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.
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