Summary of ‘Zero to One’, Chapter 9: Foundations

Summary: A startup messed up at its foundation cannot be fixed. Choose founders very carefully: they must know each other and get along. To reduce misalignment, keep your board small (three people). Prefer full-time, on-site employees. To incentivize them to create long-term value, compensate with equity, not high salaries. This includes the CEO!

Thiel’s law: a startup messed up at its foundation cannot be fixed. The universe changed drastically in its first few microseconds, and hasn’t changed much since. The US constitution was an effective barrier to changing how government should work in future. Companies are the same. At the start, you have to choose the right partners, and hire the right people.

Founding matrimony

Choose your co-founders extremely carefully! I once invested in a company founded by two people who met at a networking event. They clashed, it failed, and I lost my money. Founders should have known each other for a significant time.

Ownership, possession, and control

Working solo guarantees alignment. But it also limits what you can do.

Hiring the right people isn’t enough. You need structure to keep them aligned.

There are three forms of power in companies:

Ownership: who owns the company’s equity? (Founders, investors.)
Possession: who does the work day-to-day? (Managers, employees.)
Control: who governs the company? (Board of directors.)

Misalignment is usually between these three forms of power. Take the DMV: we the people own the DMV, but it’s possessed by petty clerks. In theory, the legislature control the DMV, but not in reality.

Large corporations suffer from misalignment between ownership and possession. The CEO of General Motors has much possession, but little ownership. To cash out, he will optimize for short-term company performance, at the expense of long-term performance and the owners.

In contrast, startups suffer from misalignment between ownership and control. Investors on the board (control) may want quick wins, where founders (ownership) want long-term performance.

Keep the board small: three people, or at most five. Public companies are regulated to have larger boards, but this makes it harder to communicate and reach consensus.

On the bus or off the bus

Generally, everyone should be full-time. People are misaligned if they don’t have stock options or a regular salary. Consultants, part-time employees, even remote employees are often misaligned. They’ll grab near-term value instead of creating long-term value. (Lawyers and accountants are pragmatic exceptions.)

Cash is not king

A high-salary CEO is misaligned: he will defend the status quo (which includes his high salary). A startup CEO should never receive more than $150K per year. A CEO should take either the lowest or highest salary! If the CEO salary is lowest, this demonstrates commitment to everyone else; if it’s highest, it sets a sensible cap on others’ compensation. Cash is about immediate optionality, which is misaligned with long-term investment, so minimize cash compensation.

Vested interests

Startups should compensate with equity, not high salaries. Ownership of the company is the only form of compensation that incentivizes creating long-term value. But you must allocate equity very carefully. Any allocation can seem unfair. So keep your equity allocation secret!

Most people don’t want equity. If the company doesn’t succeed, it’s worthless. This is why equity is powerful: a preference for equity reveals a commitment to the long term.

Extending the founding

Only at the start can you set the rules. But the most valuable kinds of company maintain an openness to invention. You’re still “founding” as long as you’re creating new things.

Tagged #zero-to-one, #summary.

More by Jim

What does the dot do in JavaScript?

foo.bar, foo.bar(), or foo.bar = baz - what do they mean? A deep dive into prototypical inheritance and getters/setters. 2020-11-01

Smear phishing: a new Android vulnerability

Trick Android to display an SMS as coming from any contact. Convincing phishing vuln, but still unpatched. 2020-08-06

A probabilistic pub quiz for nerds

A “true or false” quiz where you respond with your confidence level, and the optimal strategy is to report your true belief. 2020-04-26

Time is running out to catch COVID-19

Simulation shows it’s rational to deliberately infect yourself with COVID-19 early on to get treatment, but after healthcare capacity is exceeded, it’s better to avoid infection. Includes interactive parameters and visualizations. 2020-03-14

The inception bar: a new phishing method

A new phishing technique that displays a fake URL bar in Chrome for mobile. A key innovation is the “scroll jail” that traps the user in a fake browser. 2019-04-27

The hacker hype cycle

I got started with simple web development, but because enamored with increasingly esoteric programming concepts, leading to a “trough of hipster technologies” before returning to more productive work. 2019-03-23

Project C-43: the lost origins of asymmetric crypto

Bob invents asymmetric cryptography by playing loud white noise to obscure Alice’s message, which he can cancel out but an eavesdropper cannot. This idea, published in 1944 by Walter Koenig Jr., is the forgotten origin of asymmetric crypto. 2019-02-16

How Hacker News stays interesting

Hacker News buried my post on conspiracy theories in my family due to overheated discussion, not censorship. Moderation keeps the site focused on interesting technical content. 2019-01-26

My parents are Flat-Earthers

For decades, my parents have been working up to Flat-Earther beliefs. From Egyptology to Jehovah’s Witnesses to theories that human built the Moon billions of years in the future. Surprisingly, it doesn’t affect their successful lives very much. For me, it’s a fun family pastime. 2019-01-20

The dots do matter: how to scam a Gmail user

Gmail’s “dots don’t matter” feature lets scammers create an account on, say, Netflix, with your email address but different dots. Results in convincing phishing emails. 2018-04-07

The sorry state of OpenSSL usability

OpenSSL’s inadequate documentation, confusing key formats, and deprecated interfaces make it difficult to use, despite its importance. 2017-12-02

I hate telephones

I hate telephones. Some rational reasons: lack of authentication, no spam filtering, forced synchronous communication. But also just a visceral fear. 2017-11-08

The Three Ts of Time, Thought and Typing: measuring cost on the web

Businesses often tout “free” services, but the real costs come in terms of time, thought, and typing required from users. Reducing these “Three Ts” is key to improving sign-up flows and increasing conversions. 2017-10-26

Granddad died today

Granddad died. The unspoken practice of death-by-dehydration in the NHS. The Liverpool Care Pathway. Assisted dying in the UK. The importance of planning in end-of-life care. 2017-05-19

How do I call a program in C, setting up standard pipes?

A C function to create a new process, set up its standard input/output/error pipes, and return a struct containing the process ID and pipe file descriptors. 2017-02-17

Your syntax highlighter is wrong

Syntax highlighters make value judgments about code. Most highlighters judge that comments are cruft, and try to hide them. Most diff viewers judge that code deletions are bad. 2014-05-11

Want to build a fantastic product using LLMs? I work at Granola where we're building the future IDE for knowledge work. Come and work with us! Read more or get in touch!

This page copyright James Fisher 2019. Content is not associated with my employer. Found an error? Edit this page.