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Founding Team Alignment and Equity

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Founding Team Alignment and Equity

Scope: Thiel’s Zero to One rules for who to start with, how ownership/possession/control interact, who belongs in the company, how to pay the CEO, and how to define roles. Psychological ownership is covered in Ownership and Accountability; this article is about structure.

The First Decision

““Thiel’s law”: a startup messed up at its foundation cannot be fixed”

“When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.”

The risk is optimism: “It’s unromantic to think soberly about what could go wrong, so people don’t.” His summary: “You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.”

Ownership, Possession, Control

Three concepts locate likely misalignment: “Ownership: who legally owns a company’s equity?” “Possession: who actually runs the company on a day-to-day basis?” “Control: who formally governs the company’s affairs?”

  • Ownership attracts and rewards investors and workers.
  • Possession “motivates and empowers founders and employees—it means they can get stuff done.”
  • Control, via the board, “places managers’ plans in a broader perspective.”

Early on, “founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board.” His advice: “If you want an effective board, keep it small.”

Who Belongs in the Company

“anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided”

The decision is binary: “you’re either on the bus or off the bus.” He allows exceptions such as outside lawyers and accountants.

Pay: Equity Over Salary

Thiel states a pattern from investing in hundreds of startups: “A company does better the less it pays the CEO.” His cap: “In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.” The mechanism: a high salary “incentivizes him to defend the status quo along with his salary,” whereas “A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.” For everyone, “Equity is the one form of compensation that can effectively orient people toward creating value in the future.”

Culture and Recruiting

He rejects the transactional workplace: “taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational.” Recruiting pitches must be specific. Good answers concern “your mission and answers about your team,” meaning “why you’re doing something important that no one else is going to get done.” The shape of the team: “From the outside, everyone in your company should be different in the same way.” “On the inside, every individual should be sharply distinguished by her work.”

This builds on the “conspiracy” framing in Secrets and Contrarian Thinking: shared secret, shared conviction.

One Thing Per Person

“The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.”

The effect: “defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.” And the warning: “Internal conflict is like an autoimmune disease: the technical cause of death may be pneumonia, but the real cause remains hidden from plain view.” Dysfunction at the far end: “signaling that work is being done becomes a better strategy for career advancement than actually doing work.”

Competition inside versus outside

Thiel’s case against external rivalry (see Monopoly and Competition Avoidance) has an internal mirror: unique roles remove intra-company competition the same way a unique market removes external competition.

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