econ

52 | FORBES OCTOBER 31, 2018

Osulis patorti oculiis

sedius, urbem noste

interum condam,

nosulinatia? Ahaliam

tanum et consuliam

tam vius etrum ia

prora, con audenam

in adet vivericam

OCTOBER 31, 2018 FORBES | 53

S E L L E R ’S

R E M O RS E Facebook’s blockbuster $22 billion WhatsApp purchase

instantly made Brian Acton one of the richest people in America.

But as with his Instagram peers, his idealism clashed with Mark

Zuckerberg’s financial juggernaut, leading to perhaps the

most expensive moral stand in history. For the first time,

Acton explains why he walked away from $850 million.

B Y PA R M Y O L S O N

hatsApp cofounder Brian Acton, 46, sits in the cafe at the glitzy Four Seasons Hotel in Palo Alto, California, and the only way you’d guess he might be worth $3.6 billion is the $20 tip he briskly leaves for his coffee. Sturdily built and wearing a baseball cap and T-shirt from a WhatsApp corporate event, he’s determined to avoid the trappings of wealth and runs his own errands, including dropping off his minivan for maintenance earlier that day. An SMS has just come in from his local Honda dealer saying “payment received.” He points to it on his phone.

“This is what I wanted people to do with WhatsApp,” he says of the world’s biggest messaging service, which is used by more than 1.5 billion people and provides ad-free, encrypted messaging as a core feature. “This was infor- mational, and useful.”

The past tense and wistfulness hang in the air. More than four years ago, Acton and his cofounder, Jan Koum, sold WhatsApp, which had relatively insignificant revenue, to Facebook for $22 billion, one of the most stunning acquisitions of the century. A year ago he left Facebook, saying he wanted to focus on a nonprofit. Then in March, as details of the Cambridge Analytica scandal oozed out, he sent a Tweet that quickly went viral and shocked his former employers, who had made him a billionaire many times over: “It is time. #deletefacebook.” No explanation followed. He hasn’t sent another Tweet since.

Now he’s talking publicly for the first time. Under pressure from Mark Zuckerberg and Sheryl Sandberg to mon-

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in the Facebook universe and continued to operate for a while out of its original offices, was “a product group to him, like Instagram.”

So Acton didn’t know what to expect when Zuck beck- oned him to his office last September, around the time Acton told Facebook brass that he planned to leave. Acton and Koum had a clause in their contract that allowed them to get all their stock, which was being doled out over four years, if Facebook began “implementing monetization initiatives” without their consent.

To Acton, invoking this clause seemed simple. The Face- book-WhatsApp pairing had been a head-scratcher from the start. Facebook has one of the world’s biggest advertis- ing networks; Koum and Acton hated ads. Facebook’s added value for advertisers is how much it knows about its users; WhatsApp’s founders were pro-privacy zealots who felt their vaunted encryption had been integral to their nearly unprec- edented global growth.

This dissonance frustrated Zuckerberg. Facebook, Acton says, had decided to pursue two ways of making money from WhatsApp. First, by showing ads in WhatsApp’s new Sta- tus feature, which Acton felt broke a social compact with its users. His motto at WhatsApp had been “No ads, no games, no gimmicks”—a direct contrast with a parent company that derived 98% of its revenue from advertising. Another motto had been “Take the time to get it right,” a stark contrast to “Move fast and break things.”

Facebook also wanted to sell businesses tools to chat with WhatsApp users. Once businesses were on board, Facebook hoped to sell them analytics tools, too. The challenge was WhatsApp’s watertight end-to-end encryption, which stopped both WhatsApp and Facebook from reading mes- sages. While Facebook didn’t plan to break the encryption, Acton says, its managers did question and “probe” ways to offer businesses analytical insights on WhatsApp users in an encrypted environment, according to Acton.

Facebook’s plans remain unclear. When Sandberg, Face- book’s COO, was asked by U.S. lawmakers in early Septem- ber if WhatsApp still used end-to-end encryption, she avoid- ed a straight yes or no, saying, “We are strong believers in encryption.” A WhatsApp spokesperson adds that What- sApp would begin placing ads in its Status feature next year, but that even as more businesses start chatting to people on the platform, “messages will remain end-to-end encrypted. There are no plans to change that.”

For his part, Acton had proposed monetizing Whats App through a metered-user model, charging, say, a tenth of a penny after a certain large number of free mes sages were used up. “You build it once, it runs everywhere in every country,” Acton says. “You don’t need a sophisticated sales force. It’s a very simple business.”

Acton’s plan was shot down by Sandberg. “Her words were ‘It won’t scale.’ ”

“I called her out one time,” says Acton, who sensed “greed” at play. “I was like, ‘No, you don’t mean that it won’t scale. You

etize WhatsApp, he pushed back as Facebook questioned the encryption he had helped build and laid the groundwork to show ads and facilitate commercial messaging. Acton also walked away from Facebook a year before his final tranche of stock grants vested. “It was like, okay, well, you want to do these things I don’t want to do,” Acton says. “It’s better if I get out of your way. And I did.” It was perhaps the most expensive moral stand in history. Acton took a screenshot of the stock price on his way out the door—the decision cost him $850 million.

He’s following a similar moral code now. He clearly doesn’t relish the spotlight this story will bring and is quick to underscore that Facebook “isn’t the bad guy.” (“I think of them as just very good businesspeople.”) But he paid dearly for the right to speak his mind. “As part of a proposed settle- ment at the end, [Facebook management] tried to put a non- disclosure agreement in place,” Acton says. “That was part of the reason that I got sort of cold feet in terms of trying to settle with these guys.”

Facebook is probably the most scrutinized company on

the planet, while simultaneously controlling its image and internal information with a Kremlin-like ferocity. “Thanks to the team’s relentless focus on building valuable features, WhatsApp is now an important part of over a billion people’s lives, and we’re excited about what the future holds,” says a Facebook spokesperson. That kind of answer masks the kind of issues that just prompted Instagram’s founders to abrupt- ly quit. Kevin Systrom and Mike Krieger reportedly chafed at Facebook and Zuckerberg’s heavy hand. Acton’s account of what happened at WhatsApp—and Facebook’s plans for it— provides a rare founder’s-level window into a company that’s at once the global arbiter of privacy standards and the gate- keeper of facts, while also increasingly straying from its en- trepreneurial roots.

It’s also a story any idealistic entrepreneur can identify with: What happens when you build something incredible and then sell it to someone with far different plans for your baby? “At the end of the day, I sold my company,” Acton says. “I sold my users’ privacy to a larger benefit. I made a choice and a compromise. And I live with that every day.”

DESPITE A TRANSFER OF SEVERAL BILLION dollars, Acton says he never developed a rapport with Zuckerberg. “I couldn’t tell you much about the guy,” he says. In one of their dozen or so meetings, Zuck told Acton unromantically that Whats App, which had a stipulated degree of autonomy with-

F O R B E S B R I A N A C T O N

ACTON’S PLAN WAS SHOT DOWN BY SANDBERG. “HER WORDS WERE ‘IT WON’T SCALE.’ ”

56 | FORBES OCTOBER 31, 2018

The biggest internet deal in a decade was rushed through over Valentine’s weekend in the offices of WhatsApp’s law- yers. There was little time to examine details, like the clause about monetization. “It was just me and Jan saying we don’t want to put ads in the product,” Acton says. He recalls Zuck- erberg being “supportive” of WhatsApp’s plans to roll out end-to-end encryption, even though it would block attempts to harvest user data. If anything, he was “quick to respond” during the discussions. Zuckerberg “was not immediately evaluating ramifications in the long term.”

Questioning Zuckerberg’s true intentions wasn’t easy when he was offering what became $22 billion. “He came with a large sum of money and made us an offer we couldn’t refuse,” Acton says. The Facebook founder also promised Koum a board seat, showered the founders with admiration and, according to a source who took part in discussions, told them that they would have “zero pressure” on monetization for the next five years.

Facebook, it turned out, wanted to move much faster.

THE WARNING SIGNS emerged before the deal even closed that November. The deal needed to get past Europe’s famous-

ly strict antitrust officials, and Facebook prepared Acton to meet with around a dozen representatives of the Euro- pean Competition Commission in a teleconference. “I was coached to explain that it would be really difficult to merge or blend data between the two systems,” Acton says. He told the regulators as much, adding that he and Koum had no de- sire to do so.

Later he learned that elsewhere in Facebook, there were “plans and technologies to blend data.” Specifically, Face- book could use the 128-bit string of numbers assigned to each phone as a kind of bridge between accounts. The other method was phone-number matching, or pinpointing Face- book accounts with phone numbers and matching them to WhatsApp accounts with the same phone number.

Within 18 months, a new WhatsApp terms of service linked the accounts and made Acton look like a liar. “I think everyone was gambling because they thought that the EU might have forgotten because enough time had passed.” No such luck: Facebook wound up paying a $122 million fine for giving “incorrect or misleading information” to the EU—a cost of doing business, as the deal got done and such linking continues today (though not yet in Europe). “The errors we made in our 2014 filings were not intention-

mean it won’t make as much money as . . . ,’ and she kind of hemmed and hawed a little. And we moved on. I think I made my point. . . . They are businesspeople, they are good business- people. They just represent a set of business practices, prin- ciples and ethics, and policies that I don’t necessarily agree with.”

When Acton reached Zuckerberg’s office, a Facebook law- yer was present. Acton made clear that the disagreement— Facebook wanted to make money through ads, and he want- ed to make it from high-volume users—meant he could get his full allocation of stock. Facebook’s legal team disagreed, focusing on the word “implementing.” Zuckerberg, for his part, had a simple message: “He was like, This is probably the last time you’ll ever talk to me.”

Rather than lawyer up or try to meet in the middle, Acton decided not to fight. “At the end of the day, I sold my compa- ny,” he says. “I am a sellout. I acknowledge that.”

ACTON’S MORAL CODE—OR PERHAPS NAIVETE, given what he should have expected at a $22 billion sale price—trac- es back to the matriarchs of his family. His grandmoth- er had started a golf club in Michigan; his mother founded a freight-forwarding business in 1985, teaching him to take the responsibilities of a business owner extremely seriously. “She would lose sleep at night [over] making payroll,” Acton told Forbes right before the Facebook sale.

Acton graduated from Stanford with a bachelor’s in com- puter science and eventually became one of the first employees at Yahoo in 1996, making millions in the process. His biggest asset from that time at Yahoo: befriending Koum, a Ukraini- an immigrant he clicked with over their similar no-nonsense style. “We’re both nerdy, geeky guys,” Acton recalled in that earlier interview. “We went skiing together, played Ultimate Frisbee together, played soccer.” Acton left Yahoo in 2007 to travel before returning to Silicon Valley and, ironically, inter- viewing at Facebook. It didn’t work out, so he joined Koum at his fledgling startup, Whats App, persuading a handful of for- mer Yahoo colleagues to fund a seed round while he took on cofounder status and wound up with a roughly 20% stake.

They ran the business in the style that suited them, on a cash basis, with obsessive attention to the integrity of their infrastructure. “A single message is like your first-born child,” Acton would say. “We can never drop a message.”

Mark Zuckerberg first reached out to Koum over email in April 2012, leading to lunch at Esther’s German Bakery in Los Altos. Koum showed the email to Acton, who encour- aged him to go. “We weren’t shopping our company,” Acton remembers today. “We had no exit planned.”

But two things sparked Zuckerberg’s mega-offer in early 2014. One was hearing that WhatsApp’s founders had been invited to Google’s Mountain View headquarters for talks, and he did not want to lose them to a competitor. Another was a document analyzing WhatsApp’s valuation, written by Morgan Stanley’s Michael Grimes, that someone had shown to the deal teams at Facebook and at Google.

F O R B E S B R I A N A C T O N

WITHIN 18 MONTHS, A NEW WHATSAPP TERMS OF SERVICE LINKED THE ACCOUNTS AND MADE ACTON LOOK LIKE A LIAR.

58 | FORBES OCTOBER 31, 2018

Acton remembers. He was now seeing history repeat. “This is what I hated about Facebook and what I also hated about Yahoo,” Acton says. “If it made us a buck, we’d do it.” In other words, it was time to go.

Meanwhile, Koum stayed. He would accrue time toward his final stock grants, even if he rarely went to the office (“rest and vest,” in Silicon Valley parlance). Koum was “able to get through it,” finally leaving this April, the month after Acton’s #deletefacebook tweet, announcing via a Facebook post that he would focus on collecting air-cooled Porsches. In August 2018, when Forbes sat down with Acton, another source said Koum was sailing on a yacht in the Mediterranean, far away from everything. He could not be reached for comment.

IF WALKING AWAY FROM $850 MILLION feels like penance, Acton has gone further. He has supercharged a small mes- saging app, Signal, run by a security researcher named Moxie Marlinspike with a mission to put users before prof- it, giving it $50 million and turning it into a foundation. Now he’s working with the same people who built the open- source encryption protocol that is part of Signal and pro- tects WhatsApp’s 1.5 billion users and that also sits as an op- tion on Facebook Messenger, Micro soft’s Skype and Google’s Allo messenger. Essentially, he’s re-creating WhatsApp in the pure, idealized form it started: free messages and calls, with end-to-end encryption and no obligations to ad platforms.

Acton says that Signal now has unspecified “millions” of users, with a goal to make “private communication accessi- ble and ubiquitous.” While Acton’s $50 million should take it a long way—Signal could afford only two full-time engineers until he came along—the foundation wants to figure out a perpetual business model, whether that means taking cor- porate donations like Wikipedia or partnering with a larger company, as Firefox has done with Google.

Others have come into the space as well. AnchorFree, a software company in Redwood City, California, makes a virtu- al private network that hides your online activity and has been downloaded 650 million times. The company has raised $358 million and is reportedly profitable. The private search engine DuckDuckGo is grossing $25 million a year, showing ads but without using your search history to build a secret profile like Google does. Regulators in many countries are similarly push- ing back on ad tracking. Saul Klein, one of London’s leading venture capitalists, predicts that Facebook will eventually be forced to offer an ad-free subscription option. Acton’s metered model, in other words, might get the last laugh.

Acton, for his part, is trying to look forward. Besides Sig- nal, he’s put $1 billion of the Facebook proceeds into his philanthropic arms, to support healthcare in impoverished areas of the U.S. as well as early childhood development. He also says he’s determined to raise his kids normally, from public schools to that Honda minivan to a (relatively) mod- est house. Acton notes, however, that it’s just one mile away from Zuckerberg’s compound. Extreme wealth, it seems, is “not as liberating as you would hope.”

al,” says a Facebook spokesman. “It just makes me angry to even relive that,” Acton says. Linking these overlapping accounts was a crucial first step

toward monetizing WhatsApp. The terms-of-service update would lay the groundwork for how WhatsApp could make money. During the discussions over these changes, Facebook sought “broader rights” to WhatsApp user data, Acton says, but WhatsApp’s founders pushed back, reaching a compro- mise with Facebook management. A clause about no ads would remain, but Facebook would still link the accounts to present friend suggestions on Facebook and offer its adver- tising partners better targets for ads on Facebook. Whats App would be the input, and Facebook the output.

Acton and Koum spent hours helping to rewrite the terms of service and were stymied by a section on messaging from businesses. “We obsessed over these two paragraphs,” Acton remembers. It was here that they lost a battle against the ad model, when a lawyer strongly advised them to in- clude an allowance for “product marketing,” so that if a busi- ness did use WhatsApp for a marketing purpose, Whats App

wouldn’t be held liable. WhatsApp’s founders then did what they could to post-

pone Facebook’s monetization plans. During much of 2016, Zuckerberg was obsessed with the competitive threat of Snap- chat. This made it easier for WhatsApp to put moneymaking on the back burner and report on new product features that aped Snapchat’s: a new camera that let you add emojis to pho- tos in October 2016, and Status in February 2017, which was widely seen as a clone of Snapchat Stories.

By then, three years since the deal, Zuckerberg was grow- ing impatient, Acton says, and he expressed his frustrations at an all-hands meeting for WhatsApp staffers. “The CFO projections, the ten-year outlook—they wanted and needed the WhatsApp revenues to continue to show the growth to Wall Street,” Acton recalls. Internally, Facebook had targeted a $10 billion revenue run rate within five years of monetiza- tion, but such numbers sounded too high to Acton—and re- liant on advertising.

Acton had an alternative that he tried pushing back with: Invite businesses to send “informational, useful content” to WhatsApp users, like the SMS from his Honda dealer, but don’t allow them to advertise or track data beyond a phone number. He also pushed the metered-user model. Both to no avail.

Acton had left a management position on Yahoo’s ad di- vision over a decade earlier with frustrations at the Web por- tal’s so-called “Nascar approach” of putting ad banners all over a Web page. The drive for revenue at the expense of a good product experience “gave me a bad taste in my mouth,”

F O R B E S B R I A N A C T O N

ACTON WAS NOW SEEING HISTORY REPEAT. “IF IT MADE

US A BUCK, WE’D DO IT.”

F

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