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The Billion Dollar Battle for Snapchat
  • February 25, 2014 : 07:02
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The great remaining question is just how much Snapchat is worth. Despite its remarkable growth, the company has no proven business plan to rake in revenue. Twitter went public in November with an $18 billion valuation, but financial analysts have since downgraded its stock, even with a market cap of about $30 billion. Snapchat’s last round of investment, in June 2013, from several venture capital firms, valued the company at $800 million. (Spiegel personally extracted $10 million.) Zuckerberg’s $3 billion offer in November established the current baseline valuation. Not bad for a company with 30-some employees.

For Stanford students Brown, Spiegel and Murphy, launching a multibillion-dollar tech firm should have been the modern equivalent of now-obsolete collegiate dreams: Write a novel before you graduate, get your band signed to a record deal or—who knows?—win a Heisman trophy. Snapchat is the latest proof that, if you are at the right school at the right time, you can indeed form a company and get no-worries wealthy before you can legally drink. That’s why it is so tragic that Brown and Spiegel would never share in their success.

Pacific Palisades in summer has a surprisingly conducive climate for getting work done. The beachfront community of multimillion-dollar homes goes through an extended stretch of what locals call “June gloom,” during which the days can remain overcast until midafternoon. For the three would-be tech moguls, who were staying at Spiegel’s father’s Toyopa Drive mansion (which Spiegel nicknamed “startuphau5”), the climate was perfect for long days spent programming their app, building the design and figuring out how to launch what they were then calling Picaboo. At this stage, before they had a product to sell, Spiegel and Murphy made tangible contributions—they were, after all, writing the code that would become the application—while Brown availed himself of the free food and beer provided by Spiegel. However, Brown made undeniable contributions even during this period, including coming up with the “Ghostface Chillah” logo. Brown directed Spiegel as he used Adobe In-Design to draw the logo. (Snapchat still uses a version of that logo.) Brown also began to draw up the terms of service, privacy policy, frequently asked questions and the potential offering language for the application in the iTunes store. According to court documents, Brown also came up with the name of the limited-liability corporation that became Snapchat’s parent company, and in conversation all three agreed they would be equal partners in the venture. For now, however, the application was being developed under the aegis of Spiegel and Murphy’s Future Freshman LLC, their old, failed start-up. This was, Brown believed, a technicality, and the fact that he had zero percent equity in his frat brothers’ old business was irrelevant. At this point Murphy, in his communications with frat brothers about the new application, described it as the product of “Bobby, Evan, Reggie.”

That would be the summer of Snapchat, what should have been remembered by all three men in their golden years as a magical season when they created an application that would literally change the world and that, for those few weeks, was known only to the three of them. To be young and so promising, and to sense and believe you are on the cusp of a transformative invention, to be working 15-hour days in harness to this dream and to actually be on the verge of realizing it—the application went live on iTunes on July 8, 2011—should have engendered generosity and fraternal love instead of what apparently came to pass: a betrayal, according to Brown, and disappointment in a friend, according to Spiegel.

By August, Brown had returned to Columbia, South Carolina, believing he was equal partner in the app, which he had, after all, conceived. While there, he began to write the patent application for Picaboo, because Spiegel was increasingly worried that another tech company could steal the idea. Brown put Murphy’s name first in the patent application, followed by his own and then Spiegel’s, an order that offended Spiegel. (The order of names on a patent application does not denote relative credit for the invention.) Spiegel expressed his anger by insisting that Brown speed up the patent process, an impossible task. Brown, sensing that Spiegel was becoming more distant, felt he needed to confirm the equity arrangement in their new business. He asked Spiegel if they could have a three-way call on August 16, 2011. Spiegel alerted Murphy, telling him, “Reggie wants to discuss equity.”

Spiegel took the call from his bedroom, which his father had allowed him to renovate to his specifications with a white-leather king-size bed. Murphy was by the pool. Brown reiterated his understanding that he was an equal equity partner in the business, and he listed his many contributions. “He claimed that he had created the original idea,” Murphy said in a legal deposition. “He had designed the ghost. And there were some disagreements about what that meant.”

At one point in the conversation Brown said to Spiegel, “I directed your talents.”

Spiegel hung up.

Murphy asked Brown what he wanted. “Thirty-three percent,” Brown said.

“That’s not gonna happen,” Murphy said.

Spiegel and Murphy then changed the passwords on Snapchat’s computer servers and accounts. They never spoke with Brown again.

Spiegel has by now written Brown out of the Snapchat genesis story, describing his first phone call with Murphy as the moment of inception, the moment he wanted to transform Future Freshman into “an app that would let people send photos that would disappear.… We had no idea that what we now know as ephemeral media would change the communication landscape. We just thought it might be cool to make photos disappear.” In this alternative history, Snapchat is presented as the next in line of Future Freshman’s products. In interviews, when pressed, Spiegel has gone so far as to say that a “friend” came to him with an idea, yet he refuses to acknowledge that as the foundational moment. It was his and Murphy’s work writing the code and designing the product that was the true inspiration. In depositions Spiegel says Brown was working at Spiegel’s father’s house that summer in exchange for room and board and the valuable business experience gained at Spiegel’s knee. Brown, after all, couldn’t read computer code, so what value could he possibly have added?

Yet Brown’s attorneys, in questioning Spiegel, have asked him, “Did you come up with the idea for deleting picture messages?”

“Uh, no.”

“Did Bobby come up with the idea?”

“No, he did not.”

“Who came up with the idea?”

Spiegel answered, “Reggie did.”

Spiegel never graduated, but Brown did and has started business school at Duke University’s Fuqua School of Business—never again will he be a mere English major. Spiegel has proven to be, in accordance with his worldview, very adept at “working the system” and now presides over the company viewed as the gravest threat to Facebook and Twitter and the best bet to be the next great social-networking empire. But amid recent criticism that he too cavalierly responded to a security breach in which more than 4 million user names and phone numbers were publicly posted, some question how skillfully he can play the CEO game if and when Snapchat goes public. He seems to have calculated every angle, including this one: Even a large settlement or adverse ruling that awards Brown hundreds of millions of dollars—perhaps the worst-case scenario in the event Spiegel loses in court—is still far less valuable than 33 percent of Snapchat.

Stanford University has become, if possible, even more start-up obsessed since Snapchat began its meteoric rise. Computer science became the school’s most popular major during Spiegel and Brown’s final year, and the number of computer science majors and students enrolled in introductory computer science classes has risen since then. In the summer of 2013, to better harness the value of its own offspring, the university announced it would invest in students’ start-ups like a venture capital firm, through its incubator StartX.

If three frat brothers could work the system and create a business worth billions in a matter of months, then there must be more billion-dollar apples to be plucked on Stanford’s verdant campus. If only, incoming freshmen think as they drive up Palm Drive, they can find the right idea.

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read more: News, magazine, issue march 2014

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