but done. The board, according to one person familiar with the matter, “Was told, not consulted.”
Apparently Zuckerberg got concerned when he saw Instagram’s newly-launched Android app accrue millions of new users in a matter of days. Instagram’s 40+ million users are adding more to their numbers daily, and the focus is being taken off of sharing mobile photos directly to Facebook.
But how on earth could a mobile photography app with no revenue model ask for $2 billion? According to the WSJ, “Mr. Zuckerberg suggested looking at the value of Instagram as a percentage of the value of Facebook.”
Mr. Zuckerberg, who planned to pay for Instagram mostly with stock, asked Mr. Systrom what he thought Facebook would be worth, the people said. If he believed Facebook would one day be worth as much as a company like Google at $200 billion or more, then the equivalent of 1% of Facebook would be sufficient to meet his price, Mr. Zuckerberg told Mr. Systrom, the people said.
Mark Zuckerberg owns 28% of Facebook’s stock and owns 57% of its voting rights, so he was able to negotiate a deal like this under the radar. Kevin Systrom owned 45% of Instagram, netting him $400 million once the deal went through. His other co-founder, Mike Krieger, cashed in $100 million after the buyout.
Facebook has typically made “aquihires,” meaning that it buys other companies for the talent, not the product. In Instagram’s case, it was a strategic, bold move that Zuckerberg wants to secure Facebook’s position as the dominant photo sharing player in mobile and web. We can only hope that Facebook doesn’t turn Instagram into something that drives its user base away.
Two CEOs spending a weekend together and you have the biggest mobile app acquisition in history. That’s the world we live in.
[image via Fast Company].