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Summary:

I published a “guest column today on GigaOM”:http://gigaom.com/2007/08/05/did-club-penguin-sell-up-or-sell-out/ about the announcement last week that “Disney is acquiring Club Penguin”:http://corporate.disney.go.com/wdig/press_releases/2007/07_0801_clubpenguin.html, the fantastically successful social networking site for “tweens” (kids aged 6-14), for up to $700 million. Club Penguin’s three founders, Lane Merrifield, Lance Priebe, and Dave Krysko, […]

I published a “guest column today on GigaOM”:http://gigaom.com/2007/08/05/did-club-penguin-sell-up-or-sell-out/ about the announcement last week that “Disney is acquiring Club Penguin”:http://corporate.disney.go.com/wdig/press_releases/2007/07_0801_clubpenguin.html, the fantastically successful social networking site for “tweens” (kids aged 6-14), for up to $700 million.

Club Penguin’s three founders, Lane Merrifield, Lance Priebe, and Dave Krysko, will collect $350 million in cash today to split between them (they took no “professional money”), and Disney confirms the trio could earn another $350 million if certain performance criteria are met over the next few years. (Merrifield, Club Penguin’s CEO, will continue to run the site as part of the Walt Disney Internet Group under WDIG President Steve Wadsworth.)

“Club Penguin”:http://www.clubpenguin.com/ is barely two years old (founded in October 2005), which gives this startup’s payday a boom-era IRR, easy. But this acquisition raises the same question that the Bancroft’s sale of Dow Jones & Co. to Rupert Murdoch raised for me last week (read about it “here”:http://www.foundread.com/view/a-founding-family), namely:

*At what point is it OK for a founder (or founders) to prioritze “fiduciary duty”–or cold hard cash–over their deeply-rooted vision for the business?*

We are not so naive at Found|READ to think selling is always ‘selling-out.’ This is business, after all, and if we weren’t in it to make money, we’d call it something else–like altruism. But sometimes selling is good for a business, and sometimes it’s just cashing-in. We hope all our founders are lucky enough to face the choice — we just think they need to be mindful of the distinction (especially if they desire to get rich _and_ build a business that is lasting.)

At Dow Jones, the judgement was complicated because Murdoch offered a huge premium to the company’s public shareholders (more than 60% over the trading price at one point), so the Bancroft’s had a hard time justifying leaving so much _of other shareholders’ money_ on the table to pursue their own loftier “vision” for Dow Jones. (Plenty of people thought they’d mismanaged the company too long to merit the option any longer, anyhow.)

*Club Penguin’s situation is more straightforward.* Being privately held, with the majority stakes in the hands of the three cofounders, the trio had mostly their own financial gain to weigh against the potential impacts of the acquisition on Club Penguin — and the kids who play it. (Ten percent of the purchase windfall goes to the founders’ charitable foundation, but nearly all of the rest they will split.)

*A few of the deal’s impacts:*

*Kids who find their way to Club Penguin from Disney.com will now be exposed to advertising.* A cornerstone of Club Penguin’s original (winning!) business-model was that it was ad-free. Another was Club Penguin’s strict quality-controls for keeping the site free of violence and profanity. Not all Disney movies are free of either. Pirates of the Caribbean is, as it should be, marketed on Disney.com.

Don’t get me wrong, I’m a huge fan of Club Penguin, as I said in my GigaOM Op-Ed. It’s just that *in selling to Disney, Club Penguin’s founders have, at least, willingly loosened their grip on a core principle.* They’ve done it, Merrifield explained in a conference call last week, to scale the business in a way that helps them maintain the integrity of the game. Traffic was ramping so steeply (12 million users; 700,000 paying subscribers) that they had a hard time keeping up with foreign language translation, and couldn’t build out the infrastructure fast enough. As to that intergrity, Merrifield said http://www.clubpenguin.com will remain entirely ad-free. Nevertheless, the Disney association creates a significant alteration to the “Club Penguin experience” of any players who find their way to the game through Disney.com.

Do the Club Penguin founders feel great about this? I’d have to guess no, but you can’t have your cake and eat it, too.

*So this also makes me wonder: As a founder, how do you know _when_ it is OK to trade control for cash — whether the cash is going into “infrastructure” or your own pocket?*
What you think?

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By Carleen Hawn

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  1. adambenayoun Monday, August 6, 2007

    Carleen,
    Very interesting article, I hope that we will all face this decision some time near.

    From my understanding, it is quite clear that if you hit the limit where you cannot scale or develop your business anymore, then it is time for you to find someone else who can help you execute your vision.

    I believe that this decision wasn’t purely about the money but rather based on “Can Disney take this business and get it to the next stage?” and a little bit of “Holy cow they’re offering us lot of money”.

    They could easily crash with their business if they couldn’t scale it properly. They have enough paying customers and traffic I think to double or even triple their value within a year if they wanted, and I think Disney know it and that’s why they offered that amount of money.

    I honestly think that they should sell a big chunk to Disney and remains with some share in the business, be involved in the execution.And with the help of Disney network and infrastructures, scale Club Penguin to the next level.

    Might be that sometime founders lose interest in their business and want to pursue other paths in their life.

    Anyway, I think this is their decision to do what they want to do, I understand that sometime people may think that by selling your company and the user base, your betraying your core community, but let’s remember that this is strictly business and there’s lot of opportunities ahead.

    Anyway congrats for the Club Penguin team!}

  2. theunknownfounder Monday, August 6, 2007

    If a company is formed for the purpose of “altruism” then it should be formed as a non-profit…. but that was not the case with Club Penguin. Club Penguin did give a significant portion of it’s profits to charities (which is supposedly why Sony passed on buying them) but is that being a good corporate citizen or is it good marketing… or is there even a difference?

    The founders of Club Penguin found a market, not in children, but parents that were more than willing drop $60 a year for an online social experience that was guaranteed to be commercial, adult language and violence free. As long as the suits at Disney understand that this is the allure of Club Penguin, things should stay the same… I’m not sure if I give the House of Mouse that much credit though.

    My understanding is that Disney will stay mostly hands off especially since it was $350 million now and up to an additional $350 over the next three years based on performance. The founders haven’t lost interested, in fact, I’m sure they are now more interested than ever on landing that additional payoff three years from now.}

  3. This is not just some money. This is money that will change their lives and the lives of their future generations. They would have been foolish not to take it. Also, keeping Club Penguin commercial free seems to be a core component of their business model. I am not sure they would have fought hard for it if it wasn’t one of the key reasons that people joined. If this version of Club Penguin doesn’t live up to the founders expectations they have more then enough money now to start over again and fully fund it themselves. Some opportunities you just can’t pass up.

    – Doug K.}

  4. I have to agree with Doug, with the amount of money at stake I doubt many people would be able to prioritize the corporate principles over the financial reward. At the end of the day, the founders started a for-profit company in order to make money. In the end, that’s what they did.}

  5. Uh, what?

    There are plenty of non-profits out there and causes to support. If you really want to give back to the world, ad-free web sites isn’t really touching on the worst problems on this planet.

    Other people have a stake in your company (friends, spouses, children, family, co-founders, angels, VCs, whatever) and you’ve made a promise that there would be financial success (or other types of prosperity) at the end of the rainbow.

    Your responsibility is to pursue that. If you have a compromise between you and a financial windfall, you need to evaluate how that compromise will effect your stakeholders when COMPARED TO THE RISKS AND REWARDS OF THE ALTERNATIVE.

    Taking the money might hurt the users in the short term, but if the pain is acute enough someone else will respond and build what they want.

    In the meantime, you can spend your time doing REAL good.}

  6. Cool. That makes Disney more attractive.}

  7. 100 M&A Deals. 100 Startup Lessons « FoundRead Thursday, January 3, 2008

    [...] been written about here, or at the mother ship, GigaOM. (For example: Club Penguin by Disney, also here; Photobucket by Fox Interactive; and StumbleUpon by eBay). Steve includes links to many other [...]

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