From 0 to 1: unlocking the secrets of business and the future

Chapter 16 The Foundation Determines the Destiny
Every great business is unique, and to do well there are certain things that must be done right in the beginning.I stress this so often that my friends jokingly call it "Teele's Law": You can't save a startup without a solid foundation.

The beginning is special in that it differs in nature from the later stages. This is exactly what happened to the formation of the universe 138 billion years ago: in the first few microseconds of its birth, the universe expanded to 1030 times its original size.At the dawn of a new epoch in celestial evolution, the laws of physics were radically different from what we know today.

More than 200 years ago, the United States was founded in the same way: For several months, the framers met in the Constitutional Convention to openly discuss the fundamental problems of the country.How much power should the central government have?How should congressional representatives be allocated?Whatever you think of the agreement reached in Philadelphia that summer, it will be difficult to change since then, since the U.S. Constitution has only been amended 1791 times since the Bill of Rights was ratified in 17.Now, even though California has 50 times the population of Alaska, the two states have the same number of seats in the Senate.Perhaps this is a feature rather than a bug.But as long as the United States exists, this system must be adhered to.Another Constituent Convention is out of the question, so today we can only discuss the details.

In this respect, companies are like countries.Early bad decisions, once made (e.g. picking the wrong partner, picking the wrong employee), are very difficult to correct later.To correct these mistakes, the company may face the danger of near bankruptcy.As a founder, your first job is to get the foundation right, because you can’t build a great business from a flawed foundation.

"Marriage" at the start

When starting a business, the first crucial decision to make is who to do it with.Choosing a partner is like getting married, and having trouble with founders is like getting a divorce.Every relationship starts out optimistic, and it's not so pleasant to calmly think about the problems that may arise later, so people don't think about it.But if there are irreconcilable conflicts between the founders, the company will suffer greatly.

In 1999, Luke Nosek became a partner of mine at PayPal, and I still work with him at Founders Fund.But a year before PayPal was founded, I invested in a company that Luke co-founded.It was his first startup and one of the first companies I invested in.What none of us realized at the time was that the business was doomed from the start because Luke and his partners were a terrible pairing.Luke is brilliant and eccentric, and his partner is a typical MBA graduate who didn't want to miss the gold rush of the 20s.They met at an online event, had a good chat, and decided to start a business together.That would be as bad as marrying the first person you meet in front of the slot machines in a Las Vegas casino: There might be a chance to hit it off, but it's more likely to end badly.Their business went out of business and my money was wasted.

Now when I consider investing in a startup, I look at the founding team.Complementary technical skills and talents are important, but so is the degree of understanding between the founders and the tacit degree of their cooperation.The founders should have a deep friendship before starting a joint venture, otherwise they are just trying their luck.

Ownership, Operation and Control
It’s not just the founders who need to get along, everyone in the company needs to get along in harmony.Liberals in Silicon Valley might say you can solve this problem with sole proprietorship.While Freud, Jung, and other psychologists have a theory of how each individual's intellect is at odds with their ego, at least in business, working for yourself guarantees solidarity.Unfortunately, it also limits the kinds of companies you can start.Because going from 0 to 1 is very difficult without a team.

A Silicon Valley anarchist might say that with the right people, you can be united and thrive without any management structure.Employee whimsy and disorganization in the workplace are thought to help "break" old rules set and obeyed by others.Indeed, "If men were angels, there would be no need for governments".But the anarchist corporation ignores what James Madison pointed out: Humans are not angels.Therefore, the executives who manage the company and the directors who control the company have separate roles, which is why the power of the founders and investors in the company should be formally defined.You need colleagues who get along with you, but you also need rules and regulations to help keep everyone together in the long run.

To find the source of disunity within a company, it is useful to distinguish between three concepts:
· Ownership: Who legally owns the company's assets?
• Management: Who actually manages the day-to-day affairs of the company?
· Control: Who formally manages the affairs of the company?
A typical startup distributes ownership among founders, employees, and investors.The managers and employees who run the company enjoy the right to operate it.A board of directors, usually made up of founders and investors, exercises control.

In theory, this division of labor can make the company run smoothly.The advantage of ownership distribution is that it can attract and reward investors and employees.Effective ownership motivates and empowers founders and employees—meaning they get work done.Board oversight provides a broader perspective on managers' plans.In fact, assigning different jobs to different people is effective, but it also increases the likelihood of disunity.

For an extreme case of disunity, look no further than the DMV.Let's say you need a new driver's license. In theory, it shouldn't be hard to get one because the DMV is a government agency and the US is a democratic republic.All power rests with the "people," who elect government representatives to serve them.If you're a citizen, you're part-owner of the DMV, and your elected representatives run it, so you have the right to walk in and get what you need.

Of course, this is not the case.As the people, we "own" the resources of the DMV, but we receive a meager share of ownership.It is the staff and small leaders who manage the DMV who have the real exercise of their tiny powers.Even though government officials and the legislature have nominal control over the DMV, little can be changed.No matter what actions elected officials take, the bureaucracy will stagger with inertia.The DMV is accountable to no one and naturally does not have to cater to everyone.Whether your experience of getting a driver's license is a breeze or a nightmare depends entirely on these bureaucrats.You can try to cite political theory to remind them that you are the boss, but that is unlikely to get you better service.

Big business does a better job than DMV, but it's still easy to make mistakes, especially between ownership and management.The chief executive of a large company like General Electric owns some shares of the company, but only a very small one.Therefore, compared with ownership, the return of management rights is more motivating to himself.That is, regardless of the actual value of the company, as long as it publishes a good quarterly report, it is enough to keep him on a high salary and fly on the company's charter plane.Even if he is compensated in stock in the name of "shareholder's interest," there may still be a disparity of interest.If short-term performance is rewarded with stock, he will reduce costs rather than invest in a plan that will create greater value for all shareholders in the distant future, because he believes that the former is more profitable and much easier to operate.

Unlike corporate giants, early-stage startups are small, so the founders own and run them.Much of the conflict in startups arises between ownership and control, between founders and investors on the board.Potential conflicts increase over time due to differing interests: board members may want the company to go public as soon as possible and make money for the company, while the founders would rather stay private and grow the business.

Board of directors, the fewer people the better.The smaller the board, the easier it is for directors to communicate, reach consensus, and provide effective oversight.However, this effectiveness means that in any conflict, small boards can remove management from office.This is why careful selection of directors is crucial: every member of the board counts.One questionable director can cause you pain and possibly even jeopardize the future of the company.

A three-person board is ideal.Unless your company is already listed, the board of directors should not exceed 5 people. (Government regulations specify that public company boards should be larger—an average of nine directors.) There is, by far, the worst thing to do than to oversize a board.Looking at a nonprofit with dozens of directors, a layman would think that with so many successful people committed to the organization, it must be doing well.In fact, large boards of directors do not provide effective oversight at all; they merely provide a cover for the autocratic leadership that actually runs the organization.If you want to get out of the board's grip, make it as big as possible.If you want it to work efficiently, make it smaller.

get on or get off

Generally speaking, the staff you hire should be full-time.And sometimes you have to break the mold, for example, sometimes it makes sense to hire outside lawyers and accountants.However, people who don't have stock options or are not regular employees of the business will fundamentally disagree with you.For profits, they will favor short-term gains rather than help you create more value in the future.This is why hiring outside consultants and part-timers is not an option.Even remote work should be avoided, as not coming to work at the same time and place every day can create disagreements among colleagues.When you decide whether you want to add someone to the board, you only have two options.American 20th-century novelist Ken Kesey was right: Get in or get out.

Cash rewards are not king
Appropriate remuneration should be given to full-time staff.Whenever an entrepreneur asks me to invest in his company, I ask him how much he plans to pay himself.The better the company does, the less the CEO gets paid - I've found this to be no clearer than having invested in hundreds of startups.Under no circumstances should a CEO of a venture capital-infused start-up earn more than $15 a year.Whether he used to make more money at Google, or whether he had big mortgage payments and high private school tuition to pay, is beside the point.If a CEO makes $30 a year, he becomes a politician not a founder.A high salary will tempt him to maintain the status quo and maintain his current income instead of working with others to identify and actively solve problems.In contrast, low-paid CEOs focus on creating more value for the company.

Low salaries for CEOs also set the standard for others. Box CEO Aaron Levy once went out of his way to pay himself the lowest wage in the company—four years after he started Box, he still lives in a one-bedroom apartment two blocks from the company's headquarters, where nothing but a mattress , no other furniture.Seeing that he put all his heart and soul into the development of the company, the employees all followed suit.CEOs don't necessarily have to set an example by taking low salaries; capping pay can have the same effect.As long as the amount of remuneration is modest, it is tantamount to setting an effective upper limit on cash compensation.

The allure of cash rewards is that they offer sheer optionality, which means that once you get your hands on them, you can spend them however you want.But high cash compensation will allow employees to take away the value that the company already has, instead of investing time to create new value for the future.A cash bonus is better than cash compensation - it depends at least on how well the job is done.But even so-called incentive pay encourages short-term thinking and value-grabbing.Any salary paid in cash is about the present, not the future.

Stock compensation can make employees go all out

Startups don't need to pay high salaries because they offer something better: fractional ownership of the company.Stocks are a form of compensation that can effectively guide people to create value in the future.

However, you must be careful about allocating stock that encourages employee dedication rather than creating conflict.Giving everyone the same share is a mistake: each individual has unique talents and responsibilities, and an entirely different opportunity cost, so an equal share is arbitrary and unfair in the first place.On the other hand, it would be unfair to give differently in the first place.Resentment at this stage can destroy a company, but no ownership allocation can completely avoid resentment.

This question becomes more acute as more and more people join the company.Early employees get more stock because they take more risks, but later employees may be more critical to the company's success or failure. A secretary who joined eBay in 1996 could receive 1999 times more stock than a veteran industry executive who joined in 200. The artist who painted the walls of Facebook's offices in 2005 got stock that would later be worth $2 million, while the talented engineer who joined in 2010 may have had as little as $200 million.Since it is difficult to achieve absolute fairness when assigning ownership, the founders need to keep the details secret.Emailing the entire company and listing everyone's share of ownership is like dropping a nuclear bomb on the office.

Most people don't want stocks at all.At PayPal, we once hired a consultant who promised to help us develop our business and secure lucrative deals.As a result, the only thing he negotiated was his daily salary of $5000, and he refused to use stock options as compensation.While there are also stories of new restaurant chefs becoming millionaires, stocks are not as attractive to people because they are not as liquid as cash and can be traded quickly, but are tied to a particular company in the Together.If that company fails, the stock is worthless.

It is precisely because of these constraints that stocks are such powerful tools.Someone who is willing to take partial ownership of your company, rather than a cash salary, shows that he is willing to commit to increasing the value of the company for the long term.Stock, while not the best way to motivate employees, is the best way for founders to keep the company together.

Let the business continue

Rock singer Bob Dylan once said that a person is either busy being born or busy dying.If he's right, then birth isn't instantaneous, and you might have to manage to do something on an ongoing basis, at least that's a poetic way of saying it.And the establishment of a company is indeed only once. Only when it is first established, can it have the opportunity to formulate rules so that everyone can unite and create value together.

The most valuable companies consistently encourage the invention that is typical of the start-up phase.This reminds me of another less obvious second definition of entrepreneurship: as long as the company innovates, entrepreneurship is not over, and once innovation stops, entrepreneurship is over.When you start a business at the right time, you can do much more than create a valuable company: you can steer its future development toward innovation rather than success.You can even make the startup go on indefinitely.

(End of this chapter)