Because he is 17 year old Russian high-school student Andrey Ternovskiy.  He’s the guy who created Chatroulette by himself, on a whim, in 3 months, and is now in the US fielding offers, meeting with investors, and considering never again returning to Moscow.

Should he sell?  Would he sell?  To frame these questions it is good to start by taking stock of the assets.  He has his skills as a programmer, the codebase he has developed so far, and the domain name Chatroulette.com which is presently a meeting place for 30 million users with an additional 1 million new users per day. His skills, however formidable, are perfectly substitutable; and the codebase is trivially reproduceable.  We can therefore consider the firm to be essentially equal to its unique exclusive asset:  the domain name.

Who should own this asset?  Who can make the most out of it?  In a perfect world these would be distinct questions.  Certainly there is some agent, call him G, which could do more with Chatroulete.com than Andrey, but in a perfect world, Andrey keeps ownership of the firm and just hires that person and his competitive wage.

But among the world’s many imperfections, the one that gets in the way here is the imperfection of contracting.  How does Andrey specify G’s compensation?  Since only G knows the best way to build on the asset, Andrey can’t simply write down a job description and pay G a wage.  He’d have to ask G what that job description should be.  And that means that a fixed wage won’t do. The only way to get G to do that special thing that will make Chatroulette the best it can be is to give G a share of the profits.

If Andrey is going to share ownership with G, who should have the largest stake?  Whoever has a controlling stake in the firm will be the other’s employer.  So, should G employ Andrey (as the chief programmer) or the other way around?  Andrey’s job description is simple to write down in a contract.  Whatever G says Chatroullete should do, Andrey programs that.  Unlike when Andrey employs G, G doesn’t have to know how to program, he just has to know what the final product should do.  And if Andrey can’t do it, G can just fire him and find someone who can.

So Andrey doesn’t need any stake in the profits to be incentivized to do his job, but G does.  So G should own the firm completely and Andrey should be its employee.  The asset is worth more with this ownership structure in place, so Andrey will be able to sell for a higher price than he could expect to earn if he were to keep it.

Here is my previous post on ChatRoulette.

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