Structural Integrity and Long Term Success

The best way to make money is to create more value than you capture, right too build something that people want up. And yet we're all supposed to pretend these days that we think all kinds of making money is equally good. And there's so many ways of making money in our economy today where you can get rich without creating any value at all. And I just think like, why don't we just stop pretending that we think that's good Today, we have a very special guest, Eric Reese author of the Lean Stup, which was a New York Times bestseller and a crucial playbook for all founders. Eric has a new book coming out called Incorruptible Why Good Comanies Go Bad and How Great Companies Stay Great. And he's here to dive into some of those core themes with us. Welcome, Eric. Hey man, good to see you. Always fun to hang out. I mean the Lean startup our whole generation and the new generations how to build. now you're back with a new book called Incorruptible. What made you decide to start it You know, all my books come from pain. You know, I never ask anybody to do something in a book that I haven't done myself. And R, we've been around this a long time. Like how many companies have we seen built and created where the thing that made them special gets lost. How many founders lose control of their company get kicked out. It doesn't become what they hoped it would be. because they don't understand how to protect created Yeah. So I feel like Lean Startup, we created so many companies worth protecting, but we didn't give them the tools they needed to actually stay in control, to actually protect the trustworthiness of the thing that they made. so I'm sick of that Going from zero to one, a lot of people spend a lot of time thinking about zero to one. and I think Lean Startup is one of the Bibles for being able to figure that out. Thank you for saying that. There isn't really a playbook. that is written until now around how do you make it last for a hundred years Absolutely. and unfortunately The way we teach leadership and entrepreneurship today, we tell people that like, don't worry, just be successful. Just get to product market fit Success will protect you. So once you get successful, then you'll be powerful, that will give you freedom. And what we don't tell you and what I wish no one told me The more successful your organization, the more valuable it is as a target Like that's what makes it worth taking over. That's what makes it worth stealing from you is the fact that it is successful. So I think there's like a missing ingredient here that It was a big blind spot for me. I didn't see this coming, but I've you know, I've lived at now for quite a number of years. I've seen so many companies, you know, ha itt happened to them In the book, I tell this story about like I was coaching a new founder, Br called The prorofessor ook to protect his privacy. he's a genius. story incred an incredible person and building this really transformative technology, you know, on the cutting edge of AI post bioscience So super cool, huge upside Hell a danger because You could easily use this technology for something really aw awful, bioeapons, pandemics, you know, that kind of stuff. So he's trying to recruit talent He tell me to promise people that this is not going to be used for those things Part of why he has this massive talent advantage is people trust him. people believe. that this technology is going to be used in the right way. But then people are asking these tough questions like But aren't we a for profit company? But if investors wantan to do something evil, and he'd be like, well, I'll tell him no. Why would you be working there then if you're telling your investors no, right He didn't know how to answer those questions. But when he would meet with investors, all these VCs would just be like, oh, that's nice, honey. Oh, you're worried about that stuff. Liket don't worry about it. You know, if you're serious about business, this is not the kind of thing you should be worried about. So like he was feelillingally trapped. Anyway, I happened to be on my way Let's talkking to him to this event commemorating a founder who'd had huge success, someomeone we both know well had made unbelievable amounts of money for his investors and at the earliest opportunity they had betrayed him and kicked him out of his own company And we were doing this event to like celebrate him. And people have flown in from all over the country, employees, ex employees, like there must have been a thousand people there including people he had laid off who are like coming back at their own expense to come to this event. to be there for Tomm explaining to the founder, listen, the professor I can't talk right now because I gott to go to this thing I'm explaining about the founder, the people coming in. he's like, Wow, respect That's the kind of company I want to build someday. And I was like, you are not listening to me He doesn't work there anymore This isn't a party it's wake, right And he said, What did he die? He's still alive. He's at the party. He said, Did the company die? No the company's still publicly traded company? He's, what are you mourning And this is the thing. I remember being at that party and being like, what are we morning What exactly is it? And I realized like we all had this sense, like deep in our heart that like This is not how it's supposed to be. Something's gone wrong here We trusted this company. We trusted this guy. He was the mission guardian, the protector of this really important mission to us. And now that he's gone I like the new CEO. He's a friend of mine too. Yeah. But like If he makes a promise investors don't like Then he'll be replaced. So what are his promises worth? So we're in this era now where we have temporary organizations being led by temporary managers on behalf of temporary investors. Average holding time of stocks is like dramatically down. lifespan of companies is dramatically down. average tenure of executives is dramatically down. then people say And why is trust down? How come trust? No one trust anybody anymore? Well, because we've built an economy This is how it runs. And I just think we have the final say Matters either have to agree to or not this system. And so we actually are the ones propping it up giving it the fresh meat it needs to survive because it's so value destroy. Basically there's Delaware bylaws, is that right? Basically, you know, if you're a Delaware S cororps you have to relentlessly pursue profit. otherwise there is grounds to remove you. That specific principle is exactly how uh, you know, the end of that founder's reign of that particular company happened. I still remember the professor being like I was like, you're not listening to right?' not getting it. He's like, are you saying that's gonna be me someday I'm like, you're on a one way ticket to this exact outcome because you've adopted the so called best practices of corporate governance of how companies are supposed to be buildil and run and structured One of them, of course, is what's called shareholder primacy, right? this idea that If you arere Delaware C Corp, the thing you make is not a beautiful living thing that creates products and you know, delights customers and is like a good no. It's just a financial instrument investment returns. That's what that's all it is. That's actually a very new idea. And I think one of the things that's a big misconception for founders is they assume that this is some kind of natural law or like a pillar of capitalism going back to Adam Smith or whatever. No, Adam Smith would have been like, what the guys talking about This idea dates to the nineteen eighties. When the professor was saying to me he was just like, wait So Is it possible to build an incorruptible company? That's kind of how the book got its title? And I was like, well, it's a good news bad news kind of thing Everyone says this is impossible this kind of corruption of the mission is natural. It's just as you get bigger, as you scale, as whatever Butether's not true There were actually choices we could make as founders and especially choices we make early that can change the trajectory of the company so that as you say, its longevity could can be measured in decades and centuries, not quarters. But the bad news was dude, you've already taken wrong steps in this direction. You're already you had an incorporated Delaware C cororp. I'm like, if I pull your charter right now It says you have to maximize sharehold value. He's like, No, I doesn't. My guy would never have done that to me. I have a great lawyer. I was like, why don't you call him call me back after this party. I' go to this thing. You call me back tomorrow and you tell me what he says. And I remember talking to the next day. He was like he felt so betrayed. He's like my lawyer said He's doing me a favor. giving me the best practice documents. And then I have to sell if the most evil company in the world wants to buy this company, I have to sell it to them. If my employees do that, they don't quit. like, well, we should probably fix it. I mean, this is the way we've always done it is sort of always done it. What people are going to tell you. I say in the book that one of the things every concept every technique in this book has in common is that someone will try to talk you out of it And so there's actually a whole section on like how to talk to your lawyer about it, how to talk to your investor about it. That's just for based on my having worked with so many companies, I kept a running log all the BS objections, all the weird like just asing questions, like passassive aggressive comments that we got from anybody in the ecosystem I was like, H they are. Here's exactly how to answer them. And here's the evidence. This is the part that really blew my mind. I've been working this a long time, but the long term stock exchange, you know all the stuff I've been doing, trying to like my money where my mouth is, you're like, we're going toange this ecosystems. we all make more money, we got to do it. The thing I didn't really understand is how much evidence we have that these so called best practices suck They're like literally valued destroy. I mean, let's go into one like the most astonishing one, you know, our friend Jeff Lawon at Tillo built that company from nothing to four billion dollars in, you know, actual revenue like stock up three hundred and ninety percent since IPO. I mean, byy all accounts, you know, smash rip roaring success. And then his super voting shares expired after one hundred and ninety nine days and he's out. And so less than half a percent of shareholders did that. You know, how did that happen? Like what's going on? It's like it's honestly unbelievable to me. Well, let me make the case for why he needed to be fired and then you'll see if this makes sense to you. So what happened was, so he took the company public He agreed as part of the IPO prep process, as a lot of founders do that he would have dual class control, Founder control. He'd be the mission guardian. The protections would sunset after seven years And you're taking a company public seven years sounds like a long time Yeah. But man in the public market, seven years is just's barely a beginning. It's like a handful of quarters. Anyway, that was the deal. He made the deal. His advisors and everybody told him, don't worry about it You'd always extend it. it's always too early until it's too late. It's kind of the idea from the book. likeike, okay, whatever seeven years come and go. Now it happens to be Those seven years include the pandemic years, as you well remember, the run up in telecom and text talks we had. was like Golo stock was just up an insane amount That bubble burst and the stock came way down. So at the time he was fired, the stock was down like eighty percent from the peak And it's like, oh, wellkay cases closed. But if you measure from the IPO or even from the pandemic peak, revenue was up. It's like, did the business go down? Was revenue down? Was there some kind of problem? No And yet that was enough for them to fire him and that what really pissed me off about it the most is this one hundred ninety nine dayays. So that so he run this company for seven years as a public company Things expire. It didn't even last one year past the expiration of these protections. And even if you think he made mistakes, and even if you think there's something like And he really earned so little grace to run this company does the fact that he had made all this money, billions for his investors didn't account for nothing? Like what are we doing? And what's strange to me in the book I give not just about twelve twel, there is a fine company they're doing great now. It's not just them company after company after company. I give case studies going back two hundred years whereere we have this like urge when a founder makes a quote unquote mistake, they have to be fired. We have to have accountability for founders. So, we got to have accountab of support Oftentimes that's the end of the company. Right. Like when Edwin Land was fired from Polaroid, now people like Polaroid wasn't that instant camera company? No, man. Polaroid used to be a R and D powerhouse. They like fifteen hundred research scientists on staff. Steve Jobs like loved that company. admired them so much. when Edwin Land was fired, he called it the dumbest thing he'd ever heard. Yeah. And like they never invented another thing ever again after they fired the founder So I just think Even if you agree that the founders made a mistake, we had jumped to the conclusion Firing them, bringing in some suit, like doing the kind of standard best practice thing is somehow going to lead to a positive outcome. and so often it doesn't because Unfortunately, we're teaching people that the mission can only be protected by the founder. And then you get rid of the founder, everyone's like, well, I guess we have no mission anymore. We just become extractive, we just try to make money What I really think is that we shouldn't be just building investor controlled companies or founder controlled companies. There's a third way. Ieresting We could be building mission controlled companies where the mission itself has sovereignty and these companies can then last a lot longer What does that really look like? I mean, Patagonia sort of famously was one of the first to really do this, but You're for someone who's watching They're like, well, I know a Delaware C cororp. and then I know that there's super voting shares and I shouldn't let those expire that might save people from the Jeff Lawson. I mean, that would be better than at least be better than the sunset for sure. But no there's a lot more to this. And maybe help me tell you story. I tell the legend of St price. Okay let's move away from tech for a second. I think it's helpful to understand the precedents that got us into the situation we're in Saul is widely considered to be the father of modern retail If you want to know why he's like People say that about him to give a sense of how influential he was when a guy named Sam Walton I was thinking about starting a retailer in Arkansas He called it Walmart as an intentional tribute the company Saul created which was called FedBR Fad Mark's the original modern retail company started in my hometown in San Diego in the nineteen fifties. Saul was a lawyer before he became an entrepreneur And when he was a lawyer, he had this idea he hadd been trained You have a fiduciary duty to your client. That means you put your client's interests before yours. So when he became a retailer, he asked himself the simple question was my client. And so many companies get this wrong He was just like, this is very simple. I am a fiduciary to my customer. Customer is the client. So he had this clear fiduciary hierarchy, customers first, employeee second, shareholders third. The great Peter Drucker said he got it wrong It should have been employees first, customers second, shareholders last. The famous Johnson and Johnson Alcrredo is doctors patient and nurses first, employeee second, communities third, shareholders last. You notice the pattern. Not because shareholders aren't important, but because everyone who's ever studied this and looked at it seriously understands that shareholder value is like the exhaust that comes out of the engine When you take the exhaust pipe and put it in the intake and make that your explicit goal Now you don't stand for anything anymore. Now now product quality suffrers now, whatever, you know,, whatever The thing you think is important, the thing that iss going to make you money, design, quality, health health of your customers, whatever, everything becomes expendable on the altar of shareholder value. and no company can really endure with that structure orr they do, and it looks like Philip Morris. Or you wind up being the kind of company that your grandkids are embarrassed to be related to you? because that's what you did. And we know a lot of current tech companies are on that trajectory right now and it's sad. I don't want tona name names, but like think about companies where having that on your resumes to be like, Gold star And now people are like, why did you stay there? Yeah. I think there was a stat in your book that really jumped out at me. It's like eight billion dollars in profit. but three hundred billion Yeah in or six hundred billion. six hundred billion. Yeah, three hundred billion dollars in direct healthcare costs. Yeah. So people say that Philip Morris is profitable In order to call it profitable, you have to take this incredibly narrow view of profit They have something like eight billion dollars a year in net income. But there's been all these studies. they create six hundred billion dollars a year in costs just in the US that have to be borne by others. I think it's three hundred billion do in direct healthcare costs and three hundred billion dollars in los productivity. and obviously the mortality of people dying and therefore not being able to work. It's like, it's grim. And there's a zillion different studies. I think someone calculated recently that The tobacco industry makes six thousand dollars from every customer that dies. Do you want that to be your future? Like if you don't get the governance of your startup right No other decision you make in the long term is going to matter. because you're not going to be there to be the one making it. So someone's like, I have idea. let's turn this company to Philip Morris. What are you going to do? Back to Sol Price. FedMart embodied this principle of fiduciary to the customer. You think about the way that Steve Jobs would obsess about design S jobs just to get into fights with people about the visual design layout of the cables inside computers where he didn't even want customers to be allowed to open the case. And his engers would be like, why do you care? No one's going to see it P' like we're going to see R? Like this is my principle. this is not shareholder value If we stand for this principle, good stuff's going to happen to us. Now. How you do anything is how you do everything. Now, Steve Jobs got fired because of this exact thing. So spoiler alert, so we'll sol in a second. So he built this company. Fiducciary to the customer meant If you try to undercut him on price, he would literally put up signs inside his own store being like, donon't buy this product for me. You can get it cheaper at a competitor and he'd have like instructions on where to go. Ohow, right? Like just he was like, I don't care. My job is to get you the lest price. Yeah. I don't care if it's for me. People come to you every single time because They're like, He, know, if it's ever st cheaper. something. can you imagine a modern retailer doing that? Yeah the DTC bras where I'm just like, I gott By it on Europe then I go check over here, It's like, no why don't you be my ally and then I'll trust you So he understood trust as an asset Customers would drive like miles out of their way to shop at FedMmar. It was a huge success, huge private company success. He took the company public. Everyone made a lot of money from this IPO public company, you know what happened. Investors kept being on him. He felt this like gravitational pull He wanted low prices and high wages. invvestors seemed to want high prices and low wages. So he just was always battling investors, battling investors. Now Saul was a really stubborn SOB. in order to try to get out of this situation, he brought in a new controlling shareholder buy out public market investors to give him this protection You got a new board and the whole thing is going to take the company private. That was the whole plan And he thought the new board because they really understood retail, they understood him. They like looked him in the eye and said, I see you, man, you're the They'll surely back him up, but no The new board didn't solve anything because they were still into this gravitational hypnotic power of these best practices. So they wanted higher prices and lower wages and faster growth. and they didn't care about the collateral damage to employees, customers or anything else. They just wanted to see the number go up. So one day in nineteen seventy five, Saul comes into work and these guys have changed the locks on his door. Oh I can't even get into his office He doesn't work there anymore. Wow. So it's just like just like Jeff Lawson, just like so many people lose control. So what happened This is like a A natural AB test experiment in business history. You don't get this that often. In brranch A, Fedmark's investors got what they wanted, they got sol out of the way, They converted Fedmark to traditional business practices. It was bankrupt within seven years. Oh wow. They destroyed in seven years what he took twenty years to build. Saul was a class entrepreneur, like so many people we know. He took exactly two weeks off after this happened to him to lick his wounds? Yeah And then he was back at work. He leased the office upstairs from Fedmar for his new company. It was just like, FU, I'm doing it again He traoined a new company called PriceClub And When I was a kid Price Club was like a major retailer. My family shop there all the time. But most people today don't know Price Club because of what happened next. One of the FedMart employees, a guy who had worked his way up from Stockboy to executive, he quit FedMart in protest when Saul was fired And he created his own company because he understood, as Solindist of the engine, later the two companies merged to form a company they called Price Costco. but we just call it Costco. Makes sense. This is the deep cut backstory of how Costco came to be. Costco today still embodies That saw price fiduciary to the customer idea but it is protected by this thing I call a governance fortress protects it from outside attacks so that its board understands its job very differently than most companiess boards Instead of saying my job is just to maximize returns for shareholders, the board understands that our job is to protect the mission. And so when we talk about being mission controlled, this is what we're. aiming for now The book is loaded with techniques. likeike I promise it's not just a manifesto. There's a lot of detail to it. You're not going learn it from some guy in a podcast obbviously like, who, We'll get into some of it, but Overall, if you zoom way out the pattern is this? We need an ethos, like Saul Price had some kind of higher principle that we're committed to that we understand we're going to make money by maximizing human flourishing by doing this thing. And then we need the structural integrity the ability to protect that precious thing that we've graded from any kind of temptation or outside pressure. So that's kind of the short formula. if you don't take much away from this, ethos plus integrity equals incorruptible. How do you find the right board members for something like that? I mean, there's sort of like the docs Which, founders when you're starting out, you do have control over that. All the best docs in the world without the right people, like you still can't keep it going. Yeah. The first step and the hardest step by far is to be willing to say that you are not in line with these best practices. They are what's called a normative consensus. Everyone agrees that everyone agrees is the got to agree that you're going to be punk rock. Yeah. So you got So if you're willing Yeah you gott to be like this is not for me. becausecause like I tell a story in the book about Costco versus Kroger, the grocery store. Costco came under attack in the early two thousands for having these non standard governance practices. In fact, Costco routinely gets the worst possible governance rating from governance rating people And Kroger decided to go all in on best practices So we had this like natural experiment where like Costco has been incredibly successful since this moment, being having bad governance and Kroger has not had the same level of success. In fact, One analyst called Kroger's performance, like Costco in Rverse. So I always tell people the next time someone says to you, I want you to adopt some best practice, you just in your mind, you don't have to say anything out loud. which is best practice equals Kroger practice. This is someone who wants to be more like Kroger and less like Costco. Why would you want that? Again, no shade on Kroger. But you could be one of the greatest performing socks of all time or you could be this thing. We have to master these techniques. and the most important thing is to create selection bias So you want investors and board members who are choosing to be with you because they believe in this mission not just because they think they're going to make a quick buck from it E if they're investors who are they are going to profit from you, you want to make sure their interests are truly aligned with you. I just was talking to a founder today that ran to this common problem where you put some awesome person on your board who just think this person walks on water And you forget that you take a venture investment from a venture firm. You're not taking investment from that individual person. You're taking investment from a company thenen that person leaves And now you're stuck with some new person and you've given all these veto rights, all these control rights to someone, you don't even know who they are. You don't know if they're aligned with you. You've never read the LPA of these funds. you don't really know what their incentives are. So I think founders are generally much too naive and much too credulous about who's going to be a good long term partner. And they're so easily bamboozled by people were like, I'm founder friendly. We don't need to worry about this stuff. We're aligned. It's going to be good But I also do need to be the ability to fire you at will, you know, whenever I want. It's I thought you said you you were a believer in my vision. I was like, well As long as I like what's going on, that's not actually what belief means. YC Startup School is back. We're hand selecting the most promising builders in the world and flying them out to San Francisco for july twenty fifth and twenty sixth to discuss the cutting edge of tech and startups. Apply now for your spot What about on the dock side? Let's say you get intoYC, you've got a safe, you know, maybe you haven't converted equity yet. Yeah. The normal path, which is like pure founder shares is like, all right, let me see if I can get super voting or let's write it from day one. I guess the Delaware C Corp thing is actually a pretty big thing. A lot of AI companies have chosen to be PBCs or public benefit corporations on day one. Yeah. what sort of best practice for BB? think I think PBC is an absolute must do And kind of like an utter no brainer of all the things in the book, it's by far the easiest thing. If you want to pick one thing to do, it's the easiest thing to do. It's a two page leg filing in Delaware, your lawers can have it done for you tomorrow And especially if you only have safes if you don't have any like equity investors you turn into a PPC tomorrow. You just, you don't even need anyone to agree. you just, you just do it What's interesting to me about the PPC and most people get confused because they think it's like the same as a little be in a circle. you see at the farmer' market, which is something totally different. That's covered in the book too, but that's not what we're talking now. All it does is a restore what's called purposeful incorporation. which for the vast majority of the centuries that we have had joint stock corporations on this planet Ebody understood and thought it was totally obvious Companies should be incorporated to do a specific thing. So literally a mission or should pub benefit should have a public benefit. If you look at the nineteenth century like companies that were created and you read their charter, none of them say maximize shareholder value, that would have been considered a crime. Interesting. I a char Yeah. It would say like we've created this thing to create a railroad, to build a canal from place to place, like to do something specific board's responsibility, the fiduciary duty, their first highest priority was to defend and protect Purpose When we shifted to Charlotte Primacy, we like forgot this really important lesson. So who did this. Who did this? Who did this to us? It's actually super wild We'll do a history lesson Y. Okay yeah. This is incredible to me. So like there's this story in the book about this nineteenth century situation that like, if you know Elon's takeake overver of Twitter or whatever, you're like, I know how this is gonna to go One of the richest men in the world tries to buy take over this company that was the Eie Canal company. build and operate this canal. and he has unlimited money. So he's just like, no matter what it takes, I'm going to buy this company. convert it to what I want it to do And the board of directors, unlike modern boards who are told when that happens, you have to become an auctioneer and so no They were just like, we will fight you by whatever means necessary Both sides went crazy. It was like a crazy fight. And like there were no corporate governance or even ethical standards like we have now. Like literally the stories where like they were both bribing the same state legislatures legislators and people would like take bribes from both sides and then vote with one of them. you know, it was an epic fight. But what was interesting if you read the commentary about it, people were scandalized because they did a bunch of bad illgal stuff But nobody was like, it's wrong that the board tried to fight this. They were all like, off course they tried to fight it naturally. It makes perfect sense. And like I said, if he lost in the end They fought him off using what' called a poison pill tactic, which now today we is you could just ask your lawyer to put this in your jcks and you can just have it if you want. If you don't have it Why not? That's another tactic. So many of these things you could just You just have it. You don't have to like wait for someone to give you permission. You just do it So anyway, if he had prevailed and he had actually managed to convert the legal purpose of this company from M a Canal to maximize shareholder value That would have been considered a crime And the courts would have avoided the company's charter. It would have given them the corporate death penalty. because that would have been considered beyond the scope of what was authorized to be in the public benefit. So this was the rule all up in the US, all up through the end of the nineteenth century The problem was, in order to get one of these charters, you had to get your state legislature to give you one. You imagine if like you had to go the lobby your local state Senate permission to form a company. it was like Ver cumbersome. That part of the system was bad. So there was a big fight over the whole nineteenth century to create what was called general inccorporation, which was just a simple idea that anybody who wanted to should be able to form a company for any reason. We were very grateful that it had to be fought, it was literally a battle, statehouse by statehouse Everywhere, overver the course of nineteenth century, every state eventually came into compliance. The key date for our purposes is Delaware, adopted this in eighteen ninety nine twelve ninety nine, this is relatively recent history, eighteen ninety nine. But even in eighteen ninety nine if you read the Delaware rule It said that you could have a company for any purpose, but it still assumed you would have a purpose, a mission that was considered completely obvious. And yet over the course of the twentieth century Companies more and more and more were being advised by lawyers to instead of writing in your specific purpose, just put a general purpose in there. So most founders have never read their corporate charter. I have no idea what it says Shame on you.'ll read it You're to read it you're going say, Eric, what are you talking about? It says here Acney AI company is incorporated to pursue and there's like a little blank space like a madlib. And someone has scrawled in any legal act or activity. That means anything. So it's all good. wrong. so wrong, we're get to Y In the sixties and seventies, a bunch of academics and judges and like legal scholars, like a very small group decided that any lawful actor activity actually means shareholder privacy. Unlike General Incorporation that they were replacing, They never put this to any kind of vote. In the history of the world, shareholder primacy has never been subject to any referendum, any legislative action, nothing. So it's weird, if you learned in school The bill becomes a law There's no law. Yeah for shareholder privacy. Yet, if you ask any director on any board in America What is your first duty, they'll say to maximize returns for shareholders How can it be the law and not a law Well, the courts just decided. There were guys like Milton Friedman and they aren' they would write these op s where they write very famously things like the social purpose of a corporation is to increase its profits. Notice they never said they weren't like the B cororp people where they're like, well, we have regular corporations and we're going to have E corps, extractive companies. and there's this is the no. They said the purpose of a company is The trick was they convinced everybody that this is how it's always been And we've all learned that. We were taught Well, this is just how it is Well, turns out, We don't even need to get the law changed We just have to start saying, no. Yeah we don't actually think this makes sense and we don't want to be part of it. if you read the legal papers, I'll give you one last like funny bit, this blew my mind reading these papers. There's all be legal scholars who haveve had to write papers about why is this the law, if it's not the law And they write thisuff it's like, hilarious. I'll be like shareholder prriimacy is aill legal obligation, not a legal duty. Oh, subtle. That really settles up for me Michael. What are you talking about? What? And so they're like, look, look, look At the end of the day Even though this is not technically a law. It is the law and it's okay for the courts to enforce it like a law. Remember, you'll be fired if you violate this law. It's very it is the law And they bee about it Yeah you lose that loss ye The board of Twitter was forced to sue Elon to complete that transaction, even though they weren't that happy about it because they felt like we have this fiduciary duty. We have to do it It' so different the shareholders for the shareholders. Yeah. And if they hadn't done it, they would have been sued and this lawsuit would definitely have worked. So like they weren't wrong about their requirement But why would we build companies like this? Who wants to be taken over at the barrel of a gun basically conclude, if you read these papers, they say, look, at this point, shareolder primacy is what's called a normative Meaning everyone agrees that everyone agrees that this is how companies should act I work with a lot of founders I love to ask on, hey, Are you part of this normative consensus Does it seem right to you Every founder I've ever met it is like, oh, I'm not, certainly not, I'm not that great Have you ever told even one other human being you're not part of this norm of consensus until just now when you told me, everyverybody I talk to is like, oh no, you can't say stuff like that out loud. You can. You can say it out loud. You say it. If it's a controversy, it can't be a consensus now, can it So luckily we have the PPC tools. We have a bunch of tools in our arsenal where we can declare this formally legally for our company. So we don't have to have you a social movement per se, but we could. but we could be fun. But we could and also like In the book, I call this the builder's intuition best way to make money. is to create more value than you capture, right to build something that people want You know, Tim O'Reilly, P all the legends of our industry all agree on this. They talk about this all the time. And yet we're all supposed to pretend these days that we think all kinds of making money is equally good And there's so many ways of making money in our economy today where you can get rich without creating any value at all. Now And I just think like, why don't we just stop pretending that we think that's good? No what none of us think it's good We think it's all BS So we should start, I think, as builders, reclaim that sense of identity and say, you know what? Yeah, we're not part of this norm of consensus. We don't want to do this anymore We would like to have a different Solution. Now I think if we just say, well, because investor control is not working We should have founder control Aic control is not that great either Because I know a lot of people who are like basically trpped, they can never quit their company because they're like the one they're like literally the human shield blocking every that's too much And of course People die So if you want to build a truly long term solution, we' got to look for structural solutions that do not depend on the goodwill of any individual one person. but we start to think about almost like building a government, like checks and balances about how do we balance faction against faction. And luckily there are good precedents for this. Interesting. So if you become PBC and you have a specific mission, Do that you know, you are no longer subject to being removed if you work against or make choices that are not maximizing shareholder value correct. Does that also mean that you can be removed if you are not working towards the mission? Well, unfortunately not. interesteresting. not it doesn't work both ways. The problem is directors, especially under Delaware law have extremely wide latitude to basically do whatever they want as long as they can justify it as being know in line with what it says in the charter. It's helpful in this case, if your directors are under pressure from investors to fire you because you're not being ferlled. orre maximizing the PPC can be a shield that they can use to prot themselves from We're working We're doing this mission. Unfortunately, if they decide to fire you anyway, it still doesn't help you. You can't sue them to be like, what the F? Yeah, they still get to make their own judgment. So a huge part of the problem is we are being taught today that the best practice is to have a combination of investor directors and independent directors. And good governance is, the more independent directors have Wh is that Well, the theory So's a reasonable theory becausecause independent directgors are independent What does it mean to be independent for those that don't? it means they literally have no stake the outcome They don't they're not aligned to you at all. They don't have equity in the company. The idea is they' random people. They're basically like you want raoment people. Eminent people. The problem is they have no financial incentive for the mission to endure. But they do have a financial incentive to be seen as Bro investor Because how do you get Independent tab You get recommended by investors. Okaykay? Founders, you got to do a better job at this. Most founders never recommend anybody for a director job investors do a great job of it. So if you have a board like C classic silicon Valley board would be two VCs. two founders. an independ That's supposed to be fair because it's two and two balance. That is basically just investors control your company al? Don't kid yourself. The research, by the way, this is one of manyen there's a whole chart in chapter nine of this book that just is called prractices destroy shareholder value. This is one of these best practices that like we have the evidence, like independent directors do not accomplish the goal that they're supposed to have because They have this actual conflict of interest despite their nominal independence So the solution just like investor directors are doubly accountable. Like you put a GP of Aenture fund on your board double duty They have a duty to the company, but also a duty to their LPs. That doesn't bother anybody. We understand investors are smart enough to be able to handle that, not a big deal but independent directors donon't have that They're not really accountable to anybody. they're just accountable to themselves. is a solution. We can actually create a second entity two branch government. where we have outside trustees who have the responsibility of appointing directors, sometimes just the independent directors, sometimes all the directors. So that structure has been proven to be more stable than the so called best practice of a single entity just runs as a Delaware C Corps I tell you a story? Yeah. It is one of my favorite stories because here I'm going tell you st. I'm gonna tell you the premise of the story you're not going to believe me and then I'll try to prove it to you that's true The premise of the story is this story about a time when the nonprofit directors of a company created more than five hundred billion dollars of shareholder value. In the nineteen twenties There's a womanamed Marie Crow She was living in Denmark, and she gets a fatal diagnosis of an illness that has no known cure at that time called diabetes Today, Marie is mostly famous because her husband, August, He just won the Nobel Prize So he's a pretty smart guy. He asks her if she would, despite her fatal illness, would she accompany him on a lecture tour of North America She says, sure. So they go to North America, they're meeting scientists, you know doing these lectures and whatever. Dinner one night One of the scientists tells them that in Canada, someone has figured out how to isolate insulin for the first time potential cure. So they're excited. And so it was obvious to them that they should go see. You know, It could have easily just been like, can you send us some doses? We don't care about. No, they wanted to see it for themselves. So They meet the Canadians, they see this possibility, and they say, Look, we would like to commercialize this technology in Denmark Can we license it for you They and the Canadians have this worry dececades ahead of Martin Scrully, okay. They were like, wait a minute If we have a for profit company that is selling a life saving medicine. Like let's say you sell a medicine to me that I need to live. I want you to charge me a fair price, right? I want you to stay in business. I want you to have every incentive to keep produc the medicine that's great But I would live in fear that one day you would wake up like Marin Screlly did and be like, wait a second Eric owes his life to this medicine. Can I charge him anything I want? He's basically my slave. So they were they foresaw this in the nineteen twenties So when they went home to Denmark, they made their agreement with the Canadians, what they would do is they would build this thing they called it the Nordisk insulin Laboratorium as a for profit subsidiary of a nonprofit foundation. So they built two entities instead of one and nonprofit had trustees and the for profit had directors. That structure really was it's a great MVP story, by the way. They had the first insuline and they produced it within like three months of getting back to Denmark. They got to work. They really like this was an urgent problem for them because they wanted Marie to live, but also they wanted to save a lot of lives. Anyway, if the Nordisk insulin Laboratorium sounds familiar, it should this is the predecessor company to what we now call Nova Nordisk. This company's been going for more than a hundred years with its scientific integrity int tact. If people hear that story, they're like, well, maybe they were just lucky Maybe the Danes are more friendly or whatever. Like people have all these dumbory theories about why? No Every crazy thing The same force that came for Jeff Lawson, the same force that came for Saul Price same forece that has like destroyed so many tech companies of course it came for Nvid artist. They're a huge company of course it did So in the early two thousands, it was a big wave of new best practices for pharmaceutical companies that they all needed to combine and do M andA to get bigger the for profit board And all of its independent directors and everybody of Noverorek are like, oh, I guess we have to merge So they go around trying to find a merger to sell the company They find this company, they have a signed merger agreement. They're going to get a huge premium on the stock price.t this point, Novo is a publicly traded company. They get this agreement. The last like due diligence checklist item they have to do is go to the foundation and get their permission to do the merger. The trustees are like, well, what is the purpose of this transaction Our job is to look after the mission of Dovenordis We're only allowed to approve a merger if it's necessary for the survival of the company And the favorite detail about the story is they had to have two meetings because they were like, we're going to get back you. We're going to get bankers. They reuddle with the bankers, they bring the bankers back and they're like, Ah, since you said it's necessary for the survival of the company, this is the new best practice. in Parma, it's eat or be eaten. If we don't merge, we're going die whatever. And the n private trustees are like, okay, that's interesting. probleblem are we solving exactly? Because Novinars has been profitable for ten years in a row growing like twenty percent a year. It doesn't have to do anything. Why do we have to do? Why can't we just be a great business doing our thing anyway Long story short the trustees say no Merger over. Yeah, peopleeople are so pissed at them. ' this is gonna be like a twenty billion dollars mer.' was going make a lot of money for a lot of people. Bankers are p everyone's pissed. Now, it's rare in business that you have these moments like with FedMart where you actually get to see the counterfactual. So we know for sure that if they had not done this, All of the major R and D programs of Novanordis would have been cancellled. We know because the company they were going to merge with two years later was bought by Merc, and that's what happened. Oh my God. One of those research programs was in year, I think, eleven of thirteen of inventing GLP one because the of trustees interfered here The research program was allowed to come to fruition. You have to understand, this is GLP one was such a difficult drug to produce that even ten years in They had no evidence whatsoever that was going to work. And like everyone's like, whyy are we funding this? Iteems like it's never going to work. But they kept the faith. If you fast forward twenty years, this intervention caused Nova Nic to have for a time a value cap, a market valuation greater than the GDP of Denmark. And if you freeze frrame right that moment, you will have now noticed the delta between what they would have sold for and what they actually are worth this is long term, which is a theme over and over. over and over again. they became I think their valuation crested at six hundred billion dollars. I think though, that builders have to take some responsibility here I mentioned before that most founders have never read their corporate governing documents. Worth doing? Everyone's just like, well, my laord will take care of it. It's like governance I hate even using the word governance because as soon as I hear that, it wass like boring, Wh cares? I mean, I remember when start L start up was a book about management. I remember telling people like, it's going to talk about management. Theyike management' so boring.ike. So because we delegate this to lawyers and bankers and whoever else We like when it comes back to bite us in the butt We're like totally unprepared. I think builders have to get a lot more savvy about this First of all, make sure they understand what they're signing But then also to yeah to put on the t shirt with the fist to be like, I don't want this to happen to me. Like this is not the kind of company I want to build And I think we are not that far from being able to have an economy that is about building again. I really think we are close to that. The younger generations are super pissed off. This idea of shareholder primacy has had its forty, fifty year run now people who've grown up only under that system. have seen its failure. Like we live in a time of institutional collapse and institutional weakness And this is the thing like when companies collapse when they go through these ethical moral collapses. It's also an economic collapse. Like that's what's so interesting to me is it's value destroying. So we don't need to make a moral argument necessarily. We can just make an economic argument and the book is loaded with the evidence, for example The Novver Nordisk style of company, where you have this two tiered foundation That's called an industrial foundation structure in academic literature compomanies with that structure, there's a lot of them The German optics company Zeiss had the structure in eighteen eighty five. Oh So it's not even that new. There's enough of these companies that we have a datas set to see how they perform Companies with this structure are six times more likely to live to year fifty. Amazing. ten percent versus sixty percent probability. So we as founders When we're choosing our corporate form, we're being told that there's this business monoculture. All you can do is a Delaare C cororp, everything standard, best practice, best practice. We've been deprived of our birthright. There's way more options out there than we're being told And I just always tell founders, why are you having to hear a about it from me? Yeah Why didn't your investors tell you? Why didn't your lawyers tell you? Like, how come you if you don't know this story, why not? Why wasn't it in your NBA class? Why isn't this not in the curriculum Well we need VC funds to not be ten year funds? Well, that's a huge problem. Just for the people, the audience, I mean Basically the standard LP agreement for a venture capital fund is ten years, which also means that at the end of those ten years, the money that was put out is expected to come back. So ten years is is just not that long anymore. Eespecially I mean, it made sense. Most of these practices come from a time when companies would go public, like three years after being founded. Amazon went public, I think, that way raaised like twenty million dollars. Like just the scale of an IPO was much less of a big deal back. It used to be the three year overnight success. Now it's the twenty year overnight success. Absolutely. And of course we have companies like Stripe that are like stubbornly just refusing to go public because why should they people wring their hands about this, but it's like What do you expect, man? If you create a system that puts this gravitational pressure on companies, you have to expect people to fight back and resist. I don't think the tools we've used in our resistance are very good. I think we've been desperately grabing for whatever we can grab because we felt more founder control, which is, I mean, yeah, honestly mean what we advocate for. It's better than nothing. I mean, it's certainly better than investor control, which really is self defeating Fer contontrol has all these problems and what's interesting to me is People who do find under control. have no bridge They're stuck. So like for example, one of the things I advocate for is that if you're going to do founder control just right into the docks If the Founder of control is ever defeated for any reason, there's an alternative thing that springs up in its place. You can just write this in your docs right now. You can have this at the seed stage. It's not that hard Just say, yes, I'm going to have the Novanoris indndustrial foundoundation structure or I'm going to have there's a bunch of structures that I explain in the book. What's cool about that is founders think that Having dual class chairs makes you invincible But it really doesn't Jewel class is defeated all the time. I give a bunch of examples in the book. like, you know, stock price drops, everyone panics, Found forced out anyway. because at the end of the day, like having the votes is not the only thing that matters. There's a bunch of things that matter, including like investors being like, well, we won't give you any more money unless you turn this protection off. I think perception of being invincible and like being emperor for life Not only is it not true, those people still get betrayed, but you also it has a psychological effect that's not healthy It's called hubris syndrome in the psychological literature. It makes you less generous, less compassionate, it makes you more selfish It makes you more afraid, conversely of losing your power So if you notice some of these like, emmperor for life billionaire types out on social media, like having a mental breakdown in front of us all. L Part of what's going on is that like this is a mental illness. this is not actually a good structure. Because we had these better structures, there's really no reason to do it or at least do it as a backup for after your dual class shairs get defeated, which you know generally speaking, they eventually do get defeated, including by the death of the founder Then like I think if you want to build a fifty or one hundred year company, you' going to last long. One of the more profound reasons to start a company is actually wanting to create something that outlives you. I think so. I think that's actually part of why entrepreneurship is so awesome, as a career. The first time I ever heard of a PPC actually was from my friend Scott Phoenix. He started AI lab called Vicarious and he very explicitly said I'm going to do it as a PVC, we're going to try to create AGI And if we create AGI, we don't want to be pap, you know, sort of forced into a paperclip maximization world now where you have AGI and it's self improving And then Anyone, any shareholder could come and say, actually, we're not maximizing enough. And then you helped design the long term benefit trust Dropic ye So I'm curious. I mean, what was that like? It was wild. Yeah. Yeah, listen I do not take credit for anthropic sucess. Okay. just for the record. I played only a big part and all credit to Dario and Daniela and the whole team They're on such a run Love that But if you talk to people about why is anthropics so successful They'll often say something like, well, their inference costs are lower. That's definitely not true right now. Yeah. or whatever you know, whatever it is, right They have they have better superior focus. The models are fantastic. Models are better. But like, If you ask why, you'll like, well, they have better technical architecture, but why Well, because they're better at doing this thing or that thing, but why? Well eventually out it itss people. Yeah, it's like because they have the best talent. Why is that Well because the best people want to work there, but why because they think they're the good guys That's like a huge recruiting talent advantage It's unbelievable. So many incredible people want to work there because they are As for the focus. whyy are they so aligned Because everyone's on mission because the mission is primary. but why has an anthropic been able to be bullied from the outside. people certainly have tried. I think part of the reason is they have that magic formula, etthos plus integrity. They have this ethos of AI safety. whatever you whether you agree with it or not, they really believe it. I remember I met them you now they're world beaters, I know, but I remember meeting them when they had just left open AI. Their team was very aligned. The people were leving people were leaving a really lucrative job behind to do this. So people really were there for the mission They had what they thought were really aligned investors. including Sam Bankment Freed, so I actually turned out Not so much to be, but they thought that's what they thought at the time. It would have made that whole situation whole apparently. The stake that the bankruptcy has of those shares is worth more than the whole than all all the entire fraud by a lot. And it's going to be worth even more when when the time comes yet. It's like one of the most bizarre situations in history.retty wild. And in spite of having so carefully curated their cap table like One of the tightly curated captables I've ever seen for a company like this. A huge chunk of the company wound up being sold at auction in a bankruptcy auction. Like how crazy is that So anyway, people always think, if I just curate, if I just choose the right people, well, they thought they had They were also really worried about this paper quick maximizer thing like what happens if we're sold to the highest bidder or what happens? Well, they understood this technology going to be worth trillions if it works The incentive to take it over is going to be unbelievable. So we need a structure strong enough And so we talk just like we're talking now. We had the same conversation then that we're having now Again, credit to them for actually doing the work I remember working with them on their charter And they had to defend this idea for two years because they kept writing it into the terms sheets that they would do it, would do it, would do it. But it took time to like figure out what they wanted to do. I think it was a series C When they finally established this thing called the long term benefit trrust, which is not a nonprofit foundation. It's actually what's called a perpetual purpose trust which is a different legal category, but the same idea. oututside trustees who have the power to directors to the for profit board. People very frequently ask me, why is Anthropic the most courageous of the AI labs? And I think this is part of the reason why. They have this structural strength to stand up for what they believe. And if you notice, when companies stand up and do the right thing We live in such a polarized time. Its like what do you mean the right thing? Are you saying they're absolutely right? They're the morally perfect? No You want me to criticize that topic, I think lots of things. When I say they did the right thing, they acted consistent with their own values. Those values are consistent with human flourishing, and they have the strength to defend them So I know a lot of people, even in San Francisco, like San Frisco, I'm a lot of turmoil right now teech companies are not the most popular here right now. AI companies maybe even less so Wanthropic turned down that two hundred million dollars contract. Someone sent me a video that Sidewalks around their headquarters have been chalked up People saying, thank you. Oh wow. yeah M when I tell you that a San Francisco tech company had its sidewalk chalked up Thank you is not what should not the kind of language you're expecting. So like Because they have the strength, they get all these counterintuive benefits. Claude went to number one when they did that They couldn't have known that was going to happen. They couldn't like And who knows what's going to happen next? Oviously longong way to go with anthropic and with the question of AGI But I think the early returns are very promising that just taking a little bit of extra time to set this structure up in a thoughtful way has been incredibly valuable to their success Thank you so much for joining us. This is truly epic. It's an honor. I really think this is a message that YC founders need to hear and pay attention to. so just I'm really excited to see this finally get on the world.