If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for the company than it would have.
I'm surprised they didn't try to add photo-filters to their mobile app first. I don't think people are going to spend the next decade taking retro pictures. Just like with location - they could've added the feature to their app, people can "be part of location" without having to join a new network.
Over time, most people get bored of filtering their photos and move on. By putting that feature in mobile app, Facebook likely could've done a bit put the curb on Instagram from ever pivoting away from filters into a full fledged photo-sharing network and saved themselves a billion.
But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.
But I admit, all of those reasons are quite speculative. I could be wrong. It could be that the Instagram shareholders knowingly gave up some of the purchase money in order to have funding in case the deal fell through.
I think you have a misunderstanding of how deals like this take place. Facebook would have undoubtedly preferred to close the sale prior to the B round, but I am sure that whenever Facebook originally came calling, Instagram maintained that they were not interested in selling. I know this only because this is what hot target companies always say when receiving unsolicited offers. Instagram followed up by putting its money where its mouth was and closing a big round that gave it enough money to stay independent for a long time while growing the company. At that point, Facebook's only option was to go big or go home.
Facebook could have tried to preempt the B-round by raising its bid before the round closed, but it seems pretty clear that it was going to take about $1B to get Instagram off the block, whether that happened before or after the B round.
At the end of the day, the B-round does not make a huge deal to Facebook either way - to the extent that you are prepared to pay $1B for a company, you're not going to be too worried about a measly $50M going out the door.
It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price.
But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened.
So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it.
So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties.
But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.