“I wonder for people in their 20s if they shouldn’t go to San Francisco.
The entrepreneurs are held in excessively high regard in my view.
I think that San Francisco doesn’t really encourage the pursuit of really deep technical depth.”
Full episode out tomorrow pic.twitter.com/HuIGvZBWRQ
— Dwarkesh Patel (@dwarkesh_sp) February 20, 2024
“Thou shalt have no other gods before Me.” – The 1st Commandment
This post is going to discuss certain high-stakes financial happenings with one of the great heroes of the Startup / Tech Ecosystem of recent decades, and indeed someone I deeply admire for his technical acumen (political opinions are more hit and miss): Elon Musk. Depending on your orientation, I might even be called a “fanboi” at times. I am particularly a big fan of his achievements at Tesla and SpaceX, as well as his efforts (however imperfect and ham-fisted) to reorient X fka Twitter toward a more free speech philosophy.
Elon Musk had his hand slapped big time by Delaware courts, having his >$50 billion Tesla compensation package annulled for lack of appropriate Board governance and process. He is now very angry and campaigning to have Delaware dethroned as the international destination of choice for corporate law. His view is that Delaware has treated him unfairly by overriding the choices Tesla’s Board, clearly controlled by him, chose with respect to determining Elon’s compensation package.
On numerous occasions I’ve heard Elon referred to, particularly among startup players, as a “god.” That is understandable, because his technical and business talents certainly get close to once-in-a-generation ultra ultra elite level. An apex Navy Seal of an entrepreneur.
For that reason, I included the 1st commandment above. Completely putting aside actual religious theology, the more intellectualized interpretation of the 1st commandment goes something like this: do not deify – in the sense of treating as infallible and therefore worthy of worship, even absolute power – something or someone that doesn’t deserve it; which is to say no one and nothing deserves complete worship like “God.” Everything and everyone, no matter how good in a particular context or domain, has limits and points beyond which they need to be constrained, lest very bad things begin to happen. Inarguably (I think) good advice.
As someone who’s worked for over a decade in various startup ecosystems, watching numerous companies rise and fall (for all kinds of reasons) either up close or from various distances, I’ve come to analogize entrepreneurial energy to something like uranium, gasoline, or the sun. All highly concentrated, tremendously powerful sources of energy. The core drivers of the economy. Immensely valuable and important.
And yet, used in the wrong way, without appropriate processes, checks and balances, they kill and destroy: explosions, cancer, apocalyptic painful fire. It takes an appropriate system to channel that energy into something productive and valuable. Our sources of entrepreneurial energy deserve tremendous respect and freedom – something which American culture is uniquely good at, but they’re not gods. They too need constraints, or they’ll kill us.
Notice the word system in the term startup ecosystem. What has turned the world of American venture-backed startups into an economic powerhouse that is envied by the world is not, and never has been, simply bowing to entrepreneurs wholesale, giving them 100% unconstrained power to build whatever and however they see fit. The actual startup ecosystem has never deified genius entrepreneurs. Instead, it has placed their energy and talent within a dynamic, evolving system of independent forces, each with their own guiding principles and incentives, that shapes and channels that energy into world-changing enterprises.
Professional venture capitalists – not the unbundled dumb money funds swirling the ecosystem in recent years but actual professionals with deep networks and expertise about startup and growth playbooks – are one example of a countervailing force on entrepreneurs. You will hear propaganda in the market suggesting that all VCs are useless and just waste time beyond their willingness to write checks, but this is patently and obviously false from even a half-hearted review of the history. Numerous household names in tech were deeply shaped by elite VCs coaching, guiding, and even constraining entrepreneurs when experienced judgment suggested doing so was necessary to keep the energy flowing in a productive direction.
That is not to overstate the role elite VCs have played in the ecosystem. They too are not gods, and absolutely need their own constraints and monitoring to avoid excesses. But they are a valuable and necessary part of the system that shapes entrepreneurial energy into our elite economy.
Other not-quite revered but still important forces in the ecosystem include lawyers – representatives of the democratic and court-determined legal system for protecting and aligning interests in a high-stakes economy of diverse players – and accountants (auditors) also play an important role. Employees as well. Accelerators, despite their overall decline, are also worth mentioning even if fundamentally they are just VCs of a particular flavor.
The startup ecosystem as we know it is built by setting these players – these forces – to interact, engage, and when appropriate constrain each other. Imagine a weather system with different forces constantly swirling around and engaging, pushing and pulling, mixing and unmixing. That’s kind of how an entrepreneurial ecosystem works. No single force – yes, not even ultra elite entrepreneurs – is so universally good and important that it should completely override all the other forces that have proven themselves time and time again as essential toward channeling all the energy toward a constructive, durable outcome.
Over centralizing such a dynamic ecosystem, allowing one set of forces to take over another, weakening the checks and balances, is usually bad for the market as a whole. One example of this would be venture capitalists controlling the lawyers who advise companies, biasing their advice on conflicted high-stakes issues. I’ve written about this quite a bit. Another example would be businesses hiring sycophants as legal advisors or accountants to misinterpret or misstate laws or financials, denying the open market the transparency and protections that the system has evolved to provide. We see this quite often as well.
The fact of the matter is that Elon had a kind of kangaroo Board of Directors, including his own divorce lawyer, his brother, and supposed “independent” directors who in fact owed much of their wealth to Elon and even vacationed with him; something which may seem innocuous in smaller cases but is material when the executive in question is one of the world’s wealthiest people and can fund some really nice vacations.
Thus when Elon’s compensation package and the process for determining it were reviewed, it was a joke. Amateur hour of the highest order, inappropriate for a Series B startup let alone a public company like Tesla. There was not even a feigned attempt at a professional process. Elon thought himself a god who didn’t need to listen to the legal system or lawyers. The Delaware Chancery Court, a global force in corporate law with tremendous gravitation pull, just gave him a reality check.
While Elon is understandably not happy about that, in the bigger picture it actually reinforces why the American business economy – and Delaware law specifically – is so respected internationally. Nothing says “rule of law” (music to the ears of high-stakes economic players entrusting enormous amounts of money to complex governance systems) like overriding the (in this case arrogant) wishes of the wealthiest person on earth to enforce the rules.
To be very clear, this is not to say that laws are all important. Sometimes laws should be changed, even fudged. Uber is a great example of a company that thoughtfully broke some laws in order to improve them. Incidentally, it’s also an example of an entrepreneur ultimately getting out of hand and smart VCs + lawyers playing a constructive role to get the business back on track.
Laws are, in many respects, like speed limits. We can always assume they’re going to be fudged on the margins, and yet where you set them still plays an important role for determining how far the fudging goes. Elon clearly went too far, pushing (metaphorically) 150mph in a 75 zone. However special of a person he may be, and however important his achievements, there is always a point at which the system simply cannot tolerate anyone setting such reckless behavior as an example.
The lessons here for startup governance are straightforward. Legal advisors should not be sycophants – they should not be beholden to the VCs or the entrepreneurs wholesale. The most aggressive players on either side of the table will very often try to hire gladhander advisors so desperate for the work that they’ll rubberstamp whatever, and yet somehow independent professionals with actual backbones need to be allowed into the room.
Founders sometimes misinterpret my writings about corporate governance and “independent” company counsel as suggesting that I’m going to just be a founder CEO’s lap dog. Being independent from the VC’s so that company counsel can properly represent the common stock as a constituency is not the exact same thing as working for a particular founder.
Independent directors should be meaningfully independent, not the CEO’s or the VC’s BFF. Credible processes for setting very high-stakes compensation matter. And no, simply getting a fragmented stockholder vote at the end to “cleanse” an otherwise horrible process is unlikely to be sufficient, particularly in cases fraught with time constraints, information asymmetries, and coordination problems among the stockholders.
This is also not to say that Elon did not deserve to be extremely handsomely rewarded for his spectacular performance as Tesla’s leader. I’m sure his compensation will still be very very juicy. It just means that even Elon should have respected the process – the system – in which he was operating. He chose not to, and the system pushed back in a language that, short of imprisonment, even someone like Elon can definitely read and learn to respect: lots and lots of money lost. That kind of pushback is exactly what ecosystems must do in order to stay durable, dynamic, and not beholden to any single fallible, imperfect, definitely not a god player.
Corporate governance isn’t everything, but it matters, requiring constant monitoring and calibration to prevent conflict, collusion, and corruption. It has proven itself to serve a very important function in the startup ecosystem. Take it seriously, even if you’re an aspiring Elon Musk.