Legal AI and the Future of Startup Law

It’s been a while since I’ve written on legal tech and startup law, and given recent developments in AI, it feels like an update is in order. For context, I’m a Partner and legal CTO at Optimal, an elite boutique law firm focused on ECVC, M&A, and Tech Transactions for VC-backed startups. We’re about 20 lawyers, company-side focused, and negotiate across from all the top VCs (and lesser ones too) and the usual suspects of Bay Area and NYC-based BigLaw.

Over the past two years I’ve reviewed and/or tested a tremendous number of new AI-based legal tech products that have hit, or will soon hit, the market. The notion that the new generation of LLMs will make a material impact on the legal industry is accurate. The capabilities being released go well beyond the typical automation tools that law firms have been integrating over the past decade or so. Lawyers of all stripes are going to get a lot more productive.

However, what’s also become clear is that (predictably) shysters are coming out of the woodwork, exaggerating where this new tech is going and what can be done with it. For just one example of that, see this X thread. Given what I’ve observed over the years regarding the very short-term memory of the entrepreneurial ecosystem, I am not surprised at all that, thanks to AI, we are going to see the second, third, fourth, and on and on attempts at building the same flawed and untenable business model of some supposed new kind of law firm or legal service provider infused (somehow) so extensively with super-advanced technology that they dominate and transform the industry.

Alas, it’s just not meant to be, even if many of us tech-forward lawyers eagerly await every new tool that makes legal practice faster, smoother, more productive, etc. For those who don’t remember, Atrium was the most visible failed attempt at building the tech-driven startup law firm “of the future.” There are a lot of views out there for explaining why Atrium failed, some (in my opinion) more honest than others. I’ll summarize my views here:

A. It was controlled by a founder (Justin Kan) who, despite being brilliant in his own way, not only didn’t understand the real drivers of the elite legal industry – on the supply or demand side – but had no real interest in learning them. He assumed that his personal brand had enough gravitational pull to cover up impossible economics and a weak value proposition dependent on exaggerated technology capabilities.

B. Kan also assumed that his connections with Y Combinator, which funneled both cash investment and portfolio companies to Atrium, amplified his pull even further.

C. Not nearly discussed enough, Atrium’s organizational structure hid massively problematic ethical conflicts of interest that were a ticking time bomb. Company counsel, what Atrium purported to be, is supposed to help startups negotiate against VCs, serving as an equalizer for entrepreneurs and other common stockholders negotiating super high-stakes contracts and board decisions with financially misaligned elite counterparties. Yet Atrium was funded by the VC community, had VCs on its Board, and used all of those connections to funnel portfolio companies of its investors (including YC) into its client base.

In short, over-confidence and naivete, vaporware technology, and a go-to-market strategy dependent on pretending professional rules around conflicts of interest (for protecting clients) could just be hand-waived out of existence.

I could go on and on about how doomed Atrium was from the start, including how it depended on inexperienced de-skilled (read: no real partner oversight) young lawyers dreaming of VC-like payouts, and how its fixed-fee pricing model itself incentivized rushed work and not properly serving clients. But this post isn’t about Atrium; it’s about the people who are going to be using AI vaporware to try to resurrect it.

The narrative emerging today is something like “Atrium was just too early. Now, with AI, is the right time.” I’m sorry, but it’s really not. Even if the new generation of legal AI is more powerful than what Atrium was building – and it is – nothing coming down the pike of legal AI with the current generation of algorithms is going to be so transformational as to overcome all of the other flaws of the business concept.

At the low end of law, I can certainly see new legal AI creating something like a more dynamic version of LegalZoom, backed by highly de-skilled humans shuffling paper around in the background. But this wouldn’t be that transformational, because legal automation has already been eating up the bottom two quartiles of the legal industry doing work like small business law, simple divorces, estate planning, low-stakes dispute resolution, etc. It’s why the majority of law graduates today, even many from decent schools, can barely earn enough to pay their student loans. Sidenote: I think about half of law schools should just be shut down if they can’t find a way to operate at half the cost or less.

Startups even have their own LegalZoom: Clerky for the very earliest pre-seed stages, when everything can most easily be cookie-cutter. It works great in many (not all) contexts, and many lawyers, myself included, integrate with it.

But unlike automation tools, we (VC-backed startup lawyers) play at the elite end of law, where the stakes are much higher, and the context on the ground is far more variable and complex.

The new LLM-based generation of legal AI tools are going to make elite lawyers much more productive. We already see it happening within our own firm, and it’s influencing hiring decisions, particularly on the junior side. They will make drafting, document review, research, and other lawyer work meaningfully more productive to the point of probably shrinking the footprint of elite firms, concentrating earnings further toward the top as the real “mandarins” of elite law don’t need nearly as much on-the-ground junior labor to serve clients.

But the notion that this new technology eliminates the need for those legal mandarins – the people who not only have the years of technical training, but also the personal understanding of the client and the mix of IQ/EQ to apply legal + strategic insight to unique dynamic human contexts, is preposterous. There is simply no way to use AI to de-skill this top end of the industry such that a new organizational structure full of lower-paid “legal technicians” can actually deliver what clients want, at a quality level that doesn’t touch malpractice.

This is why literally every single elite law firm is working on integrating AI right now. Hardly luddites, they understand this tech is going to make their partnerships much more profitable, while improving efficiency for clients. It’s also going to make it a lot harder for junior lawyers to enter elite ranks. Such is life in the race against the machines, or perhaps better said: against the people using machines.

The shysters that will be peddling AI to create pretend startup law firms and alternative legal services will be taking one of a few (predictable) strategies:

They will exaggerate the extent to which elite legal work is or can be standardized, because their unit economics can’t work without hyper standardization.

See Standardization and Flexibility in Startup Law. VC-backed tech companies going after 9, 10, and larger-figure opportunities are not coffee shops. They all operate in different competitive contexts, with different investors, different growth expectations, different team cultures, and all sorts of other contextual dynamics that influence their approach to legal and Board issues. This is why even at the earliest stages Founders CEOs talk to human lawyers.

You see this play out with other automation tools that have tried (and failed) to hyper-standardize startup law: see Carta. They know their technology breaks down beyond a small level of parameters, and so they try to get clients (Founder CEOs) to believe that narrow set of parameters is all they need. But the ROI – millions – for actually negotiating contracts (flexibility) is often so high that only the most foolish entrepreneurs trust their key decisions to an automation tool.

They will de-skill their rosters in order to create margins (potentially) attractive to investors, while covering up the (significant) drop in quality.

The most expensive people at any law firm are the Partners, just as the most expensive people at a hospital are the top doctors, all for good reason. They are the ultimate quality control in a service where low quality is extremely expensive, even dangerous.

Elite law firms are built, funded, and run by a hybrid form of capital – elite partners. They provide the financial capital, but also the extremely nuanced technical knowledge required to train and run the operation: professional human capital.

If you just layer investors, like VCs, onto this model you are not going to have a competitive advantage in the industry. Too many mouths to feed, and not enough margin. So entrants, like Atrium, rely on de-skilling – eliminating real (highly skilled) partners, and trying to convince clients this doesn’t result in a drop in quality.

What will a drop in quality look like? Rushed (or non-existent) negotiation. Poorly thought-out legal strategy. Technical errors that even the best LLMs just aren’t algorithmically capable of catching, but now without senior expertise to correct them.

Law firms are far lower margin relative to the kinds of tech products funded by VCs. There’s no real magic to trying to create VC-like margins in professional services. It requires getting rid of a lot of the most elite talent, because that’s where the money (rightfully) goes. In healthcare, this can work at the low end (de-skilled), like nurse practitioners using tech to treat sniffles faster and cheaper than GPs. In high-end specialty care, it can be (and has at times been) disastrous.

They will be funded by, and partner with, ecosystem players who profit from a drop in the quality of legal service provided to startups.

This is exactly what happened with Atrium, which relied extensively on pushing so-called “standards” created by Y Combinator, an accelerator and VC, because YC funded Atrium, sat on its board, and pushed a lot of its portfolio companies to use Atrium. Unsurprisingly, those standards were designed to benefit investors financially, which means they cost entrepreneurs significantly, far more than whatever they “saved” in legal fees.

This is fundamentally what so many people in the startup ecosystem misunderstand about the role of company counsel, and some even put in effort toward ensuring entrepreneurs don’t understand it. Startup Law is, at a foundational level, adversarial and (unavoidably) zero-sum. See: Negotiation is Relationship Building. Many people want to pretend otherwise, but at the end of the day institutional investors and common stockholders see the world differently, have different goals (often), and in an exit the money can only go into one pocket or the other.

One of the most clever things I observed about how Justin Kan structured Atrium is it offered his investors a double value proposition. The first was obvious: we’ll build this supposedly massively disruptive whiz-bang-power legal tech firm. But the second one was more subtle: send your portfolio companies our way, and we’ll ensure they negotiate the “right” way and sign the “right” contracts – meaning the ones that make more money for and give more power to… those same investors.

A brilliant move, even if profoundly illegal (it flouted rules against conflicts of interest), and ultimately not enough to overcome the bigger business model flaws. Too many smart entrepreneurs – fools can always be tricked – saw through the charade and weren’t willing to bite. I expect the same to happen with the new generation of Atriums that will be attempted in the ecosystem.

Fiction: New LLMs will disrupt the legal industry, paving the way for entirely new organizational structures taking enormous amounts of business from the old guard.

Fact: At the bottom end of the market, new legal AI will incrementally allow existing automation providers to move up-market, perhaps from the 40th percentile to something like the 50th or 60th, but nowhere near the elite firms that are most-often talked about. At the high end, everyone and their mother is working to adopt legal AI into their existing firms. Elite firms will likely be smaller and more profitable, but still very much headed by elite legal mandarins wielding more powerful productivity tech.

Post-script on Healthcare: A brief point about the new generation of AI as it applies to healthcare, perhaps the field most often compared to elite law. From my vantagepoint, I expect AI to be much more impactful in the long-run to healthcare than law, for reasons I will call (i) less competitive subjectivity and (ii) more compartmentalized service.

What I mean by less competitive subjectivity is that in healthcare the goals are more straight-forward – treat/heal the patient, and the playing field is much more standardized: biology. More straightforward goals and (relatively) unform biological science lend themselves much more towards the implementation of algorithms and high-volume data crunching. In elite law, however, the goals are much more subjective and contextual: there are multiple players, often with their own worldviews and strategic priorities. Further, every company is very different. Different people, industries, business models, etc. EQ and human-oriented “reading the room” play a much bigger role here, and I believe that limits how far technology – in its currently developing iteration – can go in displacing humans as opposed to augmenting their productivity.

By more compartmentalized service, I mean that healthcare breaks down into much more discrete tasks that can be walled off and modularized, outsourced entirely to third-parties and technology, and then re-integrated into the patient’s treatment without a problem. Think blood labs, diagnostic testing, monitoring, pharma, etc. Elite law just doesn’t work that way for a number of reasons – largely having to do with the more contextualized and subjective nature of the work, which amplifies the friction involved in integrating third-parties lacking the full context of the “patient” (the client). This is why in healthcare I expect to see a flourishing of third-party AI-centric services woven into the market, whereas in legal far more of the development will be tools for law firms.

Pre-Seed Funding with Post-Money SAFEs: Revisited in 2024

There are few markets that evolve faster than the world of startups, for unsurprising reasons. I figured it was time to revisit some of my writings on seed and pre-seed funding given how much the market has evolved since 2019-2021, when I last wrote about this topic in depth.

First, a brief history:

1990s – Long before the term “pre-seed” was even a thing, before the SaaS revolution made it even conceivable to start building a tech company with only a few hundred thousand dollars (or less), almost all early startup funding occurred as a complex preferred stock round; what now is reserved for Series A and larger seed rounds. It was a very different world from today.

Early 2000s  – Then convertible notes, once reserved mostly for “bridge” rounds in between preferred stock financings, started being used for seed funding; a natural evolution for rounds that were getting smaller and couldn’t justify full equity round negotiation time or costs. It worked relatively well. We also saw in this era the emergence of “series seed” preferred stock templates, a slimmed-down version of the more complex NVCA, that allowed you to raise a seed equity round for about 40-50% less in legal fees. These also got a decent amount of traction.

2013 – Then the Pre-Money SAFE, which is a convertible note without interest or maturity (effectively) was released around 2013. Founders started (candidly) abusing that instrument by raising Pre-Money SAFEs for years and years while obscuring the real economics behind what angel investors were funding. This was do-able because if your second, third, or fourth SAFE round has a pre-money valuation cap, but nothing capping the post–money, your newest investors can’t really know what % of the company their investment is buying without making you model out all the conversion math.

They could, for example, be putting in $1 million at a $49 million pre-money cap, which would suggest a $50 million post-money valuation, but they were in fact getting way less than 2% of the business because numerous unmodeled earlier SAFE rounds were pushing up the post-money. The post-money valuation is what really hardens a startup investor’s ownership percentage.

2018 – In late 2018 Y Combinator released the Post-Money SAFE. It flipped the economics of SAFEs to have a post-money cap, making the % purchased by investors far more transparent and immune to this issue of companies obscuring a deal’s economics. This was a good development, and the Post-Money model of valuation caps has since gained substantial market share.

But there’s one very big problem. The solution YC devised went much further – to the benefit of investors (including themselves) –  than was necessary to let investors know what % of the cap table they are buying on the day they invest. It further promised those investors complete non-dilutability of that percentage until the SAFE converts, including through subsequent SAFE rounds with higher valuation caps. This makes the Post-Money SAFE far harsher economically (to founders) than any other instrument in the history of startup finance.

YC itself has made an enormous amount of money by implementing this new math into the deal it gets with its own accelerator’s startups. I’ve seen YC companies start with giving 7% (the usual deal) to YC, but by the time the SAFE actually converts, after two or three more convertible rounds, the YC % is functionally equivalent to having received 10% or more years earlier. The smartest YC companies get ahead of this issue and raise a seed equity round as soon as they can after exiting the accelerator, cutting off this problem by converting all their SAFEs, but most don’t. It ends up costing them dearly.*

That’s the history.

2024 – Today, pre-seed and seed rounds have evolved such that you very rarely see an equity round that is smaller than $3-5 million. Many companies raise more than $5-10 million as convertibles (SAFEs or Notes) before doing an equity round.

Given the current landscape and investor expectations, we typically advise founders to not swim too hard against the tide, but also not mindlessly drink the overly “standard” Kool-Aid. Yes, templates like the Post-Money SAFE have gained significant market share, but what you don’t hear as much in the (simplified) data is that they are still being negotiated, particularly on the anti-dilution economics issue discussed above.

Many founders are very uncomfortable with promising their SAFE holders anti-dilution for years, given how equity rounds have been pushed further into companies’ growth. Six years after the Post-Money SAFE’s release I still have not heard a logical argument for why if a startup successfully closes $X million as preferred stock, all prior investors get diluted (what normally happens), but if it happens to be a SAFE round (same valuation, same amount raised), no investors get diluted. Why is the paperwork structure of the round relevant to whether investors get diluted?

Many smart founders modify the Post-Money SAFE (lightly) to address the investor-biased anti-dilution issue. I posted a public redline for this years ago, available here, along with other info on the economic implications of making this modification. Changing just a few words in the Post-Money SAFE can, for a company that achieves at least a $100 million exit, amount to millions of dollars in the pockets of common stockholders (founders, employees) instead of VCs or accelerators. Anyone who thinks at least trying to make this change isn’t worth it, out of some fear of “friction” – isn’t (IMO) defending their cap table enough.

Remember that this modification still promises investors the cap table percentage that the post-money valuation cap implies. If they put in $1 million at a $10 million post-money cap they are getting 10% today, effectively. What the “fix” does, however, is ensure that 10% shrinks pro-rata if you do a new SAFE round in 6-12 months with a higher valuation cap. Because that’s what would happen if you’d raised that $1 million as an equity round instead, or as a convertible note or pre-money capped SAFE. This idea of promising non-dilution to SAFE investors was completely novel, unnecessary, and introduced by YC, costing founders a lot of money. 

Of the founders I observe actually trying to fix the Post-Money SAFEs problems, a material number (but not all) have it accepted by their investors. They send a simple markup early in the process, a little discussion happens, and investors either OK it or they don’t. It ultimately comes down to leverage, which no lawyer can change for you.

For founders unable or unwilling to push for this change, other possibilities are:

A. At a minimum understand the anti-dilution issue, and factor it into your modeling of subsequent rounds. View future SAFE dilution as stacked on top of what was previously given to SAFE investors. The earlier SAFE holders are not themselves being diluted, which means you (the founders) are being diluted more. Your valuation caps in future SAFE rounds thus need to be higher to account for the more aggressive founder dilution.

B. We’ve also seen some founders, instead of tweaking the Post-Money SAFE, simply switch back to an old school pre-money formula. I personally find this a bit awkward in the context of investor expectations of 2024, but it certainly happens sometimes.

C. Convert your SAFEs as soon as possible. This is the advice I give to YC founders, and the advice I give to anyone who has raised a substantial amount of money on unnegotiated Post-Money SAFEs. Cut the anti-dilution off as soon as you can by raising a seed equity round, even a small one. See my article Myths and Lies About Seed Equity Rounds to dispel any boogeyman stories you’ve heard about how equity shouldn’t be used until Series A.

Those stories are often driven by investors holding post-money SAFEs, who make way more money staying unconverted and therefore undiluted even as you raise more money and increase in valuation. Investors can be great sources of advice, but they are not your best friends. Cap tables are unavoidably a zero-sum game, and investors’ advice is very often designed to maximize the amount they get. Watch incentives.

Startup finance continues to evolve. Templates are useful as starting points of a negotiation. They’ve dramatically streamlined the earliest stages of funding, as the number of pre-seed and seed funds (and deals) has exploded. But be skeptical of anyone suggesting that those templates are never negotiable. They most certainly (often) are. The tiniest amount of negotiation can save you and your team millions of dollars. Don’t foolishly leave money on the table.

If you’re raising a pre-seed or seed round, feel free to reach out to us. We often do virtual office hours to help founders better understand these granularities as applied to their market context.

*YC will not modify their own Post-Money SAFE for their cohort of accelerator companies. The only way to minimize the economic harshness of its terms is to raise a small equity round as soon as possible after YC to convert their SAFE. 

Tech Bros, Pluralism, and the Startup Diversity Inquisition

Disclaimer: This post, like all posts on SHL, represents solely my personal thoughts and opinions; in this case with respect to a topic I have spent years thinking and writing about as a Mexican-American who works in “tech.” It does not purport to reflect the views of any of my colleagues at Optimal. It further in no way speaks for Optimal as an institution, or its workplace policies.

It’s impossible to write about such a sensitive topic without speaking about averages and generalities, because the topic of “diversity” derives from discontent over aggregate statistics of representation. As I state repeatedly in all my writings, while we speak and empathize about such generalities, we should aspire to treat “in real life” everyone as individuals; judging them by *their* specific performance and behavior, and how those factors impact the goals of any particular organization, group, or team. 

Related background reading:

What is “culture?” It’s much broader than a few simple categories like food and religion tied mostly to ethnicities or nationalities. Here’s one good definition from Merriam-Webster:

“the set of shared attitudes, values, goals, and practices that characterizes an institution or organization.”

Every group of people (however small or large) has a culture, and (indisputably) different cultures – different “attitudes, values, goals, and practices” produce different outcomes in different contexts. For small groups, we might call them subcultures or even microcultures. Walk into a Navy Seal training camp, and you will find a very distinct subculture. Walk up to a nurse’s station in a Children’s Hospital, and you will find another.

Is the latter subculture “better” than the former, or vice versa? More desirable? Reasonable people might respond, “Well, it depends” (on what you want, and different people want different things). Others might criticize the question entirely. Both of these subcultures are a valid and much-needed part of society. They exist to serve very different goals and overcome very different challenges. Trying to judge one as universally “better” than the other seems naive and counterproductive.

When you do, in fact, judge very different subcultures on a few simple variables, you’ll inevitably find what some would call “performance gaps.” But what exactly are these so-called “gaps?” If cultural diversity by definition means people who value and do different things, the fact that Culture X “outperforms” Culture Y on metric A or B is only a problem if we assume that different groups performing better or worse at different things must be “fixed.”

But is that not literally what cultural differences are? Go too far to “fix” those “gaps” and you are, again quite literally, asking one culture to change to become more like another. You are eliminating diversity.

Bad things happen when you take very complex societies, full of lots of different kinds of people serving different roles in different spaces, and allow the naive (but aggressive) to judge (and punish) everyone based on a few narrow metrics or values. The image that comes to my mind is the Spanish Inquisition. The Inquisitors took it upon themselves, as representatives (in their eyes) of God himself and the one true inviolable moral worldview, to “protect” society from deviant subcultures and people who violated that worldview.

There’s a plausible theory that the centralizing and dogmatic moral culture that enabled The Inquisition explains, in part, the much greater long-term “success” – economic, technological, military – of protestant societies (British) over those with deeper ties to the Vatican (Spanish, Portuguese, French). The more variation you can tolerate in your society – including variation of subcultures – the more likely you are to enable different teams to solve different puzzles/challenges, which will allow your society to win in global economic competition.

Protestantism gave Britain a leg-up over Spain by detaching the state from Rome, which created more space for diverse subcultures. America, a spin-off of Britain, went even further by separating church and state entirely, turbocharging the proliferation of spaces for subcultural experimentation. While we’re on this topic, let’s look at one of Merriam-Webster’s definitions of religion:

“a cause, principle, or system of beliefs held to with ardor and faith.”

Modernity has enabled a proliferation of “religions” – and therefore would-be Inquisitors – even if they don’t see themselves as such. The real value of separating church and state is not about avoiding the over-centralization of state power with solely traditional monotheistic religion. It is about avoiding all totalizing moral centralization – even secular “ideals” – because a diversity of subcultures with different worldviews makes a complex advanced society stronger (at least economically and technologically), so long as there’s rule of law that protects property, safety, and stability.

A bedrock of American economic and technological strength is a cultural immunity – at a national level – to Inquisitions of all stripes. That of course does not mean certain Americans aren’t constantly trying to be modern Inquisitors, but American national culture – reinforced by our federalist political structure and constitution – is pluralism writ large.

Rather than allowing anyone to step into every single space and impose their universal idea of what’s right and proper, we let 1,000 subcultural flowers bloom. Some of those flowers run schools. Some of them run militaries. Others make great art. Others build world-changing technology or financial markets. And to use a favorite modern meme phrase, we “Let them cook.” We don’t second-guess their cultural “recipes” from our cozy armchairs.

These groups/teams all look and behave, within their subcultures, very very differently; by necessity. Because different challenges require different (again) “attitudes, values, goals, and practices” and (unsurprisingly) different kinds of people are attracted to (or repulsed by) different “attitudes, values, goals, and practices.”

If an ideology ever materializes that tries to judge all of these diverse subcultures with the same simplistic yardstick, our freedom of speech enables a counter-ideology to push back. One such universalizing ideology gained a lot of strength in recent decades and set its sights on one of America’s crown jewels – its technology industry and elite startup subcultures. It’s of course DEI (Diversity, Equity, and Inclusion).

The massive irony of DEI, which I don’t think gets mentioned nearly enough, is that by trying to impose a particular definition of “diversity” within teams at a micro level, it ends up eliminating diversity of teams at a macro level. DEI designates certain team compositions universally unacceptable on moral grounds in the name of “diversity.” If every team must reflect the colors of the rainbow in its internal composition, then it logically follows that the only acceptable team is a rainbow team. The 999 other kinds of “flowers” must be burned to the ground.

Is that a desirable outcome? Do we really think that a country full of solely “rainbow teams” will solve every challenge we have, or even deliver on what (obviously) different people actually want in their lives?

Celebrating the equal dignity of the rainbow – all races, colors, religions, nationalities, genders, sexualities, etc. at a society-wide macro level (which we should do) is not even close to the same thing as mandating its representation at the micro organizational subculture (or industry) level, with no regard to the (demonstrably) varying “attitudes, values, goals, and practices” within each category and how that variation influences outcomes.

This is the classic paradox of cosmopolitan multiculturalism (what DEI promotes as “diversity”) v. pluralism, which has a long history in American political philosophy. A country with some Manhattans and some Salt Lake Cities, a California but also a Texas, is compositionally stronger because specialized “cultures” solving different challenges with space to “be themselves” outperform a singular mega cultural ideal applied uniformly in every space.

Imposing cosmopolitan so-called “diversity” everywhere actually magnifies homogeneity, because certain unique subcultures have “attitudes, values, goals, and practices” that are simply incompatible with those of others. They can’t be aggressive but also sensitive, competitive but also nurturing, rational but also emotional, innovative but also traditional, all at the same time.

Such a sterile culture would, at best, be average at everything and impressive at nothing. If you want top-tier athletes, artists, professionals, entrepreneurs, technologists, teachers, soldiers, intellectuals, pioneers, etc. then get comfortable with subcultural variation that, by necessity, chooses some ways of thinking and behaving over others.

In Diversity in Startups: Whining, Warring, Winning I wrote, from my background as a Mexican-American who grew up low-income, specifically about racial “diversity” in startups and the three strategies (Whining, Warring, Winning) adopted by activists, only one of which actually produces results in the long-run.

Complaining (whining) about how purportedly “unfair” it is that the ecosystem of VC-funded startups isn’t as racially diverse as some DEI activists would like doesn’t move the needle, because, unlike large corporations and wealthy universities, startups face uniquely amplified competitive pressures that make sustaining underperformance impossible. And yes, underperformance from URMs (under-represented racial minorities) really is (on average) a problem in the high end of tech industry recruiting.

Further, “warring” – in the form of lawsuits and PR campaigns – over racial diversity in startups is also counterproductive when there is not actual (non-performance-based) illegal discrimination occurring. Elite entrepreneurs and venture capitalists comprise some of the most intelligent, aggressively competitive, and pragmatically resourceful people on earth. They have numerous tactics to maneuver around DEI activists for protecting their high-performance cultures, including recruiting internationally from foreign countries to improve their “diversity statistics.”

The only viable strategy is (for those with the motivation and resources) helping “under-represented” founders and employees actually win at the same high-stakes and aggressively competitive game that everyone else is playing. This means putting the insults and weapons away, acknowledging uncomfortable “performance gaps,” and doing the work of actually helping people improve their performance at whatever it is you think they are “under-represented” in.

The thrust of this post is to apply the above logic not just to racial diversity, but to any number of kinds of “diversity” and “under-representation” in the tech ecosystem. Activists have once again taken to insulting and attacking “Tech Bros” and “Mediocre White Men” for what they see as an insular “Bro” subculture that prevents greater diversity from blossoming in the elite tech industries.

Apply the logic of those launching these attacks to the many other subcultures in our complex society, many of which could just as easily be (simplistically) criticized for not reflecting activists’ cosmopolitan ideals of “representation.” Do our Navy Seals, championship-winning sports teams, and award-winning entertainment industries, to name a few subcultures, internally reflect anything close to the demographic representation of our country? If not, why not?

Different challenges require team subcultures – with distinct “attitudes, values, goals, and practices” – tailored for those challenges. These subcultures are not arbitrary or artificially imposed, but logically connected to the tasks they are performing. No one walks into an Artist’s studio and wonders about the “performance gaps” between that Artist and Navy Seals in some contrived competition.

It should shock no one with a sober mind that different categories of people – races, ethnicities, geographies, ages, socioeconomic backgrounds, genders, etc. – have, on average, different spectrums of “attitudes, values, goals, and practices” (subcultures) weighted and toggled in all numbers of directions. That is literally what “diversity” is.

Yes, there is always variation within the categories at the individual level – which is why, despite being “under-represented” in any particular industry, all demographic groups still have some (minority) representation, but the level of variation is hardly the same across categories precisely because of culture – and also genetically determined personality traits. Thus, different teams tackling different challenges will inevitably have different proportions of representation depending on which subcultures in society they appeal to.

To demand that all “performance gaps” be closed is to demand that all subcultures (and people) become the same. It is, in other words, to demand that people stop being themselves, because their free choices guided by their unique subcultures produce (apparently) too much “disproportionate representation.”  If you are a fan of any reasonable flavor of freedom, this should terrify you. Ironically, many of the most egalitarian countries show wider “representation gaps.”

When any particular team, or even industry, is criticized as “too white” (sidenote: there are a lot of “not white” people in tech), “too male,” or too anything, such criticism should not necessarily be shut down entirely without good-faith examination, but it should be examined objectively and dispassionately. Because it is very possible such team or industry looks the way it does not because of some malicious cabal scheming to keep other people out, but because (i) that industry has specific challenges for which specific subcultures outperform, and (ii) certain categories of people better align, on average, with such (contextually) outperforming subcultures.

Realistically, this debate has been entertained in good faith by tech leaders for a very long time. Decades, with numerous strategies attempted for improving “representation,” usually to underwhelming results.

Because of the weak results over such a broad span of time, criticisms have devolved into hostile attacks; whining is gravitating towards warring, detectable in the overt insults against “tech bros” and such. This devolution is revealing what many in the tech industry have suspected for some time – that many (though not all) of the complaints about “bias” were not really about bias as understood traditionally in, for example, employment law literature.

The tech industry has done much soul-searching for actual illegal discrimination and bias, with valuable results at rooting out what actually existed (work is ongoing). But what many activists are really talking about when they speak of “bias” isn’t that under-represented peoples are being barred from work or denied merited promotions, but that tech industry subcultures are not sufficiently “welcoming” to the under-represented. That these subcultures must, out of moral obligation, become more appealing to outsiders.

How “welcoming” would the kind of person who gravitates toward the Navy Seals find the subculture of a set of Ivy League humanities professors, or vice versa? If a farmer from Iowa walks into a Greenwich Village coffee shop and feels “out of place” what precisely is the “solution” to that “problem” that doesn’t effectively eliminate one subculture’s right to exist? As we’ve established, subcultures across society and industries are rarely arbitrary. They’ve evolved requirements and expectations to solve specific challenges, and demanding with a ham fist that they adjust to make all outsiders more “comfortable” is to (at least in some cases) threaten their ability to do their jobs at the performance level they evolved for.

The “bros” (honestly there are a lot of very welcomed and high-performing women in this industry, just as there are many skin colors, but let’s run with the over-simplified metaphor) insist that the overall “startup” subculture of irreverence, aggression, bluntness and brashness, long working hours, unpredictable demands, social awkwardness, highly meritocratic hierarchies (see the insistence that 10x and 100x engineers exist), etc. are an organic necessity for the most chaotic and competitive early stages of high-value company creation.

One of their arguments is that the kinds of people willing (and able) to fight and win those early-stage battles – neuro-atypical (candidly) and therefore not in abundant supply – do not want the style of work environment that other kinds of people want. Note the nuance. They don’t have a problem with demographic outsiders per se. They have a problem with the (on average) preferences of those outsiders. Outsiders who can accept or acclimate to the existing subculture (and some certainly do) are welcome.

Some might say, “But this is who I am. Why should I have to change?” But is this not who they are as well? This is their team’s subculture. The parallels to broader issues of immigration and assimilation are obvious. As previously stated, pluralism acknowledges that you simply cannot appeal to anyone and everyone within the same space; not if you want any kind of productive cohesion. Subcultural diversity requires choosing A over B, and having another space where B is chosen. The beauty of America, in particular, is that there is a lot of space.

Defending a subculture within a space by no means tells you that you have to change. You are always free to find or create another space better suited to your preferences, if you don’t want to assimilate. It simply sets cultural conditions for entering that specific space; conditions often tied to what the space is designed to do.

Look throughout history and you will very often find pioneers and frontier-people who were attracted to competitive, chaotic, and stressful (but highly lucrative) environments; and who explicitly avoided environments they deemed as “soft” or “mid.” And those “frontier” environments virtually never reflect (proportionately) the full spectrum of society’s demographic composition, because people (and categories of people, on average) simply don’t want the same things.

Some might say that expecting all those who work on the “frontier” (chaotic, messy, risky) to be relaxed, diplomatic, egalitarian, and sensitive to others needs, at any level close to the broader population, is a self-contradiction. We can judge those “extreme” people harshly from our manicured spaces all we want; and yet without those people and their results, our own spaces would not exist. Careful what you (too aggressively) wish for. I could never be a Navy Seal. But I am very thankful we give them some space and “Let them cook.”

Another argument (often) made about “startup culture” is that these very early-stage companies going after extremely high-value market opportunities simply don’t have the time or resources to make their work environments more “welcoming” to a broader pool of people’s preferences, beyond removing clearly illegal behavior like discrimination and harassment. Devoting more time and resources to “softening” expectations means pulling time and resources away from beating other companies in a winner-take-all tournament with paper-thin margins for error.

The above arguments are not entirely disconnected. Some people prefer more aggressive expectations not necessarily out of aesthetic or philosophical opposition to softer cultures – they would never walk into an elementary school and demand that teachers “harden up” – but because they believe that their context and their team’s mission will be jeopardized if their specific subculture’s values and behaviors loosen too far. Different mission, different expectations.

It’s clear, however, that once companies are larger and more established (and therefore more financially secure), corporate cultures inevitably shift away from aggressive bleeding-edge expectations in order to appeal to (and recruit in higher volume from) broader audiences. It is not uncommon, once the “frontier” period of a company’s life has evolved into a calmer and less risky setting, for the self-styled “pirates” to either depart for more exciting environs (with their stock fully vested), or to isolate themselves from the growing roster of “normies” via more elaborate corporate hierarchies and lines of reporting.

All of this being said, the “tech bros” won’t (and don’t) stop anyone from trying to build an industry-defining company that is far more “welcoming” of those with other preferences and desires. What I am suggesting is that, after realizing that whining doesn’t work and that warring also doesn’t move many needles, activists demanding a more “inclusive” tech ecosystem jump right to winning. Compete. Prove the “arrogant” bros wrong.

If you dislike the so-called “bro culture” that pervades so many elite tech startups, and yet the industry defends its high-performance cut-throat values and behaviors (which still vary quite a bit), what is stopping you, together with other like-minded people, from competing with them? Whether or not this subculture, which activists so zealously malign, is truly insular (in an artificial and completely unnecessary way) is an empirical question that is wide open for testing.

What’s stopping you? You could pour more resources into resolving whatever barriers you believe are holding back more “inclusive” startup teams, but without unproductively insulting people already on the ground. As I’ve written before, there are undeniably structural issues at a societal level that play into some under-representation in tech. One of my core points, however, is that leaders within tech are not responsible for, and not capable of, “fixing” those complex societal issues. We’ve been blaming the wrong people, and some continue to do so.

When activists hear this response, many (not all) will fall back on what I referred to in The Weaponization of Diversity as unproductive “unfairness porn.” They’ll find 1,000 reasons why someone else is blocking their ideal of a more “inclusive” startup subculture – one which still overcomes the same extreme challenges and still produces the same elite results. This is understandably received with skepticism by industry practitioners who live within the hard realities of their markets and talent constraints. People actually doing always resent being talked down to by those who are merely talking and theorizing.

Similarly, some activists will resort to making arguments for national regulation of “inclusiveness.” If, their argument goes, the federal government would simply step in and mandate across the board more “inclusiveness,” then everyone would have to follow the same “diversity” requirements and face the same constraints. This obviously ignores the harsh reality of international competition. It’s all well and good to federally mandate that your Navy Seals (figurative and literal) be more “welcoming,” until they step on an actual battlefield against a nation that simply said, “Let them cook.”

Demanding that the startup ecosystem reflect the cosmopolitan “diversity” ideals of DEI activists is not going to work, just as it doesn’t work to demand that any mission-driven subculture lose its organically evolved “attitudes, values, goals, and practices” because some armchair outsider on a moral crusade said so. But taking a pluralistic approach to startup culture – with a mindset of experimentation, not dogmatic mandates – should be celebrated.

All the aggressive talk of “tech bros” and “mediocre white men” seems somewhat misplaced to many people who actually work in the industry. There are a lot of skin colors, nationalities, religions, etc. And yes, there are many very impressive women, even if they are not quite as represented as many of us would like. There’s even quite a bit of variation of cultural attitudes toward other issues like work-life balance, remote work, etc., reflecting the fact that because different businesses face different challenges, some harder than others, not everyone needs to be as cut-throat as the industry’s most aggressive champions.

It should also go without saying that true discrimination that judges people by how they look or where they come from, and not on their actions and performance, should always be rooted out. Candidly, demonizing “white men” and “bros” (ludicrously over-generalized categories) is itself (in my opinion) an immature racial and gender bias that is almost certainly counterproductive; and potentially illegal. Who wants to work with people who openly display hostility toward a meaningful segment of the team?

The organic cultural diversity and compositional variation in our society, with all of its historical, socioeconomic, and other imperfections, means that certain ideals of perfect “representation” will probably never be fully met, because that would require forcing people to become something they aren’t and (in many cases) don’t even want. But all individuals deserve a chance to show their stuff and not be assumed to represent the statistics of their unchosen demographic categories.

From my perspective, pluralism – including startup pluralism – embodies an extremely valuable form of intellectual humility and pragmatism. It does not tell anyone that they are right or wrong all the time, in every context. It is not universally “woke,” “anti-woke,” or anything in between.  Instead, it forcefully pushes back against anyone who tries, with guns blazing, to recklessly impose simplistic ideals onto a highly complex, nuanced, and sub-culturally diverse world.

In other words, it shuts down Inquisitions. It respects the varied judgment and expertise of leaders actually doing the work in the face of hard talent constraints and demands, while significantly discounting – though not fully silencing – the opinions, however well intentioned, of armchair critics.

All else being equal, we’d all love a more “inclusive” tech ecosystem. But all else isn’t equal. Constraints, tradeoffs, and priorities exist. Different “attitudes, values, goals, and practices” produce different outcomes, and that requires sorting different people into different subcultures and teams. When all else isn’t equal, in the end, win.

*All images, though none of the writing, generated with ChatGPT-4o.