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 industry, the under-represented 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 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. 

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.

Startup Governance Choke Points: Protective Provisions

Related Reading:

As I’ve written many times before, one variable that makes the world of startup governance very different from other areas of corporate law is the substantial imbalance of experience and knowledge between the business parties involved. On one side you often have seasoned VCs who’ve been in the game for decades. On the other you often have an inexperienced entrepreneur for whom all of the complex terms in the docs are completely new. This imbalance leaves open numerous opportunities for leveraging founders’ inexperience to gain an advantage in negotiations either in deals or on complex board matters.

This can make the role that corporate lawyers play in VC<>founder dynamics quite pivotal. Whereas seasoned executives at mature companies usually rely on legal counsel for executing specific directives, but not for material strategic guidance, in the startup world good VC lawyers serve as strategic  “equalizers” at the negotiation table. This is why guarding against any conflicts of interest between your lead lawyers and your VCs is so important (see above-linked post). If your lawyers’ job is to help you guard against unreasonable demands or expectations from your counterparties, you don’t want those counterparties to have leverage over those lawyers. No one bites a hand that feeds them. VCs know this, and deliberately feed (engage and send referrals to) *lots* of lawyers in the ecosystem.

Because of this imbalance of experience, and even the tendency for some VC lawyers to not fully educate founders on the material nuances of deal terms and governance issues, I regularly encounter founding teams with overlooked “choke points” in their companies’ deal and governance docs. By choke points I mean areas where, if there were a material disagreement between the common stock and investors, the latter could push a button that really puts the common in a bind. It’s not unusual to find founders who simplistically think something like, “well the VCs don’t have a Board majority, so they can’t really block anything.” Trust me, it’s never so simple.

The hidden VC “block” on future fundraising. 

One of the most common hidden “choke points” I see in startup governance is overly broad protective provisions. These are located in the company’s Certificate of Incorporation (charter), and basically are a list of things that the company cannot do without the approval of a majority or supermajority of either the preferred stock broadly, or a specific subset of preferred stock. Given that the preferred stock almost always means the investors, these are effectively hard blocks (veto rights) over very material actions of the company. No matter what your cap table or Board composition looks like, these protective provisions mandate that you get the consent of your VCs for whatever is on that list.

Fair enough, you might say. The investors should have a list of certain things that require their approval, right? Of course. Balanced governance is good governance. But good, balanced governance terms should protect against the possibility of misalignment of incentives, and even conflicts of interest, in governance decisions for the company. In other words, they should prevent situations where someone can take an action, or block an action, purely out of self-interested motivations, while harming the cap table overall.

Very often so-called “standard” (there are all kinds of biases in what ends up being called standard) VC deal terms will give VCs protective provision veto rights over these sorts of actions:

  • creating any new series of preferred stock
  • making any change to the size of the Board of Directors
  • issuing any kind of debt or debt-like instrument.

The end-result of these protective provision is that, at the end of the day, you need your VC’s permission to raise any new money, because you can’t raise money without taking at least some of the above actions.

Let me repeat that so it sinks in: regardless of what your Board or cap table composition looks like – even if a VC is a minority holder, and the preferred don’t have a majority on the Board – the kinds of protective provisions that many VC lawyers call (air quotes) “standard” allow your VC(s) to completely block your ability to raise any new financing, no matter what the terms for that financing are. A “choke point” indeed.

Why is this a problem? Well, to begin with it’s a serious problem that I encounter so many founding teams that aren’t even aware that their governance docs have this kind of choke point, because nobody told them. A fair deal negotiation should require clear understanding on both sides. But more broadly, the problem is that VCs can have all kinds of self-interested reasons for influencing what kind of funding strategy a startup will take. They may want to block a lead from competing with them, for example. Or they may want to ensure that the follow-on funding is led by a syndicate that is “friendly” (to them) as opposed to one whose vision may align more with the goals of the common stock.

I have encountered startup teams several times who think they are in control of their company’s fundraising strategy, again because they simplistically looked at just their cap table and board composition, only to have a VC inform them that, in fact, the VC is in control because of an obscure protective provision that the founders never even read.

Preventing / Negotiating this Choke Point

The simplest way to prevent your VCs from having this chokehold on your fundraising strategy is to delete the protective provision(s) entirely. That may work, but often it doesn’t. Again, balanced governance is good governance. It’s reasonable for VCs to expect some protections in ensuring the company isn’t willy-nilly fundraising with terms that are problematic. I agree with that. But as I said above, it’s also unreasonable for the VCs to expect a hard block on any fundraising whatsoever, regardless of terms.

A more balanced way of “massaging” these protective provisions is putting conditions or boundaries around when the veto right is actually effective. For example, you might say that the veto right is not enforceable (the VCs can’t block a deal) if:

  • the new financing is an up-round, or X% higher in share price than the previous raise;
  • is a minimum of $X in funding;
  • maintains a Board with specific VC representation;
  • doesn’t involve payment to a founder, to ensure they are objective.

There are all kinds of conditions you could add to provide that only “good” (higher valuation, legitimate amount of money, balanced Board representation, etc.) financings can get past a VC block. Putting this kind of list in a term sheet can be an excellent conversation starter with a VC as to what they see as the long-term fundraising strategy, and where their own red lines are. It allows you to candidly ask your VC, “OK, if the deal checks all of these boxes, why exactly do you still need a veto right over it?”

But if your VC simply responds with a “this won’t work, we need a hard veto on fundraising” position on the negotiation – at a minimum you now have valuable data as to this VC’s worldview on governance and power dynamics in their portfolio. See Negotiation is Relationship Building. Regardless of where deal terms end up, forcing a discussion about them, and requiring the other side to articulate their position clearly, still serves a valuable purpose. Sometimes you don’t have the leverage to achieve better balance in your deal terms, but it’s always a positive to at least have your eyes wide open.

Putting substantive deal terms aside, I enjoy helping founding teams understand that many of the most (air quotes) “founder friendly” investors in the market are still far from charitable actors, and can be quite clever and subtle in their methods for maintaining power, despite the “friendly” public persona. See: Trust, “Friendliness” and Zero-Sum Startup Games. Note: this is not a moral judgment, but just an acknowledgement of reality. You and I aren’t Mother Teresa either. Navigate the market with the clear-eyed understanding that everyone is following their incentives, and protect your company accordingly.

A less balanced, but still improved, configuration of these protective provisions is to create an exception if a VC Board member approves the deal. You might (understandably) think: how is this better, if the VC Board member can just refuse to approve? Without getting too in the weeds, Board members have fiduciary duties to the cap table overall, whereas non-controlling stockholders generally do not. So at least theoretically, you could call out, and even sue, a Board member if it’s blatantly obvious that they are blocking a particular deal for reasons that are more about their own interests than the company’s.

I say theoretically, because the smartest and most aggressive investors, if they really want to play games with pushing your fundraising strategy in their preferred direction (and away from the preferences of the common), will be quite creative in developing plausible deniability for their behavior: they blocked the deal because that other lead wasn’t “value add” enough, they don’t believe now is the right time to raise because of market conditions, they’re concerned about X or Y thing that at least gives them an argument that they are still looking out for the company. So don’t get too excited about these fiduciary-related exceptions to protective provisions. They’re not nearly as helpful as the better strategy of putting concrete bypasses to a protective provision veto.

To be very clear, I still see quite a few founding teams who are fully informed about these issues, have a candid conversation with their VCs about it, and still ultimately put in some kind of hard VC-driven block on fundraising. I of course also see plenty of teams who, as soon as we bring this topic up to them, dig their heels squarely in the sand and completely refuse to do a deal unless the VC vetoes are removed/modified. It depends on context, leverage, values, trust, etc. But in all cases it is a net positive for the inexperienced founding team to know what they are signing.

Startup governance and power dynamics are much more nuanced than just what your Board and cap table look like, or the usual 2-3 high-level terms that founders read in a term sheet, thinking everything else is just “boilerplate.” Ensure you’re surrounded by objective, experienced advisors who can help you understand those nuances, so the deal you think you’re signing is in fact the one on the table.

Alignment in Startup Governance: Conflict, Collusion, Corruption

Related Reading:

Anyone looking to build a meaningful business needs to understand the importance of “alignment.” Alignment refers to the fact that building your company is going to involve the participation of numerous categories of people – founders, employees, executives, investors, etc. – all of whom come to the table with different incentives and motivations; and they are hardly going to be naturally in sync with one another. To make them all “play nice” you need to find ways of getting them aligned on a single vision, so you can get their approval and support on key transactions. It’s never as simple as it sounds.

Part of the “tension” in incentives stems from the fact that different people have different characteristics and legitimate needs. For example, most major preferred stockholders (VCs) are going to be affluent individuals with diversified portfolios, and (importantly) downside risk protection in the form of a liquidation preference. This means that, other than the absolute worst scenarios, they get their money back before the common stockholders (founders, employees) get anything. They also tend to be more interested in pursuing larger exits to satisfy their LPs return expectations, even if the paths to those exits take longer and involve more risk. Their already existing wealth means the potential return from this one individual company isn’t “life changing” for them in the way it could be for a founder or early employee. A life changing exit for a founder may be a waste of time for a large VC fund.

Patience is a lot harder when 80-90% of your net worth is sitting in unrealized value on a single company’s cap table. It’s much easier when you’re already in the 0.1%, and you’re just stacking more gold on top of an already healthy balance.

Even within broad categories like “common stockholder” there is very often misalignment of incentives and interests. Earlier common stockholders, like founders, sit in very different positions from later common stockholders, like professional executives. Someone who has been working at a company for 6 yrs and has tens of millions of dollars in fully vested equity value is going to assess the terms of a later-stage financing or acquisition offer very differently from someone who just showed up at Series B, got their stock at a relatively high exercise price, and thus needs the business to appreciate much more in value before they can really get much out of their equity.

Corporate Governance is the professional field of managing the relationships among the various constituents of a corporation and their varied interests. Good governance means achieving good alignment. Bad governance often results from ignoring misalignment, and letting it metastasize into destructive conflict, or other times into collusion or corruption. In Corporate Law, there are legal mechanisms in place to attempt to protect against misalignment getting out of hand in a corporation (including a startup). Members of a Board of Directors, for example, have enforceable fiduciary duties to look out for the interests of all the stockholders on a cap table, not just their own personal interests. If evidence arises that they approved a self-interested transaction at the expense of smaller holders not represented on the Board, those smaller holders can sue.

Conflict

The source of governance conflict that gets the most attention in startups is the tension between founders and venture capitalists, particularly as it relates to power (who ultimately calls the shots) within a company. This power tension is real, but it’s not what I intend to write about here. There are plenty of other posts on this blog about that topic.

Aside from hard power, conflict can arise between founders/common stockholders and investors because of economic misalignment. As mentioned above, given their different positions in terms of affluence, risk-tolerance, and concentration of personal wealth, it’s not uncommon to encounter situations where founders or common stockholders want to pursue path A for a company, while investors are insistent on pursuing path B. In the worst circumstances, this can get into battles over voting power and Board structure. I’ve even seen situations in which investors attempt a “coup” by swiftly removing founders from a Board in order to force through their preferred agenda.

From a preventive standpoint, one of the best ways to avoid this sort of conflict is fairly obvious: ask the hard questions up front and get alignment on vision before anyone writes a check. Founders and investors should be candid with each other about their needs and expectations, and both sides should conduct diligence (reference checks, including blind ones if available) to verify that the answers they’re getting are in sync with past behavior.

Another tool for achieving better economic alignment between founders/common and investors/preferred is allowing the common stock to get liquidity in financings. Years ago the predominant view was that letting founders take money off the table was a bad idea, because everyone wanted them “hungry” to achieve a strong exit. The fear was that by letting them liquidate some wealth, they’d lose motivation and no longer push as hard. While this was a legitimate “alignment” concern, the general wisdom today is (for good reason) that it was actually getting the issue backwards.

More often than not, failing to let founders get some early liquidity is a source of misalignment with investors. Investors want to let the business continue growing and go for a grand slam, but founders (and their families typically) are impatient to finally realize some of the value that they’ve built. It can be very frustrating for a spouse to see a headline that a founder’s company is worth 8-9 figures, and yet they still can’t buy that home they’ve been eyeing and talking about for half a decade. Letting founders liquidate a small portion of their holdings (5-15%) – enough to ease some of their financial pressure but not enough that a later exit is no longer meaningful for them – can go a long way in achieving better alignment between the early common and the investor base. It makes founders more patient and thus better aligned with other stockholders with longer time horizons.

Today, I far more often see VCs and other investors be far smarter about founder and other early common stockholder liquidity. At seed stage it is still considered inappropriate (for good reason typically), and in most cases Series A is too early as well; though we are seeing some founder liquidity as early as higher-value Series As that are oversubscribed. By Series B it is more often than not part of a term sheet discussion.

But be careful. Relevant players should avoid any impropriety indicating that VCs are offering founders liquidity in exchange for better overall deal terms. That’s a fiduciary duty violation, because it benefits individual Board members while harming the cap table overall. For more on these kinds of risks, see the “corruption” part of this post below.

Collusion

Aside from destructive conflict in company governance, another concern is when various constituents on a cap table are able to consolidate their voting power in order to force through initiatives that may be sub-optimal for the cap table as a whole, but benefit the players doing the forcing.

One way in which this happens involves larger cap table players, with an interest in having their preferred deals approved, using quid-pro-quo tactics to convince other cap table holders to accept Deal A over Deal B because Deal A aligns more with the interests of the existing money players. For example, if a Series A lead currently holds a board seat and wants to lead a Series B, that VC has an interest in not only minimizing competition for that deal, but (assuming they don’t already have a hard block from a voting % perspective) also convincing other cap table players to go along with them.

All else being equal, an early seed fund investor should be more aligned with a founder than a Series A lead as to evaluating a Series B deal led by the Series A VC. They want the highest valuation, and the lowest dilution, possible. While the Series A VC is on both sides of the deal, both the seed and founder are only on one (along with the rest of the cap table). This is good from an alignment perspective. But all else isn’t always equal. For example, the seed fund and the Series A VC may have pre-existing relationships. The Series A lead and seed fund may share investment opportunities with each other in the market, and thus have an interest in keeping each other happy in a long-term sense despite their narrow misalignment on a particular company.

All it takes is for the Series A lead to invite the seed investor out to lunch, remind them of their extraneous relationships and interests, and now we have a collusion arrangement in which the seed fund may be motivated to approve a sub-optimal (for the company) Series B arrangement because of secondary benefits promised by the Series A lead on deals outside of this one.

This exact kind of dynamic can happen between VCs and lawyers, by the way. See: How to Avoid “Captive” Company Counsel. Many VCs very deliberately build relationships with influential corporate lawyers in startup ecosystems, because they know very well that a lawyer who depends on a VC for referrals and other work isn’t going to push as hard for his or her client if that client happens to be across the table from said VC. Watch conflicts of interest.

The key preventive tactic here is: pay very close attention to relationships between people on your cap table, on your Board, and among your key advisors and executives. It is too simplistic to look at the %s on your cap table and assume that because no particular holder has a number-based veto majority that you are safe. The most aggressive and smart players are very talented at cap table politics. Diversify this pool of people by ensuring that they are truly independent of one another, preferably even geographically, so that they will be more motivated by the core incentive structure of your own cap table and deals, and not by extraneous factors that muck up incentives.

Corruption

Collusion involves simply coordinating with someone else to achieve a desired goal, but it doesn’t necessarily mean that collusion violates some duty you have to other people. A seed investor who doesn’t sit on your board has no fiduciary duty to you or anyone else on your cap table. So if they collude with your Series A lead to force through some deal that you don’t like, you may not like it, but you don’t really have any statutory legal right – aside from contractual rights you and your lawyers may have negotiated for – to make them do otherwise.

When collusion becomes corruption, however, someone is in fact going against their legal obligations, and trying to hide it. A common kind of governance corruption I’ve encountered is when VCs try to ensure that senior executive hires are people with whom they have long-standing historical relationships, even when other highly qualified candidates are available. Those executives will typically sit as common stockholder Board members, and have duties to pursue the best interests of the Company as executive officers. But because of background dependencies those executives have on specific VCs – those VCs may have gotten them good jobs in the past, and will get them good jobs in the future – they’re going to ensure the VCs always stay happy.

If as a founder you suddenly find out that your VCs know about certain private matters going on in the company that weren’t formally disclosed to them, there’s a very high chance there are background relationships and dependencies you were ignoring. While it’s always great for investors to bring their rolodexes and LinkedIn networks to the table when a portfolio company needs to make key hires, my advice is to generally ensure that there is still an objective process for sourcing high-quality, independent candidates as well. Also, build the pipeline process in a way such that no one gets the feeling that it was really a VC hiring them instead of the C-suite team or broader Board. Executives should not be reporting to VCs individually without the involvement and knowledge of the Board.

A more serious form of potential corruption – and an extremely clever one – that I’ve observed in the market in recent years involves VCs and founders. Imagine VC X is a high-profile VC fund that sees lots of high-growth angel investment opportunities. The ability to “trade” access to those opportunities is extremely lucrative currency, and VCs are experts at using that currency to build relationships and influence in the market.

VC X is an investor in Company A. Founder Y is a founder of Company A. Normally, as we’ve seen, the economic misalignment between Founder Y and VC X as it relates to Company A ensures that Founder Y will negotiate for as high of a valuation as possible because she wants to minimize her dilution. This puts Founder Y very much in alignment with other common stockholders on the cap table (employees) because they too want to minimize dilution. But obviously VC X would prefer to get better terms.

What if VC X offers Founder Y “access” to the angel investment opportunities it sees in the market? Suddenly we have an extraneous quid-pro-quo arrangement that mucks up the incentive alignment between Founder Y and other common stockholders. While on this company Founder Y may want to make VC X provide as good of terms as possible for the common stock, Founder Y now wants to keep her relationship warm with VC X outside of the company, because VC X is now a lucrative source of angel deal flow for Founder Y.

See the problem? Founder Y can make money by accepting worse terms for the company and cap table as a whole, because it benefits VC X, who rewards the founder with outside angel investment opportunities. The founder’s alignment, and fiduciary responsibility, to the rest of the common stock has been corrupted by outside quid-pro-quo.

I have seen founders co-investing in the market alongside the VCs who are currently the leads in those founders’ own companies. The VCs are not doing this to just be nice and generous. They’re using their deal visibility as a currency to gain favor with founders, potentially at the expense of the smaller common stockholders whom the founders should be representing from a fiduciary perspective.

This is an extremely hard governance issue to detect because it involves the private behavior of executives and VCs completely outside of the context of an individual company. It is unclear whether default statutory rules would ever require Founder Y and VC X to disclose the outside arrangements they have, given they aren’t true affiliated parties in the classic sense of the word. Frankly, it’s kind of a “cutting edge” problem, because while investors have forever traded deal flow with other investors to build collusive relationships, only recently has this strategy (very cleverly) been extended to founders.

But it’s something everyone, including counsel, should keep their eye on. It may even be worth considering creating new disclosure requirements regarding anyone purporting to represent the common stock on a Board (founders included) and co-investment or investment referral relationships with key preferred stockholders.  We certainly want founders and VCs to be aligned on maximizing the value of a particular company. But this (trading deal flow outside of the company as quid-pro-quo favors) is not that. The losers are the employees and smaller investors whose interests aren’t properly being looked after, because founders as common board members may be favoring particular VCs on the cap table over other outside offers that have better (for the company’s stockholders) terms but don’t come with juicy personal investment opportunities on the side.

It’s somewhat ironic that ten years ago company-side startup lawyers (I don’t represent investors) had to think a lot about overly aggressive “asshole” VCs who mistreated founders, in many cases to the detriment of a company. But today it’s much harder for VCs to play that game because the ecosystem has become so much more competitive and transparent reputationally. Now we instead need to have a conversation about the exact reverse: “founder friendliness” getting so out of hand that it’s now potentially generating fiduciary duty issues and harming smaller cap table holders. Unsurprisingly, Silicon Valley is, from my observation, where things have flipped the most.

When the stakes and dollar values are very high – and in top-tier startup land they very often are – incentives drive behavior. Understand how the incentives align and misalign among the key constituencies on a cap table, and use that knowledge to achieve outcomes that maximize value not just for particular “insiders,” but for all stockholders who’ve contributed to the company.

Diversity in Startups: Whining, Warring, Winning

Recommended Reading: The Weaponization of Diversity

Almost two years ago I wrote a lengthy personal essay regarding my own story growing up as a low-income child of Mexican immigrants, weaving through the American educational system (UT Austin, Harvard Law), and eventually finding success in startups and venture capital as a managing partner of an elite boutique law firm specialized in that field. In that essay I described the significant cultural divide I observed growing up in the latino community in Houston, between the educational expectations I had at home driven by my elite college educated Mexican mother, and the cultural values of my latino peers; all of whom came from blue collar and laborer backgrounds.

We lived in the same neighborhood and were all lower-income, but our home cultures were starkly different. Many of my latino friends found my study habits extremely peculiar and aberrant from how they felt a latino child “should” grow up. As a result I was often labeled a “coconut” (brown on the outside, ‘white’ on the inside).

In that essay I applied my own childhood observations to research I’ve reviewed regarding the under-representation of certain minorities in various high-performance professions (tech entrepreneurship, elite law, etc.), as well as to my observations as an adult responsible for recruiting lawyers into our firm. My general thesis is that “warmongering” over diversity in these industries has resulted in two very negative dynamics.

First, it leads to the silencing of many people – good, very much not racist, progressive people – who see a clear causal relationship between home culture, including childhood educational values, and under-representation in elite industries dependent on compounding education and training; like tech and law. For fear of being penalized personally and professionally, these people avoid contributing constructively to the discussion, and as a result the general topic of diversity becomes dominated by stale and exhausted narratives suggesting that “racism” and “unconscious bias” are supremely explanatory for disparities. Because these narratives are (flatly) wrong, the results of their non-solutions are disappointing.

Second, aggressive pressure to increase representation in elite industries leads employers, investors, and other decision-makers to make rushed hirings, promotions, and investments in URM (under-represented minority) candidates. Because the market isn’t nearly as irrational, discriminatory, and “racist” as many people make it out to be, a significant portion of those individuals who are elevated by these “affirmative action” initiatives end up very visibly underperforming. That underperformance ends up reinforcing stereotypes (bias) in the minds of observants. In other words, it backfires. Being overly aggressive and simplistic with increasing representation of URMs in highly competitive meritocratic industries, when their under-representation broadly is actually reflective of real performance issues (on average) in the marketplace, ends up harming those same groups in the long-run by strengthening stereotypes that we should instead be strategically and methodically weakening.

The essay is long for a reason. This is an extremely sensitive and nuanced topic, and to give it its due requires time and depth. For that reason, I respectfully ask that anyone bothered or offended by the above paragraphs please actually read the essay, to understand the real point I am making. It is not victim blaming. It is not pretending socioeconomic inequality isn’t a problem. And it most certainly is not pretending that racism and discrimination do not exist at all in our society. Rather, it is an honest attempt to explain why, all else being equal, focusing on racism and “unconscious bias” as the primary reasons why URMs, like American Latinos, are under-represented in elite industries has been incredibly unproductive, even counterproductive, and it will continue as such until we inject some sincerity and reality into the discussion.

The purpose of this post is to be less theoretical and analytical than the original essay, and more practical. How should founders, CEOs, and Boards of Directors in the startup ecosystem respond to concerns about diversity and the under-representation of certain minority groups? How can they empathetically listen to the variety of voices on this topic, while constructively and safely fulfilling their fiduciary duties to maximize the performance and success of their businesses? To cover this topic, I’m going to touch on three categories of approaches advocated by “diversity activists” in elite industries (including tech startups) – whining, warring, and winning – and why it’s in the interest of both key decision-makers and under-represented minority groups to steer discussion and action toward the third.

Whining

This post assumes the perspective of my original essay; those claiming that “racism” and “bias” are the main drivers of under-representation of URMs (or at least of American Latinos specifically) in elite industries are flatly, demonstrably, wrong. Of course isolated instances of racism and discrimination can be found in a country of 300 million people, just as they can be found all over the world. These isolated cases are unacceptable, illegal, and deserve to be addressed forcefully.

But pointing to a limited number of isolated anecdotes does not in any way demonstrate that the startup ecosystem as a whole is racist. We are talking about an industry full of thousands of individual companies, and hundreds of venture capital funds, all led by highly educated and progressive people from an enormously diverse set of ethnicities and nationalities. These people are not all racists, and they would be punished financially by market competition if they were neglecting high-performing undervalued talent that competitors could then recruit or invest in.

In fact, the startup ecosystem is one of the most diverse (in terms of skin colors, surnames, ethnicities, etc.) industries you will find in America. Its diversity is part of what drew me to that kind of work in the first place. Not only is the industry incredibly diverse, it is so starved of high-performing talent that it has had to bid average salaries far above other industry norms, and aggressively recruit internationally, in order to fulfill demand; stretching even further the credibility of the suggestion that tech companies would, simply out of irrational prejudice, ignore millions of high-performing candidates available for work.

The industry is, however, fiercely, almost olympically, competitive and meritocratic; by necessity. We are talking about very small entities, with very limited budgets running usually at a perpetual operating loss, in hyper-competitive markets often filled by incumbents 100x in size, and funded by high-risk investors with high-stakes expectations of returns from their own LPs. The room for error in this segment of the economy is smaller, and the cost of underperformance is higher, than anywhere else in the market.

Saying that underperformance is the main reason URMs are under-represented in elite industries, like tech startups, is not a slam dunk argument for silencing debate; much like it isn’t in other policy discourse about race and social justice. In other parts of the economy, like universities and government, there are many activists who will argue that even if URMs underperform, organizations are responsible for elevating them anyway. This is, in essence, the argument for “affirmative action.”

The affirmative action debate in the university context gains its legitimacy from the fact that most universities are non-profit entities with missions that can be tied very closely to broader issues of social justice and fairness. Elite universities also in particular have large endowments, and spend at least 4-years with students – a fair amount of time to “catch up” – before those students enter the marketplace. Thus it takes some rhetorical gymnastics for an elite university with an endowment the size of a small country’s GDP to say that it can’t “afford” to accept and train some number of underperformers in order to pursue some higher-level societal goal.

As we move from large elite universities to large for-profit employers, the argument for “affirmative action” begins to reach stronger resistance, but not so much that there isn’t room for reasonable debate. Once a company has reached a market capitalization of, say, $25 billion, with thousands of employees and layers of staff, the idea that it too “can’t afford” to incur some costs to pursue a broader societal concept of “fairness” is far from obvious. This is why various “diversity initiatives” are not uncommon in large companies. You see them in law as well, with “diversity fellowships” in the AmLaw 100.

Gains have been made in improving the representation of URMs in large, for-profit companies, particularly at entry and mid-level positions. But activists are now starting to turn their attention to the C-suite, noticing that far smaller gains have been made there. And this is where the very real challenges and constraints of startups and much larger companies start to look similar, in terms of their legitimate inability to afford substantial underperformance. Underperformance from a CEO or CFO is catastrophic at a Pfizer or an Apple just as it is at a far smaller startup. Your views about social justice and fairness may have some legitimacy and weight in the non-profit university context, and in some market contexts, but that legitimacy ends when it starts threatening entire companies and industries, on whom millions of peoples’ livelihoods, and the economy at large, depend.

What’s a word used to describe situations when someone makes strong complaints for X or Y, often citing “unfairness,” and yet the justified response is that it simply can’t and won’t be done? Whining. I understand some people may object to my use of this term as being overly dismissive and offensive, but I nevertheless think it accurately captures the tone and language often encountered by key decision-makers in the startup ecosystem when “diversity” is used as a reason to question their judgment.

In this context, of high-stakes startups and venture capital, we aren’t talking about the right to any kind of employment, or the right to use a particular essential facility or public resource. We’re not talking about civil or human rights; the contexts in which morality and fairness really should override all other concerns. Far more often, we see someone already earning a relatively comfortable salary in a white collar job using “diversity” as a reason why they should be earning an even higher salary in a more senior position. Or someone already in the top quartile of education and income nevertheless arguing that they should receive millions of dollars in private funding for their business, because they are “diverse.” In other words, here “diversity” looks far less like a legitimate, authentic moral argument for societal fairness, and more like a rhetorical device for self-promotion and advancement.

I’m sorry, but Cesar Chavez fought for oppressed very low-wage farm workers. His spirit should not be invoked while discussing whether or not a software engineer or lawyer deserves a promotion. Speaking as someone who grew up surrounded by true low-wage laborers, let’s not hijack their challenges and the moral force of their causes for high-class soft-handed gains.

My advice to key decision-makers when they encounter this kind of argument is to focus on specifics and context. Is the argument being made that this particular individual has been judged by different performance standards than those applied to other similarly positioned individuals? That is illegal, and should be addressed immediately. But if that isn’t really the argument – and it often isn’t – but rather someone is trying to claim an entitlement to “affirmative action” treatment from a startup, return to the specific context in which it is being raised.

We are not an elite non-profit university with a billion-dollar endowment and years to help someone catch up on performance. We are not a Fortune 500 company with enormous insulation in the market to absorb the costs of helping someone meet performance standards. We’re a startup trying to survive and fulfill our obligations to our employees and investors to build a successful business in a hyper-competitive market. For that reason, we need performance today, and those who can’t perform today are not the responsibility of startups. In this context, expecting a private business to absorb the cost of fixing enormously complex and nuanced social and historical issues is unreasonable and unsustainable.

Many intelligent, thoughtful, progressive people who support upper-income diversity in far more appropriate and sustainable contexts will understandably draw a hard line when asked to risk the survival of their own businesses and careers for such a cause; the equivalent of levying a tax on people who simply do not have the means to pay it. We need to leave space for people agreeing on the goal of greater diversity to still be open and honest about the very real problems with specific tactics for achieving it.

Warring

When mere arguments and complaints about “fairness” have not resulted in the action that diversity activists want to see, the most aggressive have turned to weaponizing and politicizing diversity. In other words, they start using economic punishment as a way to force private market actors to improve their “diversity numbers.”

For very large consumer-focused companies, weaponizing diversity can take the form of public shaming and threats of economic boycotts. Activists may put together statistics about “disproportionate representation” at X or Y company, and fund a PR campaign to make those numbers highly visible. Public backlash then results, with consumers withholding their purchasing dollars, and the company responds by increasing their hiring of the appropriate groups. This is effectively politicizing hiring, by making it no longer simply about the productivity of the individual candidate, but about how that candidate’s characteristics feed into statistics that then impact the public image of the company, which then impacts the purchasing of the company’s products and services, and ultimately benefits the bottom line. It can be highly effective in some mass-market contexts.

In more private areas of the economy, this sort of weaponization can take the form of channeling investment dollars or referrals of work depending on a particular company’s “diversity statistics.” For example, very large Fortune 500 companies who have responded to their own weaponized diversity incentives by upping “diverse” hiring in their ranks, can make sending legal work to X or Y law firm dependent on that firm meeting certain diversity statistics for its own roster of lawyers. Activist limited partners of venture capital funds have started this tactic as well, pressing the venture partners that they fund to improve the “diversity” of their portfolio.

This is where benign pushing for diversity now becomes much more aggressive shoving. Do it, or it will cost you money that we control. Is it effective?

As I mentioned in my original essay, no one engaging in a serious discussion about diversity issues argues that high-performing URMs simply do not exist. That would be racist, but no one is saying that. What they say is that for historical, socioeconomic, and (importantly) cultural reasons high-performing URMs are much harder to come by in the market. What happens when you have a scarce resource for which demand is subsidized with economic incentives? Those who can pay top dollar are able to obtain it, and those who can’t don’t.

Already elite companies, capable of paying the highest amounts of compensation, absorb the more limited number of high-performing URMs; high-performers who wouldn’t have had trouble getting work to begin with. These companies are then able to promote how “diverse” and progressive they are, as if their superior cultures are the reason they are so “inclusive.” Weaker and smaller companies (startups?) can’t afford to bid away those in-demand high-performers from the deep-pocketed elite, and so they end up being less “diverse.” Calling one “inclusive” and the other “racist” completely misses the mark of what is actually happening. It’s about money.

It’s unclear that, even at large companies, using sticks and stones for diversity has moved the needle much on the core issue (the supply of high-performing URMs) other than creating a bidding war for the already-existing high-performers in the market; a war which benefits those able to pay the highest comp packages. There is, however, an emerging strategy that both large companies and startups are increasingly adopting in response to aggressive warring over diversity, and it almost certainly wasn’t intended by activists.

Have you noticed how in recent years the startup and tech ecosystem has dramatically increased its involvement in both Africa and Latin America? There are surely a number of reasons for this, but one big reason is companies realized that international hiring is a highly effective way to disarm some of the strongest rhetoric from diversity activists. If you know there are complex social, historical, cultural, etc. reasons why it is not feasible to dramatically increase your domestic (US-side) URM recruiting and investment without running up against very costly performance issues, but you also know that you really aren’t racist and that skin color and ethnicity are not drivers of your decision-making, there is a growing industry more than happy to help you recruit highly qualified talent directly from Mexico, Chile, Argentina, Nigeria, Kenya, and Ghana, among other countries full of ambitious, driven prospects.

Because American companies can pay so much better than local industry in those countries, they can recruit among the cream from their very large populations. Also, those populations aren’t subject to the historical, cultural, and immigration selection dynamics that are the core backdrop (see my essay) of why American URMs struggle disproportionately with performance in education-driven technical industries. Google and tomorrow’s Googles want diverse high-performing talent, but they are not fools, and will recruit directly in Mexico City or Lagos before diversity warriors force them into hiring US-side underperformers that they can’t even acknowledge as underperformers (and thus in need of extra training or lower-level roles) because someone will accuse them of being racist.

Thus we are seeing tech companies and startups increasing their “diversity” with more international talent. Is this a “win” for diversity? It depends on whom you ask. If the goal was simply to increase the number of latino and black people in tech and startups, then yes it is definitely a win. But if the goal was to increase hiring and investment in American under-represented minorities, then no, much less progress is being made. Such little progress will continue until activists are willing to put down their weapons, and let industry be honest about the real causal relationships behind disparities. Until that happens, no one should blame founders, CEOs, and Boards for taking a logical path, via international hiring, that proves they aren’t racist, while still fulfilling their obligation to recruit high-performing talent that furthers the survival and success of their companies.

International hiring and investment is a very effective near-term tool for improving the diversity of the startup ecosystem, even if it’s not the result that warmongering activists actually wanted to force decision-makers into.

Winning

We are thus faced with the fundamental tension in the diversity debate as applied to startups, and other high-performance, high-stakes industries. Diversity and increasing representation of minorities is a categorically good thing in an abstract sense. You will be hard-pressed to find someone actually say, publicly or privately, that they’d prefer a less diverse startup ecosystem. That would be inane.

But startups operate in the most competitive, high-stakes, low-margin-of-error segment of the modern economy. Arguments and tactics used by diversity activists that have found some success in universities, and even in large companies, face a fundamentally different set of constraints and realities in the startup economy. As I said in my original essay, and I will repeat here, if you want to see more URMs in startups, you need to actually help them win.

Whining and warring will not materially move the needle on diversity in a startup ecosystem that simply cannot safely absorb underperformance in the way that universities and massive companies can. Winning will. Unambiguous, credible, level-playing-field winning. You know who really doesn’t care about representative disparities, and judges a startup’s products and services purely on their objective merits? Their customers. There is no more brutal judge of performance than the open market, and for that reason no one does URMs any favors by acting as if affirmative action special treatment should continue well past the educational system and into the for-profit marketplace. When results, and only results, silence all other factors, help people actually deliver.

The most honest and effective diversity activists in tech and startups do not adopt childish arguments suggesting that hundreds of founders and VCs are “racists.” Nor do they suggest that highly competent and progressive executives are ignoring high-performing talent out of some dramatically oversold armchair idea of “unconscious bias.” Rather, they understand performance gaps are real, and are doing the work of filling those gaps; via additional resources, training, and networks applied to under-represented candidates. This is a perfect corollary to how elite universities who’ve adopted affirmative action policies didn’t do so by simply throwing sub-qualified URM students into their schools and hoping for the best. They thoughtfully implemented extra training and resources to help those students “catch up” to the performance of the rest of their student bodies.

This costs time and money. As I’ve emphasized, elite universities are very large, very rich orgs with plenty of time and money to pursue higher-level societal goals. The vast majority of the players in the startup ecosystem simply do not have the time or resources to play a material role in this process. For completely understandable reasons, they can only afford to recruit and invest in today’s winners, with the ethnic or racial makeup of their teams and portfolios being neither here nor there. That is their mandate. It doesn’t make them racists or jerks. It makes them pragmatic, normal businesspeople with a job to do.

But tomorrow’s winners, including those who are under-represented minorities, are being trained, built, and elevated by honest people who aren’t shying away from uncomfortable realities. They aren’t throwing colleagues and friends under a bus with slanderous labels. They also aren’t pretending that feel-good messaging, “bias workshops,” or public guilting and shaming of decision-makers are the key to success for URMs in a highly competitive market economy. They’re addressing the game actually on the field, and putting in the time and resources to help URMs win it, under the same rules everyone else plays by.

We all want to see a more “diverse” startup ecosystem, in every sense of the word. To get there we need less whining, less warring, and good people willing to put in the work and honesty to ensure there’s far more winning.