Five things you need to know about Facebook-Instagram

Confused about Facebook's blockbuster acquisition of photo-sharing app Instagram? Here's what you need to know about the deal and why it made sense for both companies.

It's been more than a week since Facebook's blockbuster acquisition of Instagram , and many people are still confused about the deal. It's understandable -- the $1 billion acquisition happened in the span of 48 hours between two CEOs rather than over the course of weeks between two armies of lawyers.

Facebook and Instagram consistently defy convention though, and that's one of many things you need to understand about both companies -- they are anomalies rather than the norm, even in the fast-paced world of tech startups.

I've seen countless reporters and bloggers question the valuation (that's understandable), but some are even comparing it to the Bernie Madoff Ponzi scheme (that's just ridiculous). Regardless, there are a lot of questions still surrounding the deal. Answering them requires a deeper understanding about how both companies operate.

Here are five very important things you need to understand about Facebook, Instagram, and their billion-dollar deal:

  1. Zuckerberg has absolute control over Facebook. Facebook's undisputed leader owns 28 perecent of the company's shares, but controls 57 percent of the vote through proxy deals he cut with Sean Parker and Facebook's other big stakeholders. This means that, even after the IPO, he doesn't have to consult anybody for his decisions , not even COO Sheryl Sandberg or Facebook's board of directors. That's why he was able to negotiate the deal with Instagram CEO Kevin Systrom in two days.
  2. Systrom retained full control of Instagram when it was acquired. By the same token, Systrom owned approximately 40 percent of Instagram before the purchase, meaning that he could make most decisions unilaterally. Co-founder Mike Krieger owned approximately 10 percent, meaning the two founders could also make an acquisition decision.
  3. Zuckerberg made sure the board voted, but the vote was a formality. A company's board of directors has to vote on a change of control, but Zuckerberg has the power to vote off any director that votes against him. In other words, Zuckerberg's word is absolute at Facebook, even at the board level.
  4. The Instagram acquisition was defensive, not offensive, in nature. This is why the deal was so expensive, despite the company making zero revenue and having only 13 employees. Facebook could make its own filters, but that wouldn't stop Instagram from growing into the mobile social network for photos. The plurality of Facebook activity revolves around photo sharing and interactions, and Facebook couldn't let Instagram threaten that activity. Zuckerberg knew it would be more expensive to leave Instagram independent than to take it out now for a high price.
  5. No matter who acquired Instagram, there were going to be conflicts of interest. There were only a few companies that could have acquired Instagram, and most of them have board members or employees that invested in the company. Facebook board member Marc Andreessen was an Instagram investor, for example. However, Twitter wanted to buy Instagram as well. Its executive chairman, Jack Dorsey, also happens to be Instagram's highest-profile angel investor. That would have been far messier, and it's probably the reason Zuckerberg doesn't invest in startups.

When you look at the facts, it becomes clear why Facebook needed Instagram and why the deal got done so quickly. That's why you should ignore people like Donna Klein, who love to conjure up sinister plots about ponzi schemes out of thin air.

The reality is this: Zuckerberg saw Instagram as a threat to Facebook and wanted to squash it before it became bigger, so he moved to get this deal done. And with his voting control, he was able to do it quickly. There's nothing sinister or underhanded about it.

 

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