Startup Founder Ethics

1. 0:00 – 0:25

   The “final judge” of startups: IPOs, acquisitions, and real accountability

   1. DCDalton Caldwell0:00

      There is a final judge of all startups. Like, someday-

   2. MSMichael Seibel0:04

      [laughs]

   3. DCDalton Caldwell0:05

      ... all will be accounted for, okay? There is a reckoning for all startups, right?

   4. MSMichael Seibel0:10

      [laughs]

   5. DCDalton Caldwell0:10

      And that's either, you know, when you go public and the m- market gives you a value, you may not like it, but that is a reckoning.

   6. MSMichael Seibel0:16

      That is a reckoning.

   7. DCDalton Caldwell0:17

      Or, it's you get acquired, and that is a-

   8. MSMichael Seibel0:19

      Yes

   9. DCDalton Caldwell0:19

      ... there will be a number there, and someone-

   10. MSMichael Seibel0:21

       Yes

   11. DCDalton Caldwell0:21

       ... will come up with that number. [upbeat music]

2. 0:25 – 1:27

   Failing is acceptable; cheating is not: the trust-based rules of the game

   1. MSMichael Seibel0:25

      All right. This is, uh, Dalton + Michael. This is a throwback episode, and today we're gonna be talking about the ethics of the startup game. Maybe a topic that doesn't come up enough. What do you think, Dalton?

   2. DCDalton Caldwell0:39

      This was a recurring theme in all of our talks to the YC batches over the year, which is-

   3. MSMichael Seibel0:43

      Yes

   4. DCDalton Caldwell0:44

      ... there's some basic rule of the game, and one cool thing about, you know, Silicon Valley and the tech industry is you can fail, and you will be held up and celebrated by the community, right?

   5. MSMichael Seibel0:55

      Yes.

   6. DCDalton Caldwell0:55

      Like, it's okay if your startup-

   7. MSMichael Seibel0:56

      Yes

   8. DCDalton Caldwell0:56

      ... doesn't succeed. We would-

   9. MSMichael Seibel0:57

      It's not unethical to fail.

   10. DCDalton Caldwell0:59

       Yeah. That's part-

   11. MSMichael Seibel1:00

       [laughs]

   12. DCDalton Caldwell1:00

       ... of the business. You earn respect from your peers. But we would always say, in our advice to YC companies, "There are rules [laughs] , and if you, you know, cheat people or lie or, uh, follow bad business practices, you will be in trouble." You know, like, you are out of the business, basically. Like, it is, it is very hard, if not impossible, to recover from that, and that is not the way to fail.

3. 1:27 – 2:27

   Milestone obsession and the myth of the “easy part”

   1. MSMichael Seibel1:27

      Over the years, it's be- be s- become painfully obvious that we're in a trust-based business, and I think the major mistake that founders make is they over-fetishize the next milestone. I almost wanna kill this analogy that's been popular, which is like, oh, a startup ... You know, first you're pushing the rock uphill, and then it's like you're pushing it down- you're following downhill, and that's the easy part. I think there's kind of a bit of a mentality that, like, do whatever you can to get to the easy part, because then it's gonna be easy and then, like, whatever. You'll fix it later. Where, like, when we talk to our friends who are running massive, successful companies, I think they haven't found the easy part yet. [laughs] Like, I'd argue it's like, it's maybe a better analogy is pushing a rock uphill, but your legs are getting stronger. When you believe this myth that like, oh, if I just raise that round, then everything will break open, or if I just hit this ARR, then everything'll break open-

   2. DCDalton Caldwell2:26

      Yeah. It's like-

   3. MSMichael Seibel2:26

      Then you can-

4. 2:27 – 3:38

   How small exaggerations become career-ending lies

   1. DCDalton Caldwell2:27

      ... how small lies become big lies, right?

   2. MSMichael Seibel2:29

      Exactly.

   3. DCDalton Caldwell2:30

      Like, you start by-

   4. MSMichael Seibel2:31

      Yes

   5. DCDalton Caldwell2:31

      ... little things, and then to keep up, you just dig deeper and deeper and deeper-

   6. MSMichael Seibel2:36

      Yes

   7. DCDalton Caldwell2:36

      ... um, till you can't recover, right?

   8. MSMichael Seibel2:39

      Yes. And I think that's the tricky thing is that, you know, we're both founders. I remember there was a moment where, you know, it was like we're ... I'm, I'm pitching an investor, and I'm giving them our metrics, right? Like [laughs] , like there's no, like, au- third-party audit on how many unique visitors we have. Like, but then, you know, my next thought was this, is that ultimately I'm being graded on how much value I'm creating. Like, ultimately there's an accounting. When that ultimate accounting happens, if it shows up that like, oh, this is all smoke and mirrors, there's no reward at the end of that tunnel. Like, you know? So it's like-

   9. DCDalton Caldwell3:19

      It's, it's all downside, right? Um-

   10. MSMichael Seibel3:22

       It's all downside. [laughs] But it's weird, because like, yeah, maybe, maybe it's fun on that road, but if the end of the road is, like, no payoff-

   11. DCDalton Caldwell3:31

       [laughs]

   12. MSMichael Seibel3:31

       ... is the road ... Like, is that ... [laughs] Like, what? Like, does it matter?

   13. DCDalton Caldwell3:34

       It's not just no payoff. It's, like, career ending.

   14. MSMichael Seibel3:36

       Negative payoff.

   15. DCDalton Caldwell3:36

       It's, it's-

   16. MSMichael Seibel3:37

       Yeah, exactly. Yeah.

5. 3:38 – 5:09

   Engineering ethics: building things that can’t fail safely

   1. DCDalton Caldwell3:38

      I think if you look at the history of the tech industry, um, there's like a culture thing to talk about. I think that historically engineering, not software, let's talk about engineering. The deal with engineering is you had to build things that wouldn't kill people, like bridges and buildings and stuff. And so I think it was built heavily into an engineering mindset that, like, details matter and not hurting people matters, and that's literally the job. Like [laughs] -

   2. MSMichael Seibel4:06

      That's the final accounting.

   3. DCDalton Caldwell4:07

      That's the-

   4. MSMichael Seibel4:08

      Someone's gonna walk on this bridge. [laughs] Like-

   5. DCDalton Caldwell4:10

      Yeah. Um, and I think it's, like, pretty well grounded into you. I think the other thing going on is, you know, not to make generalizations, but, um, spectrum-y type people tend to like rules. Um, I guess I'm one of those people. But if you believe in logic and reason, and the whole way you see the world is through an engineering mindset of, like, strict rules and, like, everyone has to follow the rules and, like, rules are important, historically engineering is, like, a good place for those types of people. [laughs]

   6. MSMichael Seibel4:40

      Yes.

   7. DCDalton Caldwell4:40

      Because you can put numbers on everything, and you can make sense of the world, and there's laws of physics and, you know, th- there's all these rules where the wh- where everything makes sense in a way that other parts of, of society may be a little bit trickier. You still with me?

   8. MSMichael Seibel4:52

      Agree.

   9. DCDalton Caldwell4:53

      The technology industry was seen as a place for people that feel that way and think that way and are aligned, uh, with everyone agreeing to a code of conduct and agreeing to rules and numbers being super factual, uh-

   10. MSMichael Seibel5:07

       Yes

   11. DCDalton Caldwell5:08

       ... in every way.

   12. MSMichael Seibel5:08

       Yes.

6. 5:09 – 6:14

   Money changes culture: when hype attracts rule-benders

   1. DCDalton Caldwell5:09

      And so I think there's always been this tension as money flows into the tech industry-

   2. MSMichael Seibel5:15

      Oh

   3. DCDalton Caldwell5:15

      ... that the more money and lucrative this stuff gets, the more it attracts people that would-

   4. MSMichael Seibel5:20

      Mm-hmm

   5. DCDalton Caldwell5:20

      ... not be in this industry if there were no money in it, right?

   6. MSMichael Seibel5:23

      Agree.

   7. DCDalton Caldwell5:23

      'Cause there's some people that are, like, engineers, whether physical engineers or software engineers, they would be doing this even if this was, like, making no money, right?

   8. MSMichael Seibel5:29

      Yep.

   9. DCDalton Caldwell5:29

      'Cause they like it. And there's some people that are 100% only doing this versus whatever, because-

   10. MSMichael Seibel5:37

       Banking. [laughs]

   11. DCDalton Caldwell5:38

       Right?

   12. MSMichael Seibel5:38

       Yeah.

   13. DCDalton Caldwell5:39

       [laughs] In the '60s, it was starting a rock band, right? Like, there's a lot of people, if you're an ambitious young person, in the '60s you started, like, a rock band, and a lot of people went far with that. Um, starting a startup is, like, something you do if you're an ambitious young person. And so where I'm going with this is that in this cultural tension, I think a lot of the true nerds are very angry and upset when they see what they feel is an injustice. And again, I guess I'm one of them. Like, it bugs me too. Like, I, you know, I'm gonna level with you. Um-And that folks with a different perspective might just be like, "Oh, this is how everything works."

   14. MSMichael Seibel6:14

       Mm.

7. 6:14 – 6:51

   Market cycles and sketchiness: hype heats up bad behavior

   1. DCDalton Caldwell6:14

      And it reminds me a little bit of, I don't know, like high school, where there, there were some people that were like, "Yeah, cheating's just part of the game. Like, of course we cheat. Like, everyone cheats." And I don't know, man, like, I've always just found it kind of a drag to, to see some of that influence coming into the tech industry. And, like, last thing from me on this point, I've noticed it, it has everything to do with market cycles, and when, you know- [laughs]

   2. MSMichael Seibel6:40

      Yep

   3. DCDalton Caldwell6:41

      ... the hotter things get in terms of money, the sketchier things get. And when there's no heat on the, on the tech industry, this is less of a problem.

8. 6:51 – 8:22

   Investor incentives: short-term scoreboards that distort founder behavior

   1. MSMichael Seibel6:51

      I think that investors also have a role here. It's so funny, I remember reading something where some young investor would be given a lot of praise and, you know, some snarky Twitter person was like, "Well, those companies haven't even exited yet." And then the reply was like, "Well, how do we grade people if it takes a really, really long time?" I feel like investors can get caught up in these short-term competitions. Did I get the hottest company on demo day? Like, how many of my companies have raised a Series A? How fast did they raise a Series A? How fast is my fastest company growing from 1 million to 10 million in ARR? Because the longer competitions take so long. And I think that unfortunately, when early-stage investors get into this mindset, it can, it can help in- infect the community with the mindset that these short-term things matter. And I don't know about you, Dalton, but, like, man, I've been advising startups for so long now. You know, time separates everything out.

   2. DCDalton Caldwell7:52

      Yeah.

   3. MSMichael Seibel7:52

      And, like, the fads go away. Things that don't create value go away. Valuations become irrelevant. The amount of money you raised, how famous you are, like, all those things with time. The only thing that's, like, the core and rock is how much value you're creating. And, like-

   4. DCDalton Caldwell8:10

      Yeah

   5. MSMichael Seibel8:10

      ... sometimes I kinda wish investors would have that longer term mindset, as opposed to wanting to split the long game up into short games that probably don't matter, or are not indicative of the long game at all.

9. 8:22 – 8:52

   Why VCs play the game: career pressure and portfolio signaling

   1. DCDalton Caldwell8:22

      Sort of to their defense, they're just worried about their career and their next promotion, and whether they're, you know ... Like, what we're saying works for us, but if you're, like, a junior VC and your entire career is based on if you're funding winners, otherwise you're out. From the investor perspective, um, it's hard for us to, to say they should do bad things their, for their career by not hyping up the companies they invested in. [laughs] Right? They're, they're just trying to show that they're good investors, and they're trying to, you know, make their portfolio companies look good. And so-

   2. MSMichael Seibel8:52

      Yes

10. 8:52 – 9:40

    Back to the reckoning: all interim numbers are ‘a little made up’

    1. DCDalton Caldwell8:52

       ... I understand the incentives are a little tricky there. But to reiterate what you've been saying, there is a final judge of all startups. Like, someday-

    2. MSMichael Seibel9:00

       [laughs]

    3. DCDalton Caldwell9:01

       ... all will be accounted for, okay? There is a reckoning for all startups.

    4. MSMichael Seibel9:06

       That's true. [laughs]

    5. DCDalton Caldwell9:06

       Right? And that's either, you know, when you go public and the m- market gives you a value, you may not like it, but that is a reckoning.

    6. MSMichael Seibel9:13

       That is a reckoning.

    7. DCDalton Caldwell9:13

       Or, it's you get acquired, and that is a-

    8. MSMichael Seibel9:15

       Yes

    9. DCDalton Caldwell9:16

       ... there will be a number there.

    10. MSMichael Seibel9:17

        Yes.

    11. DCDalton Caldwell9:17

        And someone will come up with that number. And so at the end of the day, um, all the numbers between when you start and when you end are a little bit made up. [laughs]

    12. MSMichael Seibel9:27

        We're fair. [laughs]

    13. DCDalton Caldwell9:27

        And so you should be worrying about your reckoning value, which is-

    14. MSMichael Seibel9:31

        Yes

    15. DCDalton Caldwell9:31

        ... how you articulate the value you're creating.

    16. MSMichael Seibel9:34

        Yes.

    17. DCDalton Caldwell9:34

        Which is a real thing, and not fake vanity stuff, you know? Like, that stuff's not real.

11. 9:40 – 10:43

    Don’t overreact to competitors: six-month spikes don’t justify fraud

    1. MSMichael Seibel9:40

       I agree. I, I don't wanna be on a high horse here. It is hard, and during a heavy buzz game, it's hard. My parting piece of advice is the advice I often give to founders, when it's like when they see something blowing up, it's so often I'll be in office hours and they'll be like, "Oh, well these guys, they're blowing up. Like, should we chase them? Like, da, da, da, da." I have not seen games won or lost in six months. And so it's like don't, don't, kind of like don't use some short-term excuse to justify cheating, bending the thing, like, cooking the books. Like, don't use that, because you're overreacting to something that is probably going to change, and that overreaction is extremely dangerous. Like [laughs] , like, it, it could be career-ending. So, like, don't overreact-

    2. DCDalton Caldwell10:38

       Yeah

    3. MSMichael Seibel10:38

       ... and, like, destroy people's trust in you over something that's probably not the end of the world.

12. 10:43 – 11:42

    Peer effects and proof from real winners: big outcomes are audited

    1. DCDalton Caldwell10:43

       I worry a lot about peer stuff. So I think a lot of why we used to talk about this in YC, and I guess why we're making this video, is that you can say, "Oh, these guys, you know, they're full of crap. They're just saying this, but every, you know, all the founders I know are exaggerating their numbers and, and lying to investors." And A, um, that sucks if that, if that's what you ... You know, sorry. Sorry for you. [laughs]

    2. MSMichael Seibel11:06

       Yeah.

    3. DCDalton Caldwell11:06

       Sorry to hear that if you feel like-

    4. MSMichael Seibel11:07

       Go get better friends

    5. DCDalton Caldwell11:08

       ... everyone's doing it. Yeah. Like, that-

    6. MSMichael Seibel11:09

       [laughs]

    7. DCDalton Caldwell11:09

       ... that sucks. You should get better friends. Um, and then two, again, I'm, I, I really mean this, I know the numbers of a lot of the most successful YC companies, and they really did go public. And Michael can attest to this, too. They're real. These are real companies. [laughs] Whatnot's numbers are real, and Brex's numbers are real, and Reddit's numbers are real. Like, like, this is audited. I can't stress enough that the truly successful big late-stage companies are doing something real.

13. 11:42 – 12:38

    Cheating doesn’t teach the skill: the carpentry test analogy and closing values

    1. MSMichael Seibel11:42

       It's like cheating on, like, a practical test where you're learning a skill, but then you actually have to go out there. Like, okay, we, we think you know how to build a house now. You cheated on all the tests for carpentry. We're now sending you out there to build a house. Oh, your house doesn't work? [laughs] It's like, well, like, what did cheating get you in the end? Like, um, you know, if, if there's gonna be a final accounting, cheating ain't gonna help. I think in this environment, for the founders who are kinda holding the line, you know, we wanna say we have your back. Like-

    2. DCDalton Caldwell12:15

       Yeah

    3. MSMichael Seibel12:15

       ... create long-term value.

    4. DCDalton Caldwell12:16

       You have a place in this industry. We respect you. Everyone respects you. And your integrity is the most valuable thing you can have, and you should never, you should never compromise on that. Like-

    5. MSMichael Seibel12:29

       Nope

    6. DCDalton Caldwell12:29

       ... that's it. That's the game.

    7. MSMichael Seibel12:30

       Nope. That's the game. Great chat, Dalton.

    8. DCDalton Caldwell12:33

       Cool. All right, thanks. [outro music]

Episode duration: 12:45