The untold story of Google's $1.65 billion acquisition of YouTube, from those who lived it

From left: YouTube founders Steve Chen, Chad Hurley, and Jawed Karim; Google cofounder Larry Page, former Google CEO Eric Schmidt, and Google cofounder Sergey Brin.Noah Berger/AP Photo; YouTube; Paul Sakuma/AP Photo; Samantha Lee/Business Insider
  • YouTube's sale to Google for $1.65 billion in October 2006 altered the course of Silicon Valley history.
  • In honor of YouTube's 15th anniversary, Business Insider spoke with early employees, investors, and founders about the whirlwind 18 months of YouTube's life as an independent company. That story is impossible to tell completely without delving into the weeks and months leading up to YouTube's landmark sale.
  • From the day YouTube decided to sell to the day the deal was announced was a matter of weeks. In the end, YouTube was hours away from inking a deal with Yahoo before deciding to give Google one last shot at acquiring the company.
  • The sale came at the perfect time for the fledgling startup: YouTube was burning through cash, running out of server space, and weathering litigation threats from record labels. Its staff was working around the clock and its founders were growing increasingly wary of how to sustain the company without some muscle in its corner.
  • This is the inside story of YouTube's sale, including the quiet bidding war, the last-minute deals with some of the largest rights holders in the world, and a late-night meeting in a Denny's parking lot.

In the early hours of an October day in 2006, David Drummond, Google's general counsel, and Gideon Yu, YouTube's chief financial officer, huddled over the hood of Yu's car, which was parked in a Denny's parking lot in Redwood City, California.

As they used the light from their Blackberry phones to read through a sheaf of documents, a police officer pulled up. He briefly blared his siren, casting a bright light on the pair of executives. He demanded to know why they were having a clandestine meeting in a Denny's parking lot at 3 a.m.

"We're signing a merger agreement, sir," Yu said with his hands in the air. Advertisement

The officer called Yu over to his car. Yu, dressed casually in shorts, a t-shirt, and a backwards baseball cap, walked over and showed the officer the documents, which stated that Google would buy YouTube for $1.65 billion. The officer told them to carry on.

Drummond and Yu, still shaking from the experience, signed the papers and went home, their respective companies celebrating for different reasons. Google, for acquiring what would become one of the most valuable parts of its growing empire. YouTube, for gaining some muscle in its corner. The company, only 18 months old at that point, was fending off potentially costly copyright claims and scrambling to support a user base that was growing so quickly, the site's infrastructure was cracking.

Though it had already become a global sensation, on the inside, YouTube was stretched nearly to a breaking point.
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'We didn't have the resources to keep on fighting'

The months leading up to that day had been hectic for YouTube.

The small team — led by cofounders Steve Chen, YouTube's chief technology officer, and Chad Hurley, the company's CEO — was struggling to keep up with demand. It was a time before technology like Amazon Web Services existed, and YouTube was burning through server space. "It was pretty balls to the wall, I guess you would say. I think we were working seven days a week," Yu Pan, an engineer and YouTube's first employee, told Business Insider. "We were growing like crazy. The number of views was exponential. We were burning hard drives like nobody's business." Advertisement

Gideon Yu, who joined as CFO in September 2006, remembers the team begging everyone they knew for access to server space.

"There was a time when we reached out to all of our investors and all of our friends and said, 'Hey' — and this email actually went out — 'if you have any servers that you're not using, can we borrow them?'" Yu said. "We literally went around to friends at companies, at their houses, and got every server we could."

YouTube's first headquarters was above Amici's East Coast Pizzeria in San Mateo, California.Katie Canales/Business Insider
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On top of that, YouTube was scrambling to avoid being seen as another Napster-like company. So much content owned by music labels and movie studios was showing up on YouTube that the employees couldn't take it down fast enough.

"The founders did not intend it to be a place for pirated content," according to Roelof Botha, who had worked with the YouTube founders years earlier at PayPal and pushed his firm, Sequoia Capital, to invest in YouTube. "From the get-go, we worked with the legal team and started to build a content moderation team. As soon as you let things like that happen, that drags down the site. If you let that stuff filter through, it will just take over like a cancer."

At the time, the litigation threats were a very big risk for YouTube, Botha said. Advertisement

"It made Chad and Steve question whether it was worth soldiering on with the company," he said. "We didn't have the resources to keep on fighting."

Zahavah Levine, YouTube's general counsel and VP of business affairs, remembers feeling like YouTube couldn't keep up. The infrastructure demands were too high. The company's bank account was dwindling. Music company executives were demanding hundreds of millions of dollars. Other players were practically banging down YouTube's door trying to form partnerships.

"We were doing the best we could," Yu, the CFO, said. "But when you took the confluence of all these factors, it became very difficult to raise money. And look, raising more money, it would mean more money would go right out the door to infrastructure as well as to potential deals with IP owners. So we were stuck in a little bit of a catch-22 there."Advertisement

3rd Avenue Sports Bar, directly next door to YouTube's first office.Katie Canales/Business Insider

One afternoon, the company had a contentious meeting with Universal Music, which was being "very, very aggressive" with YouTube in marking copyright violations of its music, according to Botha. Later that day, Chen and Hurley made their way to the bar next door to the YouTube office, 3rd Avenue Sports Bar, where they would sometimes go at night to have discussions about the company. They had taken a walk around the block in San Mateo and made a decision. At the bar, they told Yu they wanted to sell. The way Yu tells it, both Chen and Hurley were frustrated by the amount of meetings the company was having about copyright infringement, meetings that were becoming increasingly hostile. They told Yu that they had started YouTube to make a good product. This wasn't what they signed up for. Advertisement

The group discussed whether it made sense to look to larger companies for an acquisition, companies who had the resources to negotiate deals and solve infrastructure issues — a company with the "really blunt instrument" of a lot of people and a lot of money, Yu said.

After consulting with YouTube's board and its investors, everyone agreed: it was time to move forward with an acquisition.

The bidding war

YouTube's acquisition took only about three weeks after that night at the sports bar, Yu said.Advertisement

While the bidding war for YouTube was said to involve nearly a half-dozen players, including Microsoft, Viacom, and News Corp., at the end of the day, there were really only two contenders: Yahoo and Google.

"The bidding war was actually a very small and tight bidding war," Yu said. "We wanted to keep information flow very tight, minimize the chances of leaks. The minute we got rights holders and other folks involved in that kind of a circus, it could have ended a lot more poorly for YouTube than it ended up ending."

Neither Chen nor Hurley came from finance backgrounds, and turned to their investors at Sequoia for advice on how to negotiate the terms of the deal. Advertisement

"We used to have a pizza dinner at my place here, at our house in the dining room. We would all sit around our table, and Roelof Botha was in charge of getting the pizza," Pierre Lamond, a former partner at Sequoia, said. "It was clear to both Yahoo and Google that we had a unique product, that it would be very difficult to compete with. We had the tailwind by then."

Yu, who had been Yahoo's treasurer before joining YouTube, said he called his old colleagues and told them they had a chance to buy YouTube. But if Yahoo was interested, it needed to set up a meeting right away.

What followed sounds like Silicon Valley lore, but it's been well-documented: Because the YouTube founders had become so famous in Silicon Valley, they had to pick a meeting place no one would notice. They chose a Denny's in Redwood City, a 14-minute drive from YouTube's offices.Advertisement

On the first day, Hurley and Chen met Google's Larry Page and Eric Schmidt there. The next, executives from Yahoo. (Chen told journalist Sarah Lacy at TechCrunch Disrupt in 2011 that he ordered the mozzarella sticks.)

The Denny's in Redwood City, California.Katie Canales/Business Insider
Soon, Google made an offer. It was, according to Yu, too low. Advertisement

Meanwhile, YouTube had been working on deals of its own with the music labels in hopes of avoiding costly copyright lawsuits. In September 2006, Levine and Chris Maxcy — one of the earliest YouTube employees in charge of business development for the site — closed a deal with Warner Music.

Levine described it as a "landmark, first-of-kind" deal, one that would enable YouTube to host user-generated videos that contained music owned by Warner for a share of the ad revenue.

At the time, Levine and Maxcy were negotiating three more deals with big rights holders as quickly as possible. On the day YouTube announced its acquisition, it also announced three separate deals: one with CBS, which would allow YouTube to broadcast CBS programs; the other two were with music labels, Universal Music Group and the predecessor to Sony Music, allowing YouTube to air their music videos. Advertisement

"We were negotiating the acquisition prices between Yahoo and Google simultaneously with those rights deals, and we were saying to Yahoo and Google, 'Look, just assume that we're going to get those deals done and let's negotiate accordingly,'" Yu said.

Levine said she essentially moved into the law firm they were working with at the time.

"I lived in San Francisco, but I couldn't even afford the time to go back and forth between Palo Alto and San Francisco," Levine said. "I took a hotel room right next to the law firm where I slept an hour or two a night."Advertisement

As if there weren't already enough moving parts, YouTube had outgrown its San Mateo office and was planning a move to San Bruno. Sequoia's Lamond had used his connections with higher-ups at The Gap to get them to lease their old headquarters to YouTube.

The plans to move to the new office had been in place for months, well before YouTube had decided to sell, but the timing made things complicated for Levine, who was still negotiating the licensing deals along with Maxcy.

"We were in the office at like, 2 o'clock in the morning on a Saturday night, hammering out these deals, and the movers were there packing everything up," Levine said. "I remember being on a call with Sony Music and suddenly the call was disconnected and the movers had pulled the plug of some piece of hardware that was related to our phone system and our printer. We were saying, 'No! Stop! It's OK! Do not disconnect these phones, do not disconnect our printer!'"Advertisement

One last chance for Google

The Denny's parking lot in Redwood City, California.Katie Canales/Business Insider

By early October, YouTube was close to signing a deal — but not with Google. YouTube had a meeting on the books with Yahoo for a full day of due diligence, and the plan was to sign a term sheet for an acquisition at the end of the day, according to Yu. The day before, they decided to give Google one last chance. Advertisement

"We put Yahoo on the 'back-burner' while we pushed Google for a higher price," Lamond said.

Yu said he got approval from Hurley and Chen to give Google a price.

"I said, 'If you hit this price, we will cancel our meeting with Yahoo,'" Yu said.Advertisement

The YouTube team proposed $1.65 billion: a number purposefully 10% more than what eBay paid for PayPal in 2002, according to Botha. PayPal's alumni network, which included Peter Thiel, Elon Musk, and Reid Hoffman, in addition to the YouTube founders and Botha, had a "healthy competition," Botha said.

Google agreed to the price, and YouTube said it was ready to do the deal. But the plan was still to meet with Yahoo the next morning — if this deal was going to happen, it needed to happen right away so YouTube didn't cancel with Yahoo and leave itself high and dry. Drummond and Yu would need to work all night and into the morning to get it done.

That's how they found themselves, in the middle of the night, back at Denny's — a 14-minute drive from YouTube and a 12-minute drive from the Googleplex — signing the papers on the hood of Yu's car. Advertisement

"I went back and I showed the papers to Chad, to Steve, and then we called Yahoo and canceled the meeting," Yu said. "And that's how it happened."

Yahoo declined to comment on its involvement in YouTube's sale.

'It was all on adrenaline'

YouTube's second headquarters in San Bruno, California.Katie Canales/Business Insider
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From the day the term sheet was signed to the day the deal was announced was a matter of days — Chen estimates it was five, Levine and Yu both pegged it at about a week. Either way, the turnaround was quick.

"By that time, it was all on adrenaline," Chen said. "We had signed the deal, it was down at the legal offices. I remember then driving at something like 100, 110 miles per hour to San Bruno and walking into the office for the first time and making the announcement for the team." There was no big, flashy announcement, no fanfare — Larry Page, Sergey Brin, and Eric Schmidt showed up at the new San Bruno office to announce the acquisition with Hurley and Chen.Advertisement

Jamie Byrne, who joined YouTube in June 2006 as director of ad sales and is still at the company as senior director of creator partnerships, described it as "this completely surreal, shocking moment."

"I think what made it even more poignant for many of us was that the competition for YouTube at the time was Google Video," Byrne said. "There was a lot of excitement around the fact that we now had this incredible benefit of the infrastructure and the support that Google was going to be able to provide us, but also a sense of pride that we went up against the biggest possible player in the space and we actually were very successful in what we were doing."

While some YouTube employees were in-the-know about the acquisition, others, like Misty Ewing-Davis, a content moderator, weren't clued in. The employees expected that Monday would be consumed by the office move, not a life-changing acquisition. Many of the employees were dressed in what Ewing-Davis described as "grubby clothes," since the team was planning to spend the day figuring out the new seating plan and assembling desks. Advertisement

The team ended up walking across the parking lot to a since-demolished TGI Fridays and had a few drinks to celebrate.

"I'm sure if anybody has photos from that day, we all just look like slobs," Ewing-Davis said. "Nobody expected that."

Byrne remembers the team writing and recording a short video that Hurley and Chen ended up filming outside in the parking lot that day, the red and white striped awning of TGI Fridays visible in the background. Advertisement

In the video, a clearly giddy Hurley and Chen, dressed in blazers, announced the sale and thanked the community of creators.

"We're going to stay committed to developing the best service for you, developing the most innovative service and tools and technologies so you can keep having fun on our site," Hurley said.

A 'pretty big step up'

Life remained mostly unchanged for the YouTube crew after the acquisition was completed in November. YouTube was — and remains to this day — in a separate office in San Bruno. Advertisement

Chen left YouTube for Google in 2009, and moved on from the company two years later. Hurley stayed on as CEO until 2010, when Google's Salar Kamangar took over. Chen says he and Hurley had "already been talking about doing something else together," and they partnered up in 2011 to launch an internet company called AVOS Systems.

Most of the early YouTube employees noticed only minor changes to their life, especially at first. Google added its mini convenience-stores to YouTube's office, where employees could access as many free packs of gum and soft drinks as they wanted. Yu Pan, YouTube's employee No. 1, noticed that the company parties got better. The day after the acquisition was announced, the staff got to have a catered lunch of Subway sandwiches, according to Gideon Yu. "We were snacking on Cup of Noodles and stuff at the old office," he said. "Pretty big step up." Advertisement

YouTube's current headquarters in San Bruno, California.Katie Canales/Business Insider

But Google had promised to let YouTube keep doing what it was doing, to stay hands-off and let it grow, and to keep fostering the community of creators YouTube had built. It kept that promise.

"You always hear these nightmare stories of integrated companies, but that wasn't the case for us," said Kevin Donahue, YouTube's vice president of content at the time.Advertisement

Even under the new ownership of a tech giant, Chen and Hurley had control. They shared an office, from which they delegated tasks to newfound hoards of employees that came from Google. As long as they could deliver the promised traffic demonstrating YouTube's monumental growth, they had say over the decision-making, Chen said.

The biggest concern to the team was presenting YouTube and Google Video as a united front going forward.

"It was like shaking hands with our biggest enemy and now we were being forced to be allies," Chen said. "It sounds awkward at first, but it was just the Google Video and YouTube teams being merged together."Advertisement

Eventually, as is the case with nearly every startup that is able to grow or become acquired, the dynamic shifted. YouTube started to feel less like a small, close-knit family and more like what it eventually became: a multi-billion-dollar business housed inside one of the biggest companies on the planet.

Botha, the Sequoia partner who served on YouTube's board, remembers walking into YouTube's office days after the deal was announced. After a year of getting to know everyone on a first-name basis, he says he was stunned to see new faces staring back at him.

"I walk in, and they had replaced everybody. They had a new front desk person, " Botha said. "I felt like a complete outsider, I was so taken aback. It was clear at that point: It was Google's company."Advertisement

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