Facebook was founded by Mark Zuckerberg with his college roommates and fellow computer science students Eduardo Saverin, Dustin Moskovitz and Chris Hughes. The website's membership was initially limited by the founders to Harvard students, but was expanded to other colleges in the Boston area, the Ivy League, and Stanford University. It gradually added support for students at various other universities before opening to high school students, and, finally, to anyone aged 13 and over.

Facebook has met with some controversy. It has been blocked intermittently in several countries including Pakistan, Syria, People's Republic of China, Vietnam, and Iran. It has also been banned at many places of work to discourage employees from wasting time using the service. Privacy has also been an issue, and it[clarification needed] has been compromised several times. Facebook settled a lawsuit regarding claims over source code and intellectual property. The site has also been involved in controversy over the sale of fans and friends.

A January 2009 Compete.com study ranked Facebook as the most used social network by worldwide monthly active users, followed by MySpace. Entertainment Weekly put it on its end-of-the-decade 'best-of' list, saying, "How on earth did we stalk our exes, remember our co-workers' birthdays, bug our friends, and play a rousing game of Scrabulous before Facebook?"

Mark Zuckerberg wrote Facemash, the predecessor to Facebook, on October 28, 2003, while attending Harvard as a sophomore. The site represented a Harvard University version of Hot or Not, according to the Harvard Crimson. According to The Harvard Crimson, Facemash "used photos compiled from the online facebooks of nine Houses, placing two next to each other at a time and asking users to choose the 'hotter' person". To accomplish this, Zuckerberg hacked into the protected areas of Harvard's computer network and copied the houses' private dormitory ID images. Harvard at that time did not have a student directory with photos, and basic information and the initial site generated 450 visitors and 22,000 photo-views in its first four hours online. That the initial site mirrored people’s physical community—with their real identities—represented the key aspects of what later became Facebook.

The site was quickly forwarded to several campus group list-servers but was shut down a few days later by the Harvard administration. Zuckerberg was charged by the administration with breach of security, violating copyrights, and violating individual privacy, and faced expulsion, but ultimately the charges were dropped. Zuckerberg expanded on this initial project that semester by creating a social study tool ahead of an art history final by uploading 500 Augustan images to a website, with one image per page along with a comment section. He opened the site up to his classmates and people started sharing their notes. The following semester, Zuckerberg began writing code for a new website in January 2004. He was inspired, he said, by an editorial in The Harvard Crimson about the Facemash incident. On February 4, 2004, Zuckerberg launched "Thefacebook", originally located at thefacebook.com.

Membership was initially restricted to students of Harvard College, and within the first month, more than half the undergraduate population at Harvard was registered on the service. Eduardo Saverin (business aspects), Dustin Moskovitz (programmer), Andrew McCollum (graphic artist), and Chris Hughes soon joined Zuckerberg to help promote the website. In March 2004, Facebook expanded to Stanford, Columbia, and Yale. This expansion continued when it opened to all Ivy League schools, New York University, MIT, and gradually most universities in Canada and the United States. Facebook incorporated in the summer of 2004 and the entrepreneur Sean Parker, who had been informally advising Zuckerberg, became the company's president. In June 2004, Facebook moved its base of operations to Palo Alto, California. Facebook received its first investment later that month from PayPal co-founder Peter Thiel. The company dropped The from its name after purchasing the domain name facebook.com in 2005 for $200,000.

Facebook launched a high school version in September 2005, which Zuckerberg called the next logical step. At that time, high school networks required an invitation to join. Facebook later expanded membership eligibility to employees of several companies, including Apple Inc. and Microsoft. Facebook was then opened on September 26, 2006, to everyone of ages 13 and older with a valid e-mail address. On October 24, 2007, Microsoft announced that it had purchased a 1.6% share of Facebook for $240 million, giving Facebook a total implied value of around $15 billion. Microsoft's purchase included rights to place international ads on Facebook. In October 2008, Facebook announced that it was to set up its international headquarters in Dublin, Ireland. In September 2009, Facebook claimed that it had turned cash flow positive for the first time. In June 2010, an online marketplace for trading private company stock reflected a valuation of $11.5 billion.

Traffic to Facebook has increased exponentially since 2009. More people visited Facebook than Google for the week ending March 13, 2010. Facebook has also become the top social network across eight of individual markets in the region, Philippines, Australia, Indonesia, Malaysia, Singapore, New Zealand, Hong Kong and Vietnam, while other brands commanded the top positions in certain markets, including Google-owned Orkut in India, Mixi.jp in Japan, CyWorld in South Korea and Yahoo!’s Wretch.cc in Taiwan.[citation needed]

Most of Facebook's revenues comes from Credits, and advertisements that are served from the website's Flyers application. Microsoft is Facebook's exclusive partner for serving banner advertising, and as such Facebook only serves advertisements that exist in Microsoft's advertisement inventory. According to comScore, an internet marketing research company, Facebook collects as much data from its visitors as Google and Microsoft, but considerably less than Yahoo!. In 2010, the security team began expanding its efforts to counter threats and terrorism from users. On November 6, 2007, Facebook launched Facebook Beacon, which was an ultimately failed attempt to advertise to friends of users using the knowledge of what purchases friends made.

Facebook generally has a lower clickthrough rate (CTR) for advertisements than most major websites. For banner advertisements, they have generally received one-fifth the number of clicks on Facebook compared to the Web as a whole. This means that a smaller percentage of Facebook's users click on advertisements than many other large websites. For example, while Google users click on the first advertisement for search results an average of 8% of the time (80,000 clicks for every one million searches), Facebook's users click on advertisements an average of 0.04% of the time (400 clicks for every one million pages). Sarah Smith, who was Facebook's Online Sales Operations Manager, confirmed that successful advertising campaigns can have clickthrough rates as low as 0.05% to 0.04%, and that CTR for ads tend to fall within two weeks. Competing social network MySpace's CTR, in comparison, is about 0.1%, 2.5 times better than Facebook's but still low compared to many other websites. Explanations for Facebook's low CTR include the fact that Facebook's users are more technologically savvy and therefore use ad blocking software to hide advertisements, the users are younger and therefore are better at ignoring advertising messages, and that on MySpace, users spend more time browsing through content while on Facebook, users spend their time communicating with friends and therefore have their attention diverted away from advertisements.