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Confusion in Zynga's S-1

July 5, 2011: 2:40 PM ET

Zynga says it first raised outside capital in 2008. But did it?

After Zynga filed for its $1 billion IPO last week, there were lots of congratulatory blog posts and tweets for investors who had seen the company's early potential, and now stand poised to capitalize on their foresight. Totally deserved, given that nobody at the time had figured out how to make money on Facebook apps.

What remains in question, however, is when did those early investors first invest? More importantly, why does Zynga's S-1 seem to provide two different answers?

In a section of its registration statement titled "Certain relationships and related transactions," Zynga provides the following chart:

From this, it looks like LinkedIn (LNKD) founder Reid Hoffman was the first money in, with a Series A investment of around $165,000 in January 2008. Venture capital firms Avalon Ventures, Foundry Group and Union Square Ventures then followed in February 2008 with a combined Series A-1 investment of nearly $5 million.

Except that it couldn't have happened that way.

Take a look at this regulatory filing, back from when Zynga was still known as Presidio Media. It is dated December 31, 2007, and signed by company founder and CEO Mark Pincus. At that time, Zynga listed Avalon Ventures, Foundry Group and Union Square Ventures as shareholders (i.e., two months before the S-1 suggests they first invested). Moreover, there is no mention of Series A-1 stock. Just Series A.

There also are two more pieces of information that support an initial investment prior to what is listed in the Zynga S-1:

  1. 1. Zynga said that Brad Feld, a managing director with Foundry Group, has been on the Zynga board of directors since November 2007. No way he takes that seat if his firm -- which had just closed its debut fund -- hadn't invested at around the same time.
  2. 2. Fred Wilson of Union Square Ventures blogged about the investment on January 15, 2008. In fact, he wrote that the investment had "already allowed Zynga to double the size of its engineering team and to integrate several other social games and social game developers into their network."

In addition, the class of shares supposedly held by these early investors doesn't make much sense. The above chart suggests that Avalon, Foundry and Union Square all held the exact same type of stock (Series A-1), purchased at the same time at the same price. The only difference would be that Avalon bought a lot more than either Foundry or USV.

Later on in the S-1, however, Zynga reports about having repurchased shares from certain insiders. Here is part of the chart:

How exactly did USV and Foundry sell "Series A" shares when they were "Series A-1" investors?

My understanding of the early investment has always been that USV and Foundry co-led the original investment, with Reid Hoffman and some other angel investors also participating. Then Avalon Ventures came aboard shortly thereafter, at pricier terms. This would make sense according to the preceding chart about repurchased shares, but not based on the previous ones about original share issuance.

Perhaps there is some legal or accounting explanation for these apparent discrepancies. One wouldn't like to think that Zynga has misreported its own history in a document that must have received an intense amount of internal scrutiny. But, as of this moment, it sticks out like FarmVille on MySpace.

Zynga thus far has not responded to a request for comment. I've also reached out to Avalon, Foundry and USV -- but have not yet heard back.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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