Startup Founders Fret over Getting Fired Like Sam Altman
wsj.com
wsj.com
The other investors have a fiduciary duty to their own stakeholders that generally comes before the founder’s desire for special treatment. Good founders that know they’re not the right ones to lead the next phase of the business know when to step aside. Founders that don’t and try to cling on when they’ve long passed the threshold of their own competence to lead aren’t doing anyone favors by trying to cling on.
An example from another industry is successful restaurants - if you don’t franchise you’re basically capped, and some are quite content with that. A local bar “franchised” - each of the kids of the original owner has their own variation on the bar/restaurant.
"Lifestyle business or scalable business", and "bootstrapping or vc" are largely orthogonal concerns. Not completely as there's basically no path to taking VC funding to build a lifestyle business. But the converse does not hold - you can certainly bootstrap a company that is meant to grow into far more than a "lifestyle company". Is it easy? No, but nothing worth doing ever is...
Not everyone is going to care about that stuff, but many do.
https://www.britannica.com/biography/Martin-Eberhard-and-Mar...
[1]: https://www.vanityfair.com/news/2007/05/tesla200705?currentP...
Even if you don’t like Musk, attributing Tesla to them is silly. Roadster, Model S, Model X made Tesla a niche luxury car company (and they both were only involved in the Roadster, the least successful car of the 3) Model 3 and Y made Tesla one of the world’s most valuable companies, especially model Y turning out to be the best selling car in the world in all categories this year. There are tons of engineers, designers in Tesla that you can attribute its success to without going back 20 years to attribute Tesla to Martin and Marc just to spite Musk. Joe Straubel, ex CTO who has been with Tesla since its earliest days is one example. In fact Tesla’s worst days by far happened during ramping up model 3, where it went extremely close to bankruptcy during mid 2017-2018. The founders had no role in pulling them through this or Teslas subsequent journey from being the most shorted stock in the stock market to a 100X increase in stock price in 2020. Which is why I find the talking point that Musk didn’t really found Tesla to be silly, Musk was heavily involved when Tesla actually became a company everyone’s talking about, it doesn’t matter whether he founded it or not.
Musk’s influence however needs to be judged in context. He’s made many decisions that seriously harmed the company such as bailing out solar city and other that have kept things growing. So would Tesla have been better off without him? That’s a question he doesn’t want anyone to ask and being thought of as a founder is one way to sidestep those questions.
Tesla was founded so roughly 5 years down the line when they could start roadster production battery technology would ready for the ultra enthusiasts. With a luxury sedan to hit a few years later.
As to Musk’s role he wasn’t involved in seed funding, was the largest but not only Series A investor, and became the 3rd CEO 6 months after the roadster entered production and 6 months before the Model S was unveiled. So he may have influenced the Model S, but it was well into development at that point. The company may have been less successful without his involvement, but it would have likely gotten both the Roadster and Model S into production.
I literally don't know. However, that's where I'd draw the line between who deserves credit. If it was Musk's idea, he deserves it. If it was them, then they do. Because that seems to me to be the major innovation. Also, if stationary storage devices started with them, then I'd argue their long-term plan was probably better than Musk's. However, I don't know who started that either. It just seemed like the long-term plan was to use eco-conscious rich people to finance storage innovations that would make the overall grid much more efficient through stationary solutions.
Part of making that happen is to make sure the founder has little economic handcuffs. Ie. if the company is wildly successful they should get a decent payout whoever is at the helm.
It's not a business that's about making $$$ (supposedly). Altman doesn't even own shares.
That doesn't pass the small test anymore. Altman must have some other angle.
2. "Leaders" want to create scale and "progress". The company is doing fine with one engineering team? But how would that look on my resume? Let's get two dev ops team to "optimize" $100/month cloud costs for a $2 billion dollar revenue company (yes, you read that right). Let's add 9 more dev teams. Let's completely rebuild the tech stack because a). My friends prefer x to y and z). We can pretend we did something. If I sound bitter, I am not, but this IS a true story - 3 years in, 70 more IT employees (mostly devs), dev isn't any faster and we just go back to where the product started, almost.
3. "Leaders" often can't zoom in, despite the claim that leaders are excellent at focusing at the right scale.
4. "Leaders" like to play leader, because actual leading is hard. Acquiring random companies definitely creates "growth".
5. On top of #4, they come in when there is financing and are basically used to free money, so they throw it around.
If "leave before things start going downhill from the pretend-growth" happens everytime, there is an arbitrage opportunity to just continue compounding the "good" company.
That's why Venture Capital has an history of about 25 years, whereas debt has a history of 10,000 years.
Business is a very abstract thing, not very limbic at all, and thus it's only fun when you can call the shots, otherwise it becomes a boat where you steer left and nothing happens, you steer right and nothing happens, basically every sailor's nightmare.
With debt you get to steer the boat whatever and however you like, but if you don't make it in time to the next port of call the bank repossesses it, that's a much better proposition, concentrating the politics solely in the moments where you close the loan and then after it you are free to do whatever the fuck you want and in the worst case scenario you declare bankruptcy.
That's also why equity-like investing in some form or another has been around for centuries (e.g. whaling ships), and Venture Capital in essentially the same form as today has been in the US at least since the 40s.
They solely qualify as weaknesses in this modern world where the stock and bond market eat the world.
In the past investing simply meant making money without having to do any work, so even an extremely small profit made without working meant good news for the investor, because the risk free rate was just sitting on top of it and make zero profit, or even negative profit because you had to defend your money against thieves and rats, humidity and sunshine.
Of course nowadays every investment opportuinity is compared against the US Treasury or the SP500 in terms of volatility, liquidity, stability etc...
That's also the reason why we should break up big banks, big banks are always in capital conservation mode and so they will always compare a lending opportuinity against the SP500 and Fed Rate, always inveitably picking the latter even when it's zero. Because for them capital conservation and status quo=winning given that they are so big and powerful already. A small bank is hungry to grow and can only do that by giving out risky loans.
Alternatively the entrepreneur should give some kickbacks to the guy within the big bank who takes the responsibility to extend him loan instead of dumping those funds into Fed Rate and SP500.
An other alternative would be that people stop trusting public companies because cooking the books is trivial and the big 4 auditing companies are clueless anyway, so that at least some of those funds end up being availible for loans at the local level where gossip dominates the conversation and that's a much better instrument to evaluate a company than rating agencies and auditing companies.
The problem is that now we have the Facebook/Zuckerberg example, wherein the founder managed to take outside money, and even go public, while still protecting his absolutely control of the company.
As with most public firms, each Class A share owned gives you one vote. However, Meta also has Class B shares that give the owner TEN votes each -- and Zuck owns a simple majority of those Class B shares. His voting power means he can do whatever he wants regardless of what the Class A shareholders want. (Zuck is also both CEO and Chair of the board.)
https://www.morningstar.com/sustainable-investing/how-facebo...
This structure is weird, but not unique. The end result is that Zuck got to have his cake (public money) and eat it to (keep absolutely control).
Everyone thinks they can replicate his success because they too are smart and have a great idea, but most really aren't as smart as him and he really lucked out with the timing, SV funding was still young enough that he was able to get away with things that would never fly today.
He was really good at hiring (and listening to) people who were better than him at lots of other things. Sheryl Sandberg in particular is probably more responsible for FB's success than anyone except him.
He also retained a ridiculously large proportion of those early folks, who could tell him he was being dumb. He's basically lost almost all of them in the past 3-5 years (to be fair, they were all billionaires so he did well to retain them for as long as he did), so we'll have to see how the next 5-10 years work out.
If you want it to be 100% yours you must bootstrap or keep it as a side project (either side income or just FOSS).
Expecting something to be 100% yours after taking other peoples' money to build it feels kind of entitled TBH.
That being said, good investors want the founder to be very committed and to have a personal attachment to the company. They need you to really give a damn. So some amount of attachment beyond "just a job" is good and even expected. I'm just saying there is a continuum between "just a gig" and "it's 100% my baby" and an externally funded company is neither. Closer to your baby than just a gig, but not 100%.
If you don't let go a little bit and put a little bit of boundary up when you take capital, you are setting yourself up for heated conflicts with your investors, co-founders (if any), and other senior employees. You're also setting yourself up for a soul-crushing ego blow if it doesn't go well and especially if it goes sideways for reasons you don't have full control over.
That is not a criticism. It should be obvious why outsiders invest in something, and it sounds like some founders forget this because they are so focused on the thing they spent a lot of time on.
>> Good founders that know they’re not the right ones to lead the next phase of the business know when to step aside.
But it's debatable when that is. It also depends what the goals are. There is absolutely NO legal requirement that a company has to have profit as it's main objective. If the goal is to make the best widget possible, one can go from MVP and ramen profitability to a lifelong business without taking investment. Hah, so that's "when" you step aside - when you decide to shift from product-focused to money focused! Those are definitely two different skills. You are effectively cashing out, but investors aren't just going to buy the business and hand you a check. They need to keep you around because you're the expert in whatever you've built so far, hence letting you stay as a minority shareholder (handcuffs).
I don't mean "sell out" in the colloquial sense where it is a negative. Nothing wrong with selling something, but that has consequences.
If a founder is really worried about this I guess they could see how investors feel if you want a "but you can't ever fire me" clause or something, at the very least it should make the exchange clearer...
Taking a step further we see regular "Founder sold company to mega corp and is now sad about the result". Dude got paid and got his ... that was the deal. I get their sentiment but when I'm a customer I am sometimes a bit miffed when I see that expressed as it's my problem now and he got out with the cash.
OpenAI is an AI research and deployment company. Our mission is to ensure that artificial general intelligence benefits all of humanity.[1] The OpenAI Research Organization said pretty much the same thing.[2]
I don't see how monopolizing the technology is supposed to benefit all humanity, such as letting microsoft have large investments in it. If I wouldn't know better, OpenAI is just another company that cared about making $$$.
This is different from being a founder of a for profit company as opposed to being an employee of a foundation with a specific goal and mandate.
You have to have one with teeth, like all code is GPL 3 or something, that can be concretely followed.
The board is the teeth to the mission. What happened here wasn't that the mission was vague, it was that the board turned out to be a paper tiger.
[0] https://www.councilofnonprofits.org/running-nonprofit/govern...
One lens into Effective Altruism might suggest that the best path to a good outcome is to gather as much power and wealth in the hands of the elect as possible, and at the right moment, they'll use it efficiently to achieve the best outcome.
Exact definitions of 'the elect', 'the right moment', 'efficiently', and 'the best outcome' are left as an exercise for us readers, but it matters very little what conclusions we make, because we are functionally outside the light-cone of these events. We just get to watch.
Uff. Doesn't sound good for others.
If you don't save people right now, you might actually save less people in the long run.
I'm sure the board didn't complain when Microsoft funneled billions of dollars into the company, thereby making their mission possible to begin with.
I have the utmost respect for people who start their own restaurant with their own money and grow it into multiple locations over decades.
But the tech industry isn’t anywhere close to that.
If I had ever worked for a company where the CEO visibly did positive things instead of just trying to not fail long enough to collect his golden parachute, maybe my view would be different.
Having said that, there are any number of examples, from Uber's Travis Kalanick to Andrew Mason (Groupon), Jerry Yang (Yahoo) to - probably most famously - Steve Jobs from Apple.
For founders, there's only really two ways to absolutely ensure to stay in control:
- Retain 50%+1 of the business
- Decouple monetary ownership from voting rights by having multiple share classes, then ensure you own 50% of the voting rights class
It might also be helpful to:
- Be indispensable. This should be a given if you're the founder/CEO, but if you feel there's a potential revolt brewing, there's some Machiavellian stuff you can do, e.g. by ensuring only you personally have some key relationships or- as Adam Newman at WeWork showed - by e.g. personally owning a lot of the real estate. (Not that that helped in the long run)
- Play board politics. Ensure that you control (on a social and relationship level) a fraction of the board that adds up to 50%+
But ultimately, there's a different question: Yes, it's your baby and of course you should be the first one to run it. But why does your board think you shouldn't? Removing a Founder-CEO comes with very high risk, makes the VC fund look bad (if your board is composed of VCs) and will bring a lot of chaos to the company. So - what's so problematic about you that people feel compelled to consider it? Or maybe there's nothing problematic per se, but you're a great product-market-fit finder and growth CEO, but now it's a large company and it requires another set of talents? Would it really be so bad to do the Google/Eric Schmidt playbook and let someone else run things while you do what you enjoy the most, e.g. heading product? Or become an executive chair person that spends most of their days travelling between Tuscan vineyards?
When you take investor capital, you suddenly have the power to do things you would not have had the ability to do for years. You can quit your job day job, hire other engineers, your development speeds up, you may even have a budget to spend on marketing. But the tradeoff here is your entire business shifts overnight, you are no longer the sole authority (ie. the benevolent dictator) and by that you no longer have complete say over the direction of your company. You might want one thing and your investors want another thing, and your job quickly becomes managing the relationship between your investors and the company you founded.
Now if you decide to not take investor capital then you stay in absolute control. You call the shots, and only you (and your co-founder(s) if you have them). If you are just a founder with no co-founders then there is zero chance a Sam Altman situation will happen, and even with co-founders that scenario is extremely unlikely because you very likely own an equal stake in the business to your counterparts. The only problem with this scenario is the money, or lack thereof. Until you make enough sales you can forget about hiring help, or quitting your dayjob and forget about a marketing budget because you simply don't have enough money for that.
I see these things as opposite sites to a "perfect company" coin. If you have a "perfect company" (as a founder), it means not only is your business generating enough revenue for getting all the cool things you could get with investor dollars, you are also in control like you would be if you didn't take investor dollars. Achieving the "perfect company" is practically impossible so you have to manage which side of the coin you prefer and your business can bear. For a small software company, it's definitely possible to go the bootstrapped route and achieve the "perfect company", though hard. But when you're talking about any capital intensive business (the Tesla's, SpaceX's of the world), then not taking investor dollars means there is a 0% chance your company succeeds unless you're already extremely wealthy.
Given AIs power and hype & control over people, maybe also don't go about trying to disrupt the industry with a bunch of anti-Democracy sovereign powers. Maybe stay a little closer to home.
There's so much general banter in comments about ownership & what to do/what not to do. Little of it is specific to what happened here. Don't undermine your startup by creating a new startup thats going to overtake & subjugate your current startup. The people running the current one don't want to be devoured.
I think most founders who are at loggerheads with their board can only dream of being fired like Sam Altman
Moral of the story is, if you want more control over your company, don't try to trick people into thinking your startup is actually a nonprofit.
Maby startups don't even need to take on seed investor money (could be self funded, smaller team, longer time before funding etc) - but founders obviously prefer to have a nice salary and soft landing. Or sometimes literally just as a marketing strategy "we are backed by x/y/z, this proves our value". This is the price to pay. What am I missing?
Which means he probably doesn’t have voting shares to exert company control.
Sam (+ Elon) were though initial board members.
https://en.wikipedia.org/wiki/OpenAI#:~:text=It%20was%20foun....
https://finance.yahoo.com/news/sam-altman-says-doesn-t-20432...
> OpenAI’s research director is Ilya Sutskever, one of the world experts in machine learning. Our CTO is Greg Brockman, formerly the CTO of Stripe. The group’s other founding members are world-class research engineers and scientists: Trevor Blackwell, Vicki Cheung, Andrej Karpathy, Durk Kingma, John Schulman, Pamela Vagata, and Wojciech Zaremba. Pieter Abbeel, Yoshua Bengio, Alan Kay, Sergey Levine, and Vishal Sikka are advisors to the group. OpenAI’s co-chairs are Sam Altman and Elon Musk.
Odd to use OpenAi as an example here ... If anything the founders of OpenAi set it up appropriately to fire Sam.
You end up fundraising, preparing forecasts and budgets for investors for the next X years, attending conferences, working with marketing on PR, dealing with unglamorous problems that are not part of anyone's job but need to get done and someone else doing it would impact morale too much. It's lucky if you find 1-2 days a week for "deep work" given constant context switching.
Even if you work 2 shifts you can't sometimes match the level of being necessary for day-to-day operations as "regular" employees. But you own orders of magnitude more equity.
And no, I'm not just being glib in saying that. Not every startup needs to follow the "take a bunch of outside capital, grow really big really fast, and (hopefully) exit" model. Unless you're building something that's genuinely capital intensive (like building a factory to build cars or rockets, or doing drug trials) there's a good chance you can ship a working product, sell said valuable product to actual customers and fund growth from gasp customer revenue gasp.
I know, I know... heresy, right? Sounds like an outdated way of doing things? Well, maybe. But if you're really concerned about maintaining control, it might just be worth a shot if it's viable for what you're doing.
Some might say that if all it takes is cash to catch up your moat then you don't have a moat.
Sadly most businesses who claim to have a moat are infact just doing the same thing a tiny bit differently and just dressing it up in marketing bullshit to make it sound like they have some amazing secret sauce. The old rolling a turd in glitter routine.
A real moat is something like ASML. Throw as much cash as you want at it but its going to take you decades to catch up, if you ever do.
Less extreme examples than ASML exist, of course. But you get my point.
Someone like comma ai competes very well because you can buy it today and it'll make your drive somewhat more pleasant.
They have a product and it works and a lucky few can use it right now. Unlike other products, they can't just spin up a factory and make 10 million more and just sell them world wide like you can with an iPhone. They're undoubtedly working on a new vehicle platform that won't have a steering wheel or driver's seat.
Well the amount of cash matters. With infinite cash you could take on and surpass pretty much any company you want.
But it has to be an amount of cash where the ROI makes sense.
Nobody has budget, personnel or appetite for quixotic "Stamp out a tiny would-be competitor" projects. The business climate inside large orgs is now more conservative and financially constrained. There is no infinite stack of cash. Headcounts have been slashed so there's no longer teams or leaders that have the bandwidth to try and spin up a new product/team.
To add to that: people forget when you're private and not splashed across the pages of every business magazine nobody really knows how successful your company really is outside your own employees and maybe some savvy industry insiders. And none of them know all the details. A big company seeing slowing growth (or a shrinking market) is going to be reluctant to believe some startup in an adjacent space is seeing enough growth to get a foothold.
Competition is good, actually, and is essential for a functioning free market. When you have insufficient competition, you end up with a situation where large companies can exercise tyrannical power over consumers and their own employees by all colluding informally or formally. That doesn't happen if you have a functioning market where a consumer can switch to a competitor or an employee can quickly change jobs if a company is misbehaving.
I agree that the risk exists, but I don't necessarily by that it's a fait accompli that taking VC money is the safer route. Consider that taking VC money comes with it's own risks, including:
1. VC's who think of themselves as "smart money" and want to be actively involved in running the company, and wind up muddling the vision and taking the company in non-productive directions.
2. The need to adhere to artificial timelines w/r/t spending, fund-raising rounds, etc. which are inherent in the VC model for structural reasons (funds are time-boxed, etc)
3. Taking VC money acts as validation of the idea on a much broader scale, prompting even more competitors to enter the market
and so on.
Keep in mind, as another commenter mentioned, if you stay private, focus on talking directly to your customers, don't get caught up in the "attract massive attention to yourself at all costs" cycle, and fly under the radar, you can most likely get yourself pretty well entrenched before this hypothetical "idea thief" even becomes aware you exist.
I'd also argue that most people - especially the actually talented ones - aren't just sitting out there waiting to steal someone else's idea. If they're talented enough to execute your idea, they most likely have plenty of ideas of their own. That's not to say that "idea thievery" never happens, but I think this notion is over-stated. YMMV, of course.
Also, for the sake of clarity, to expand on what I meant by it's safer: it's definitely not without its risks (as mentioned), but if we assume that the idea and team is good, and that it is possible that a competent competitor to take your idea but execute on it faster with more money, if you approach things right, with an actual good idea and business plan, taking on VC money can be good and relatively safe for the business.
That's quite the claim. Can you explain why you think this is the case?
(I'm Roger Beaman, I was featured in the article)
It looks like the company you were at is still operational too.
Can you give more details about what happened? What is the investors side of the story? Do you think looking back it could have gone a different way/what would you have done differently to avoid the suboptimal outcomes? Whether that be negotiating better terms like you did with the latest company or something else tactical.
One of those things is - if you have hit product market fit, a company becomes hard to kill. I do think it's dying a slow death, but had they done what they did later, it might not have, look up the Cisco story. After all, in a way starting a company that no longer needs you to run it might be the definition of success for a startup (e.g. it's what leads to a successful acquisition).
As for what happened - as a first-time founder I hadn't put normal founder protections in place, and this meant that at the time that I was about to close the round referenced in the article that valued Smartrr at $75mn, it was possible for investors to push me out and take pretty much all my equity which was worth tens of millions of $ and could have been worth billions were the company to go on to succeed. The incoming investors wanted to get rid of this vulnerability and increase my control ("we're betting on you here...") and there was some tension around that with existing investors. I viewed my first sales hire as a very close friend and confidant and was going to promote them to President to formally be my righthand as part of the round and give them a large chunk of equity that would otherwise have been my own. Instead that first sales hire used what I had confided to collaborate with existing investors and push me out of the company the night I was to sign that deal. Instead of closing that world-class round I woke up the next day without the company I had started.
You might read that and think I was a naive moron and that's okay, I now think I was too, but I also don't think there's any moral shame in that.
At that time I believed that people were good or at least wanted to be and much was built on that foundational view. This experience broke that foundation, but I now believe the scarcity of being good makes it that much more special.
Regarding their story, the investors and the present CEO who did it gave no public statement apart and privately lied and said that I had somehow stolen money from the company (the WSJ wouldn't have included me if this were true).
I think what you're really asking is what would their "true" story be, the one in their minds not their mouths. They'll never be honest publicly if they wouldn't even be privately, but that itself in some ways reveals the answer. They just saw an opportunity to take a lot of equity worth a lot of $$$ from an overly trusting first-time founder who hadn't protected themselves, and so... they did it.
I used to believe that everyone needs to convince themselves that they are good for humanity in order to sleep at night, it's a nice to think that but try reconciling that with the existence of Ted Bundy.
With regard to what I would have done differently, there are a lot of tactical things (look up "double trigger clause", that's really the most important one).
In a way though, my fatal mistakes stemmed from the optimistic view of the world that says if you work hard and are honest and do right by people, good things will happen. That view led to a lot of poorly placed trust, certainly in that first sales hire who I brought into my thing and sought to elevate and is now has my former job as CEO of the company, but also in an investor that I viewed as a mentor figure.
While I believe the dollars I lost are certainly eye-popping and would have been nice, I just don't have that kind of emotional attachment to money, that's not what hurt.
What hurt was rebuilding from that shattered of that world view and accepting a much more nuanced one, where being good in the classical sense is often exploited as a vulnerability and in order to preserve the good you need to be able to fend that off.
That's where I ended up, but it was a journey through hell to get there, one where I saw the people that were hurting me and my family so much get lauded on social media and in the press for the short-term success of my Smartrr following my departure.
Anyways - if you happen to stumble on this and it helps you, shoot me a message on LinkedIn, happy to help further if I can.
1) Be a good CEO 2) Don’t take on questionable board members. 3) Don’t take on questionable equity partners.
I don’t think this is easier said than done, just takes some discipline.
Step 0. Be committed to the principles even in the face of adversity and challenges when meeting goals, aka Don't cheat the rules to meet your goals.
Step 0 is very very hard to do. When shit hits the fan, the shoulders drop and tummy swirls and the only thing left are the bones that make you the person you are. Your biggest challenges will be to be a "professional" for the job you took.