Post Category → Ethics

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 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, even 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 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, but because they believe that their context and their team’s mission will be jeopardized if the subculture’s values and behaviors loosen too far.

Though it’s clear that once companies are larger and more established (and therefore more financially secure), corporate cultures inevitably shift to appeal to 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 the federal government would simply step in and mandate across the board more “inclusiveness,” then everyone would have to follow the same 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. 

Lessons from Elon Musk (Mistakes) for Startup Governance

“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.” 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 religious theology, the intellectualized interpretation of the 1st commandment goes something like this: do not deify – in the sense of treating as infallible and entitled to unconstrained deference – 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. Only the naïve treat talent within a specific technical domain – legendary impressiveness notwithstanding – as reason for a single person (or even group of people) to override the 100s of other kinds of expertise and talent that the world also depends on.

As someone who’s worked deeply for over a decade in various startup ecosystems, watching numerous companies rise and fall (for all kinds of reasons), 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 refinement and constraints, or they’ll kill us (or at least wastefully burn enormous amounts of money).

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 self-evidently 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. Many of them are at least as mercenary and capable of financial destruction as the hyper aggressive entrepreneurs who make headlines. 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 legal system for protecting and aligning interests in a high-stakes economy of diverse players acting as fiduciaries for huge amounts of money – 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. These different constituencies of players do not need to like each other to engage productively – you’ll regularly hear VCs, for example, whine about lawyers. That’s because lawyers on the side of startups very often prevent aggressive VCs from getting their way on contested company issues, when the overall governance calculus doesn’t warrant it. The semi adversarial way in which the players interact is by design; a feature, not a bug.

Imagine a weather system with different forces constantly swirling around and engaging, pushing and pulling, mixing, unmixing, and remixing. 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 responsible for ginormous amounts of other peoples’ money) like enforcing the rules against the (in this case arrogant) resistance of the wealthiest person on earth.

To be very clear, this is not to say that laws are all-important and inviolable all the time. Sometimes laws should be fudged, even changed. 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 (Kalanick) 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 professionals with actual backbones and principles need to be allowed into the room. If the insiders don’t let that happen (because they are colluding), outsiders with their own lawyers will get it done for you, at much higher cost (just ask Tesla).

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 VCs so that company counsel can properly assist the Board in pursuing the interests of the common stock as a constituency (which usually includes all founders and early employees) is not the exact same thing as working for a particular founder. Usually those interests are all aligned, but not always, particularly when someone is excessively aggressive, immature, or uncoachable.

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 juicy. I’m sure it would have been juicy even if he had not consciously chosen a captive clown show as his Board governance model. Elon simply should have respected the process – the system – in which he was operating. He chose not to; a classic (quite common) case of an aggressive entrepreneur treating sensible legal advice as handwavy bureaucratic nonsense.

The system pushed back in a language that, short of imprisonment, even someone as powerful as Elon can learn to respect: lots and lots of money lost. Whether he likes it is irrelevant. That kind of assertive 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. To repeat: the system is designed to have power clashes. That’s part of how it self-regulates to avoid disasters. There is no other way of going about it.

Elite entrepreneurs are like the star players on the football team. Super important, deserving of reverence, fame, and lots of wealth, but they aren’t – they can’t be – above the game and rules (which can change and evolve) themselves, or the whole thing will collapse.

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.

Postscript: You will notice plenty of VCs using this Delaware <> Musk case to pump up their “founder friendly” credentials on social media, decrying it as judicial activism and whatnot. Always watch incentives. When VCs feel like their own money is being wasted by an entrepreneur, or that their own portfolio company’s governance has gone off the rails, their first thought is “call our lawyers.”

But in this context, all their incentives are to give a soapbox speech about how they believe in founder-led companies and support Elon’s perspective. Costless marketing. I wrote in Trust, Friendliness, and Zero-Sum Games about the marketing dynamics of investors creating excessively “friendly” PR portrayals of themselves. It’s understandable, but founding teams shouldn’t fully drink the Kool-Aid.

The (Real) Problem with Carta for Startups

TL;DR: Carta has forever sold itself as friction-reducing “infrastructure” for the startup ecosystem. What this recent debacle around shady secondary sales pitches reveals is that “reducing friction” often comes at a cost of over-centralizing the market. We need to think more broadly about whether keeping the startup ecosystem a bit more decentralized, even if that may seem “inefficient,” is actually a net positive in terms of trust and security for startups.

Carta, the cap table tool and self-proclaimed “infrastructure” for startup ecosystems, was all over the news recently in startup circles, because of the following:

In short, it appears that sales people for Carta’s secondary liquidity platform (for selling early startup shares to interested later-stage investors) were accessing cap table data, including investor contact info, of startups using Carta and directly pitching investors as to liquidity opportunities – all without (importantly) the knowledge of CEOs or Boards. A clever (in a mercenary sense) revenue-building strategy, but a spectacular breach of trust. No CEO or Board wants to be worrying about potential huge shifts in their cap table because their cap table software is out trying to get their angels/seed investors to sell their shares.

After a lot of back-and-forth, including some peculiarly aggressive accusations by its CEO, Carta eventually decided to exit the secondary market entirely; a smart move in my opinion even if it’s criticized by some as too reactive. 

What I want to write about on this post is that this whole debacle reveals something concerning about Carta’s long-stated aspirations as it relates to the startup ecosystem. What does it really mean when Carta repeatedly states that it wants to become foundational “infrastructure” for startup equity, and that it seeks to reduce “friction” in startup equity markets? Being a great cap table tool – what Carta originally was – has always been an obvious positive for startups, even if Carta has repeatedly been criticized for being overpriced and too complicated and has since started receiving more heated competition from leaner alternatives; particularly Pulley.

But should founders, VCs, and other startup ecosystem players actually want a centralizing tool to maximally unify the ecosystem and reduce so-called “friction,” as Carta has repeatedly pursued, or is there something about the decentralized nature of the startup market that is actually good? Is it possible that some “friction” in how the startup ecosystem functions is desirable and positive for founders and startups?

Analogies to the decentralization philosophy of crypto, and perhaps also open source software, are appropriate here. Crypto gets lambasted for all the energy that is expended in maintaining blockchains, but the regular response is that “inefficiency” is worth the added security of not having any centralized node that market participants need to trust to behave “nicely.” Friction is a price that is sometimes worth paying in high-stakes situations where trust and security are paramount.

You see similar concerns when discussing proprietary v. open source approaches to various forms of software and hardware. Yes, there is some benefit in some contexts to relying on proprietary “infrastructure” – scale economies, data aggregation, etc. – but obviously concerns about monopolistic rent extraction loom large and very often push markets toward decentralized or even open source standards.

I’ve raised my own concerns about conflicts and interest in startup ecosystems, when self-interested players with broad brands pretend to be helping founders but are in fact using their market power to effectively extract rent from the market. For example, I wrote about how YC’s Post-Money SAFE is actually a horrible instrument (economically) for many startups, and many founders don’t get advised about how to make its terms more balanced. YC has made a ton of money from pushing the Post-Money SAFE as a “standard.”

But the selling point of YC’s templates has always been “efficiency” and “reducing friction.” Again, we see a trade-off: trusting a self-interested party (in this case an influential investor) to set so-called “standards” may in some sense reduce “friction,” but the cost of that friction reduction is significantly more dilution to startup founders. Friction reduction, and trusting a centralized party to provide it, is not a free lunch. We need to assess the full costs before determining that it’s actually a good idea.

I’ve advocated for a more open source approach to startup financing templates, where we don’t pretend anything is a “standard” that shouldn’t be negotiated, but still allow for a github-like repository of well-known starting points for negotiation. This allows for some measured benefit of standardization, while maintaining decentralized adversarial players who negotiate and ensure each deal truly makes sense for the context.

I’m also an advocate for open source cap table templates. I think automated cap table tools have over-sold themselves, particularly at the earliest stages, and founders would be wise to understand that Excel is perfectly fine (and free) until perhaps Series A, or at least post-Seed.

I’ve also written about the tendency for startup law firms to flout conflicts of interest with the VC community. They’ll build deep relationships with VCs, while parlaying those relationships into representing the companies those same VCs invest in. The founders are often told that these counsel<>investor ties will “help” them – it will reduce “friction” because the lawyers know the VCs well – but it’s complete nonsense and even contradictory to the entire point behind rules around conflicts of interest in law.

You simply can’t trust lawyers to advise you properly in negotiating with a VC if that same VC regularly sends work to those same lawyers. This is why we designed Optimal to be a company-focused firm, and we regularly turn down VCs who ask to work with us. That has a cost in terms of limiting our revenue opportunities, but not unlike Carta’s decision to exit secondaries, it’s about preserving client trust. It’s a bet that the market needs and wants a player, in our case a law firm, offering trusted advocacy above what more conflicted players can provide.

All of this suggests that friction, though sometimes spoken of exclusively in negative terms, often serves a purpose. Negotiation is friction. Diligence (including of a VC’s reputation) is friction. Competition and independent review (even if redundant) is friction. Having multiple sets of advisors representing different parties instead of everyone mindlessly trusting one conflicted group is friction. Assessed holistically, sometimes friction is worth it when interests are fundamentally misaligned. 

So my advice as a VC lawyer watching how this has all played out with Carta is: the outcome here is good. It’s good that the ecosystem spoke its voice, and Carta acknowledged a fundamental problem with its business model. But let’s not miss the much broader lesson here as it relates to the many other situations in which some influential ecosystem player will promise startups “less friction” in exchange for trusting them perhaps far more than they really deserve.

I like Carta as a cap table tool, even if I think it needs to simplify itself and lower costs. I am, and have been, much more deeply skeptical of Carta as centralized “infrastructure” for the entire startup ecosystem, promising all of these wonderful benefits so long as we trust it with enormous amounts of power and data. This most recent debacle (I think) shows why others should be a bit more skeptical too.