Post Category → Tech

Tech Bros, Pluralism, and the Startup Diversity Inquisition

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

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

Related background reading:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Carta SAFE for Seed Rounds

Background reading:

As I’ve written in various places (see above), a significant problem that has emerged in startup ecosystems involves certain investor organizations pushing startups to adopt their preferred financing templates. Predictably those templates are often riddled with issues that favor the interests of the money. Of course these organizations are far too clever to come out and state transparently, “we want you to use this document because it makes us and other investors more money,” so they spin other narratives about saving founders time, or reducing legal fees; even though the “cost” to founders is often orders of magnitude higher than whatever they might be “saving” by mindlessly signing the templates.

This dynamic was most visible with YC’s announcement of the Post-Money SAFE, which implemented economic concepts exorbitantly favorable to seed investors (including YC of course), but was marketed as a way to (air quotes) “help” founders have more “clarity” about their cap table. YC, their long list of positive impacts on the ecosystem notwithstanding, is still an investor with lots of mouths to feed. No one should’ve been surprised that it would use its brand leverage to push a more investor-favorable document onto startups, particularly now that, with its brand having significantly matured, it no longer needs to rely as much on “founder friendliness” to attract startups.

Carta, the incumbent capitalization SaaS used by startups, recently announced that it is enabling automated SAFE financing on its platform. Interesting news, and I’m sure it’ll save teams planning on closing SAFE financings a bit of hassle. But automated SAFE closings have been available on other platforms, like Clerky, for some time, and realistically the technology behind it is hardly earth-shattering. Given that SAFEs are utilized far more in California than in the rest of the market, that’s probably where the automation will have the most impact.

What I find much more interesting, and relevant to topics I write about, is that Carta chose to tweak the YC SAFE docs and create a “Carta SAFE.” Companies can still close on YC’s Pre-Money or Post-Money SAFE templates, but they also have the option of a Pre-Money or Post-Money “Carta SAFE.” The changes themselves are fairly innocuous, but helpful and balanced. More importantly, I think it’s worth recognizing the valuable role that an organization like Carta could play in promoting various template financing structures to startups.

YC is a venture capitalist, and thus highly biased in the terms it purports to offer as “standard.” They lost tremendous credibility among the legal and startup community – although surely gained favor among VCs – with their 180 on the Post-Money SAFE. They absolutely deserve respect for their track record of picking successful startups, but lines have been crossed with respect to any facade of “founder friendliness” in their template standards.

Carta, however, is a technology company that (as far as I know) is not investing in dozens of startups every year. Carta has far less reason to favor an investor-biased document, and thus potentially has far more credibility in swaying market “standards” in a more balanced direction. This is visible in how they’ve implemented their automated seed financings and templates, relative to how YC pushed out the Post-money SAFE.

Go to YC’s website, and you can’t even find the old pre-money SAFEs with more company-favorable economics and terms. All you have is the new (profoundly investor-biased) Post-Money docs for download. This simple fact has actually caused huge confusion among inexperienced founders, who often aren’t even aware that YC dramatically changed their forms and economics, and thus (thinking they are doing themselves favors) simply download and execute the forms on YC’s site. YC could’ve very easily offered up the new Post-Money SAFEs, while leaving the old forms also available for download, with clear prompting to founders to work with advisors to decide which form they prefer. Instead, YC consciously chose to promote only the new forms, signaling a clear desire to change the market “standard” in favor of investors.

Contrast that with Carta. The Pre-Money v. Post-Money distinction is front and center in their UI, with both types of forms easily accessible to startups, and with helpful tools for comparing dilution from the different structures. This is a far more honest and transparent way for helpful templates to be offered to startup teams, without shady gimmicks or marketing spin to nudge them in favor of the money. It should be applauded.

Of course, I’m not going to wrap up this post without acknowledging that Carta still has bias. Who doesn’t? As an automation tech company, they are obviously biased toward automation and templates that enable automation. There are countless ways in which financing documents can (and often should) be negotiated and tweaked to make them a better fit for the unique context of a particular company raising money from particular investors. Sometimes convertible notes of various flavors make more sense. Other times seed equity. Other times the full suite of NVCA equity docs.

Despite growing traction among public templates, an enormous amount of investors and startups still take advantage of flexibility and customization in their deal docs, because the stakes are so high, the context and people involved so nuanced, and the terms so permanent, that it’s worth doing a bit of negotiation. If a few thousand dollars of legal fees can save you a few million in the long-run on your cap table, it doesn’t take advanced calculus to arrive at a decision.

In saying that, I’m obviously reflecting my own bias as company counsel to startups (and not investors). My job is to ensure startup teams are aware of all the options on the table for their financings and corporate governance. That of course includes bringing up when an automated template might make sense. Sometimes it does, often times it doesn’t. We can all stop pretending that serious lawyers are in any way threatened by tools like Carta or Clerky. I love these tools, because the last thing I enjoy spending my time on is shuffling cookie-cutter forms. Use the cookie-cutter when it makes sense, but make sure you really understand the tradeoffs and limitations, because a lot of very smart teams decide to put the cookie-cutter down and take a more “custom fit.”

Venture capitalists, together with Startups, are biased in favor of their own bank statements. Automation tech companies, like Carta, are biased in favor of hyper-standardization and automation. And high-end ECVC (Startup) lawyers, like me, are biased in favor of flexibility and customization. There’s no need to hide any of this. Every party has an important role to play in the ecosystem, and the interaction of all the moving parts ensures we all arrive at a reasonable equilibrium.

Moving (Too) Fast and Breaking Startup Cap Tables

Related Posts:

As I’ve written many times before, the “move fast and break things” ethos, which makes absolute sense in a software environment where fixing “bugs” is quite easy and low-stakes, becomes monstrously expensive and reckless when applied to areas where the cost of a mistake is orders of magnitude higher to fix (if it’s fixable at all). Silicon Valley got a very visible and expensive (to investors in terms of capital, and founders in terms of legal errors and terrible legal advice) lesson in this reality a while back with a very well-funded (but ultimately failed) legal startup heavily promoted as enabling (via over-hyped vaporware) startups to “move faster” and save significant costs. That legal startup was, perhaps unsurprisingly, controlled by money players with all kinds of reasons to profit from startups (that they invest in) getting weak legal and negotiation guidance. No one wants an in-experienced founder to move fast and mindlessly do what investors want more than… those investors.

That fundamental point is one that inexperienced founders need to keep their eye on throughout their entire fundraising and growth strategy. Notice how, for example, certain Silicon Valley groups adamantly argue that SV’s exorbitant rents and salaries are nevertheless worth spending capital on, and yet simultaneously they will howl about how essential it is that startups minimize their legal spend (a small fraction of what is spent on rent and salaries) in fundraising, and move as quickly as possible; usually by mindlessly signing some template the investors created? Why? Because they know that the one set of advisors most capable of “equalizing” the playing field between inexperienced startup teams and their far more seasoned investors is experienced, independent counsel. Aggressive (and clever) investors say they want you to adopt their preferred automation tools and templates because they care so much about saving you money, but the real chess strategy is to remove your best advisors from the table so that the money can then, without “friction,” leverage its experience and knowledge advantage.

At some obvious level, technology is an excellent tool for preventing errors, especially at scale when the amount of data and complexity simply overwhelms any kind of skilled labor-driven quality control mechanism. But there is a point at which people who sell the technology can, for obvious financial incentives, over-sell things so much that they encourage buyers to become over-dependent on it, or adopt it too early, under the delusion that it is far more powerful than it really is. This drive to over-sell and over-adopt tech for “moving really fast” is driven by the imbalance in who bears the cost of fixing “broken things.”

Ultimately the technology seller still gets paid, and puts all kinds of impenetrable CYA language in their terms of service to ensure that no one can sue them when users zealously over-rely on their products in ways clearly implied as safe by the tech’s marketing. Founders and companies are the ones who pay the (sometimes permanent) costs of a poorly negotiated deal or contract, or in the case of cap tables incorrect calculations and promises to employees or investors.

In the world of cap tables, automation and tracking tools like Carta (the dominant player, justifiably, by far) are enormously valuable, and doubtlessly worth their cost, in helping the skilled people who manage the cap tables keep numbers “clean.” In the early days of Carta’s growth (once called eShares), there was a general understanding that cap tables rarely “break” before the number of people on the table exceeds maybe 20-30 stakeholders as long as someone skilled at managing cap tables (in excel) is overseeing things. That last part about someone skilled is key.

There are in fact two broad sources of cap table errors:

  • Using Excel for too long, which creates version control problems as the number of stakeholders grows; and
  • Management of cap tables by people who are simply too inexperienced, or moving too quickly, to appreciate nuances and avoid errors.

Technology is the solution to the first one. But today it’s increasingly becoming the cause of the second one. The competitive advantage of technology is speed and efficiency at processing large amounts of formulaic data. But the advantage of highly-trained people is flexibility and ability to safely navigate nuanced contexts that simply don’t fit within the narrow parameters of an algorithm. In the extremely human, and therefore subjective and nuanced, world of forming, recruiting, and funding startups in complex labor and investor markets, pretending that software will do what it simply can’t do –  delusionally over-confident engineers notwithstanding – is a recipe for disaster. The combination of new software and skilled expertise, however, is where the magic happens.

The Carta folks have been at this game long enough to have seen how often over-dependance on automation software, and under-utilization of highly trained and experienced people in managing that software, can magnify cap table problems, because it creates a false sense of security in founders that leads them to continue flying solo for far too long. Sell your cap table software as some kind of auto-pilot, when the actual engineering behind it doesn’t at all replace all the things skilled experts do and know to prevent errors, and you can easily expect ugly crashes.

That’s why Carta very quickly stopped promoting itself as a DIY “manage your cap table by yourself and stop wasting money on experts” tool and evolved to highly integrate outside cap table management expertise, like emerging companies/vc law firms and CFOs; who spend all day dealing with cap table math. They realized that the value proposition of their tool was sufficiently high that they didn’t need to over-sell it as some reckless “you can manage cap tables all by yourself!” nonsense to inexperienced teams who’ve never touched a cap table before. The teams that use Carta effectively and efficiently see it as a tool to be leveraged by and with law firms, because startup teams are rarely connected to anyone who is as experienced and trustworthy (conflicts of interest matter) in managing complex cap table math better than their startup/vc law firm.

But as is often the case, the cap table management software market has its own “race to the bottom” dynamics – but a better name may be the “race to free and DIY.” If I’m a company like Carta, and I know that truthfully very few companies need my tool before maybe a seed or Series A round (excel is perfectly fine, flexible, and simple until then), I’m still extremely worried that someone will use the time period before seed/Series A to get a foothold in the market and then squeeze me out as their users grow. That someone is almost always a “move fast and break things” bottom-feeder that will, once again, over-sell founders on the idea that their magical lower-cost DIY software is so powerful that founders should adopt it from day 1 to save so much money by no longer paying for expertise they don’t need.

Thus Carta has to create a free slimmed down version, and they did. But they’ve stuck to their guns that cap tables are extremely high-stakes, and even the best software is still extremely prone to high-cost errors if utilized solely by inexperienced founders. That’s why Carta Launch has heavy ties to a network of startup-specialized law firms. It’s free as in beer, but honest people know that it still needs to be used responsibly by people who fully understand the specific context in which it’s being used, and how to apply it to that context.

But the bottom-feeders of cap table management are of course showing up, with funding from the same people who were previously happy to impose costs (errors, cleanup) on inexperienced teams as long as their software gets adopted and their influence over the ecosystem therefore grows. The playbook is tired and predictable.

Why are you using that other (widely adopted and respected) technology that still relies (horror of horrors) on skilled humans? It’s 2020, you need :: something something automation, machine learning, AI, etc. etc. :: to stop wasting money and move even faster. Our new lower-cost, whiz-bang-pow software lets you save even more time and manage your cap table on your own, like the bad ass genius that you are.

We know where this is going. Many of us already have our popcorn ready. While before I might run into startups who handled only a formation on their own, and show up with a fairly basic and hard-to-screw-up cap table, I’m increasingly seeing startups who arrive with seed rounds closed on a fully DIY basis, and totally screwed up cap tables involving investors and real money. They also often have given up more dilution than they should’ve, because no independent, skilled expertise was used to help them choose and negotiate what funding structure to use. Clean-up is always 10x of what it costs to have simply done it right, with a thoughtfully chosen (responsible) mix of technology and skilled people, on Day 1.

Technology is wonderful. It makes our lives as startup/vc lawyers so much better, by allowing us to focus on more interesting things than tracking numbers or inputting data. The stale narrative that all VC lawyers are anti-technology really gets old. We were one of the first firms to adopt and promote Carta, along with numerous other legal tech tools. Not a single serious law firm views helping their clients manage cap tables as a significant money driver. But that’s like saying no serious medical practice views X or Y low-$ medical service as a significant money driver. Something can be a small part of a professional’s expertise, and yet still way too contextual, nuanced, and high-stakes to leave to a piece of software pretending to be an auto-pilot.

When the cost of fixing something is low, move as fast as you want and break whatever necessary. But that’s not contracts, and it’s not cap tables. In those areas, technology is a tool to be utilized by still-experienced people who regularly integrate new technology into their workflows, while maintaining skilled oversight over it. Be mindful of software companies, and the clever investors behind them, who are more than happy to encourage you to break your entire company and cap table as long as you utilize their half-baked faux-DIY tool. Their profit is your – often much larger than whatever money you thought you were saving – loss.