The-$700-Million Question of The Day:

I published a “guest column today on GigaOM”:https://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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