Facebook sold stake because of 'hardware stuff up'

A year ago Facebook announced that it had received an additional $25 million from venture capital firms. At the time it seemed an arrangement mutually beneficial to all: a social network on the cusp of great expansion had secured the necessary funding, an investment team – led by Greylock Partners, a Silicon Valley-based group – had backed one of the most promising start-ups in many years. Now it emerges that the venture capitalists came away best off. Facebook's call for funds had been prompted by a rather pressing situation which left it with little room to negotiate: it had run out of computer space.

Times Online has learnt that the investment, which resulted in the founders' stock being diluted by as much as 10 per cent, stemmed from Facebook not having leased enough servers to accommodate its growing subscriber base.

Facebook's chief executive, Mark Zuckerberg, one of the most talked about internet entrepreneurs of the moment, who turned down on offer reportedly as high as $1.5 billion for his company form Yahoo! last year, will now not cash in as heavily as he might have done, should he decide to sell or list.

A well-placed Silicon Valley source said that Facebook requested the funds when it realised it had not leased enough computers to store the rapidly increasing amount of data uploaded by its subscribers, which now number 24 million, including 1.4 million in the UK.

Greylock Partners, the Silicon Valley-based venture group, led a funding round of $25 million – valuing the company at $250 million – in order to finance the purchase of the necessary hardware.

"It was a major stuff up," a source close to Greylock said. "The management should have realised about the expansion and didn't."

The source added that at the time of the investment, in April last year, Facebook was not as popular as it is now, suggesting that the owners would not have been in a position to be choosy about the dilution of their stock in return for funding.

Greylock's holding in Facebook, which is understood to be as high as 10 per cent, will now translate to a significant windfall if, as is widely expected, the site decides to list.

A spokesman for Facebook said: "As is typical of most start-ups, Facebook began looking for venture capital in 2004 to fund its growing business. The company has received $37 million in venture capital through three rounds."

Facebook announced last month that it was opening up its platform to developers, such as Amazon, to write applications catering to its user base, reassuring its subscribers that "we're not about owning the content."

On the subject of a buy-out, now considered by most Silicon Valley observers to be out of the question, Mr Zuckerberg, 23, has said: "We've always said that FaceBook should remain independent, and this move strengthens that."