How The Best Companies Defend Against Mediocrity And Rot

Eric Ries 0:00 The best way to make money is to create more value than you capture, right? To build something that people want.

Garry Tan 0:05 Yeah.

Eric Ries 0:05 And yet we're all supposed to pretend these days that we think all kinds of making money is equally good, and there's so many ways of making money in our economy today where you can get rich without creating any value at all. And I just think, like, why don't we just stop pretending that we think that's good? [upbeat music]

Garry Tan 0:25 Today, we have a very special guest, Eric Ries, author of The Lean Startup, which was a New York Times bestseller and a crucial playbook for all founders. Eric has a new book coming out called Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great, and he's here to dive into some of those core themes with us. Welcome, Eric.

Eric Ries 0:45 Hey, man. Good to see you. Always fun

Eric Ries 0:47 to hang out.

Garry Tan 0:47 I mean, The Lean Startup taught our whole generation and the new generations how to build. Uh, now you're back with a new book called Incorruptible. What made you decide to start it?

Eric Ries 0:58 You know, all my books come from pain. You know, I never ask anybody to do something in a book that I haven't done myself. And man, we've been around this a long time. Like, how many companies have we seen built and created where the thing that made them special gets lost? How many founders lose control of their company, get kicked out? It doesn't become what they hoped it would be because they don't understand how to protect what they had created.

Garry Tan 1:19 Yeah.

Eric Ries 1:19 So I feel like Lean Startup, we created so many companies worth protecting, but we didn't give them the tools they needed to actually stay in control, to actually protect the trustworthiness of the thing that they made. So I'm sick of that.

Garry Tan 1:31 Going from zero to one, a lot of people spend a lot of time thinking about zero to one, and I think Lean Startup is one of the bibles for being able to figure that out.

Eric Ries 1:38 Thank you for saying that.

Garry Tan 1:39 There isn't really a playbook that is written until now around how do you make it last for 100 years.

Eric Ries 1:46 Absolutely. And unfortunately, the way we teach leadership and entrepreneurship today, we tell people that, like, "Don't worry. Just be successful. Just get to product market fit. Success will protect you. So once you get successful, then you'll be powerful. That will give you freedom." And what we don't tell you, and what I wish no one told me, the more successful your organization, the more valuable it is as a target. Like, that's what makes it worth taking over. That's what makes it worth stealing from you, is the fact that it is successful. So I think there's, like, a missing ingredient here that I-- It was a big blind spot for me. I didn't see this coming, but I've, you know, I've lived it now for quite a number of years. I've seen so many companies, you know, have it happen to them. In the book, I tell this story about, like, I was coaching a new founder. I, I call him the Professor in the book to protect his privacy.

Garry Tan 2:30 Mm.

Eric Ries 2:30 But, like, he's a genius. I mean, he's-

Garry Tan 2:31 Those are the best stories always

Eric Ries 2:32 ... really incred-- an incredible person and building this really transformative technology, you know, on the cutting edge of AI plus bioscience. So super cool and huge upside. Hella danger, right? Because you could easily use this technology for something really awful, bioweapons, pandemics, you know, that kind of stuff. So he, he's trying to recruit talent, and he's having to promise people that this is not gonna be used for those things, and that's part of why he has this massive talent advantage is people trust him. People believe that this technology's gonna be used in the right way. But then people are asking these tough questions like, "But aren't we a for-profit company?"

Garry Tan 3:04 Yeah.

Eric Ries 3:04 "What if an investors wanna do something evil?" And he'd be like, "Well, I'll tell him no." Why would you be working there then if you're telling your investors no, right? He, he didn't know how to answer those questions. But when he would meet with investors, all these VCs would just be like, "Oh, that's nice, honey. Oh, you're worried about that stuff. Like, don't, don't worry about it. You know, if you're serious about business, this is not the kind of thing you should be worried about." So he, like, he was feeling trapped. Anyway, I happened to be on my way, I was talking to him, to this event commemorating a founder who'd had huge success, someone we both know well, had made unbelievable amounts of money for his investors. And at their earliest opportunity, they had betrayed him and kicked him out of his own company. And we were doing this event to, like, celebrate him, and people had flown in from all

Eric Ries 3:43 over the country, employees, ex-employees. Like, there must've been 1,000 people there, including people he had laid off who were, like, coming back at their own expense to come to this event to be there for him. So I'm explaining to the founder, "Listen," to the Professor, "I can't talk right now 'cause I gotta go to this thing." I'm explaining about the founder, the people coming in. He's like, "Wow, respect. That's the kind of company I want to build someday." And I was like, "You are not listening to me. He doesn't work there anymore. This isn't a party. It's a wake, right?" And he's like, "What, did he die?" Like, "No, he's still alive. He's at the party." He said, "Did the company die?" "No, the company's still a publicly traded company." He's like, "What are you mourning?" And this is the thing. I remember being at that party and being like, what are we mourning? What exactly is it? And I realized, like, we all had this sense, like deep in our heart that, like, s- this is not how it's supposed to be.

Garry Tan 4:25 Yeah.

Eric Ries 4:25 Something's gone wrong here. We trusted this company. We trusted this guy. He was the mission guardian, the protector of this really important mission to us. And now that he's gone, I like the new CEO. He's a friend of mine, too.

Garry Tan 4:36 Yeah.

Eric Ries 4:36 But, like, if he makes a promise investors don't like, then he'll be replaced.

Garry Tan 4:40 Right.

Eric Ries 4:40 So what are his promises worth? So we're in this era now where we have temporary organizations being led by temporary managers on behalf of temporary investors. Average holding time of stocks is, like, dramatically down. Lifespan of companies is dramatically down. Average tenure of executives is dra- dramatically down. Then people say, "Then why is trust down? How come trust-- no one trusts anybody anymore?" Well, 'cause we've built an economy that this is how it runs. And I just think we have the final say. Founders either have to agree to or not this system. And so we actually are the ones propping it up. We're giving it the fresh meat it needs to survive because it's

Eric Ries 5:12 so value destroying.

Garry Tan 5:12 Basically, there's, um, Delaware bylaws. Is that right? Basically, you know, if you're a Delaware C corp, you have to relentlessly pursue profit. Otherwise, there's grounds to remove you. That specific principle is exactly how, uh, you know, the end of that founder's reign of that particular company happened.

Eric Ries 5:34 I still remember the Professor being like-- 'cause I was like, "You're not listening to me," right? "You're not getting it." And he's like, "Wait, are you saying that's gonna be me someday?" I'm like, "You're on a one-way ticket to this exact outcome because you've adopted the so-called best practices of corporate governance, of how companies are supposed to be built and run and structured." One of them, of course, is what's called shareholder primacy, right? This idea that if you're a Delaware C corp, the thing you make is not a beautiful living thing that creates products and, you know, delights customers and, and is like a good-- It's, no, it's just a financial instrument- ... for investment returns. That's what, that's all it is. That's actually a very new idea. And I think one of the things that's a big misconception for founders is they assume that this is some kind of natural law or, like, a pillar of capitalism going back to Adam Smith or whatever. No, Adam Smith would've been like, "What the F are you guys talking about?" This idea dates to the 1980s. What the professor was saying to me was just like, "Wait, so is it possible to build an incorruptible company?" That's kind of how the book got its title. And I was like, "Well, it's a good news, bad news kind of thing." Everyone says this is impossible, that, like, this kind of corruption of the mission is natural. It's just as you get bigger, as you scale, as you whatever. But that's not true. There are actually choices we can make at f- as founders, and especially choices we make early, that can change the trajectory of the company so that, as you say, its longevity could be measured in decades and centuries, not quarters. But the bad news was, dude, you've already taken wrong steps in this direction. You're already a... You had an incorporated Delaware C corp. I'm like, "If I pull your charter right now, it says you have to maximize shareholder value." He's like, "No, it doesn't. My guy would never have done that to me. I have a great lawyer." I was like, "Why don't you call him and call me back after this party?"

Garry Tan 7:11 Yeah.

Eric Ries 7:11 "I'm gonna go to this thing. You call me back tomorrow and you tell me what he says." And he... And I remember talking to him the next day. He was like... 'Cause he felt so betrayed. He's like, "My lawyer said he's doing me a favor by giving me the best practice document."

Garry Tan 7:23 Yeah.

Eric Ries 7:23 "And that I have to sell... If, if the most evil company in the world wants to buy this company, I have to sell it to them?"

Garry Tan 7:28 Yeah.

Eric Ries 7:28 "If my employees knew that, they'd all quit." I was like, "Well, we should probably fix it."

Garry Tan 7:31 I mean, this is the way we've always done it, is sort of the-

Eric Ries 7:33 We've always done it

Garry Tan 7:34 ... what, what people are gonna tell you.

Eric Ries 7:36 I say in the book that one of the things every concept, every technique in this book has in common is that someone will try to talk you out of it. And so there's actually a whole section on, like, how to talk to your lawyer about it, how to talk to your investor about it. That's just for based on my having worked with so many companies. I, I kept a running log of all the BS objections, all the weird, like, just asking questions, like passive-aggressive comments that we got from anybody in the ecosystem. And I was like, "Look, here they are. Here's exactly how to answer them, and here's the evidence." This is the part that really blew my mind. I've been working on this for a long time with the Long-Term Stock Exchange. You know, you know all the stuff I've been doing, trying to, like, put my money where my mouth is. You know, like, "Look, we're gonna change this ecosystem so we all make more money. We gotta do it." The thing I didn't really understand is how much evidence we have that these so-called best practices suck. They're, like, literally value

Eric Ries 8:20 destroying.

Garry Tan 8:20 I mean, let's go into one-

Eric Ries 8:21 Yeah

Garry Tan 8:21 ... like, the most astonishing one. You know, our friend Jeff Lawson at Twilio built that company from nothing to $4 billion in, you know, actual revenue. Like, stock up 390% since IPO. I mean, by all accounts, you know, smash rip-roaring success, and then his super voting shares, uh, expired after 199 days and he's out. And so less than half a percent of shareholders did that. You know, how did that happen? Like, what, what's going on?

Eric Ries 8:54 It's, it's like, it's honestly unbelievable to me. Well, here, let me make the case for why he needed to be fired, and then you'll see if this makes sense to you. So what happened was, so he took the company public. He agreed as part of the IPO prep process, as a lot of founders do, that he would have dual class control, founder control. He'd be the mission guardian. The protections would sunset after seven years. Man, you're taking a company public, seven years sounds like a long time.

Garry Tan 9:15 Yeah.

Eric Ries 9:16 But man, in the public market, seven years is just... That's barely a beginning. It's like a handful of quarters. Anyway, that was the deal. He made the deal. His advisors and everybody told him, "Don't worry about it. You can always extend it." You know, you can... It's always too early until it's too late. It's kind of the, [chuckles] the idea from the book.

Garry Tan 9:29 Mm-hmm.

Eric Ries 9:29 Like, okay, whatever. So seven years come and go. Now, it happens to be those seven years include the pandemic years, as you well remember, the run-up in telecom and tech stocks we had. It was like Twilio stock, like s- was just up an insane amount. That bubble burst and the stock came way down. So at the time he was fired, the stock was down, like, 80% from the peak. And it's like, oh, well, case closed. But if you measure from the IPO or even from the pandemic peak, revenue was up. It's like, did, did the business go down? Was revenue down? Was there some kind of problem? No. And yet that was enough for them to fire him. And the... What really pissed me off about it the most is this 199 days. So let's see. So he had run this company for seven years as a public company. Things expire. He didn't even last one year past the expiration of these protections. And even if you think he made mistakes, and even if you think there's something ba- Like, had he really earned so little grace to run this company? Like, had, had... Does the fact that he'd made all this money, billions for his investors, didn't... Does that count

Eric Ries 10:27 for nothing? Like, what are we doing? And what's strange to me, I, in the book I give... Obviously, it's not just about Twilio. Twilio is a fine company. They're, they're doing great now. It's not just them. Company after company after company. I give case studies going back 200 years where we have this, like, urge when a founder makes a, quote unquote, "mistake," they have to be fired. We have to have accountability for founders. True, we do have accountability. It's important. But oftentimes that's the end of the company.

Garry Tan 10:50 Right.

Eric Ries 10:50 Like when Edwin Land was fired from Polaroid. Now people are like, "Polaroid, wasn't that instant camera company?" No, man. Polaroid used to be an R&D powerhouse. They had, like, 1,500 research scientists on staff. Steve Jobs, like, loved that company, admired them so much. When he, when Edwin Land was fired, he called it the dumbest thing he'd ever heard.

Garry Tan 11:05 Yeah.

Eric Ries 11:05 And, like, they never invented another thing ever again after they fired the founder. So I just think even if you agree that the founders made a mistake, it... We jump to the conclusion that firing them, bringing in some suit, like doing the kind of standard best practice thing is somehow gonna lead to a positive outcome. And so often it doesn't because unfortunately we're teaching people that the, the mission can only be protected by the founder. And then you get rid of the founder, everyone's like, "Well, I guess we have no mission anymore. We just become extractive. We just try to make money." What I really think is that we shouldn't be just building investor-controlled companies or founder-controlled companies. There's a third way.

Garry Tan 11:41 Interesting. Okay.

Eric Ries 11:41 We could be building mission-controlled companies where the mission itself has sovereignty and these companies can then last a lot longer.

Garry Tan 11:47 What does that really look like? I mean, Patagonia sort of famously was one of the first to really do this. But, you know, for someone who's watching, they're like, "Well, I know a Delaware C corp, and then I know that there are super voting shares and I shouldn't let those expire."

Eric Ries 11:59 Yeah. Yeah. Yeah. Exactly.

Garry Tan 12:00 Like, that might save people from the

Garry Tan 12:01 Jeff Lawson situation.

Eric Ries 12:01 I mean, that would be better than at least... [chuckles] That'd be better than the sunset-

Garry Tan 12:04 Yeah

Eric Ries 12:04 ... for sure. But no, there's a lot more to this. And maybe let me tell you a story I'll tell you the legend of Sol Price. Okay, let's get, let's move away from tech for a second. I think it's helpful to understand the precedents that got us into the situation we're in. Sol is widely considered to be the father of modern retail. If you wanna know why he's, like, people say that about him, to give a sense of how influential he was, when a guy named Sam Walton was thinking about starting a retailer in Arkansas, he called it Walmart as an intentional tribute to the company Sol created, which was called FedMart. FedMart's the original modern retail company. Started in my hometown of San Diego in the 1950s. Sol was a lawyer before he became an entrepreneur. And when he was a lawyer, he had this idea, he had been trained, that you have a fiduciary duty to your client. That means you put your client's interest before yours. So when he became a retailer, he asked himself the simple question, "Who's my client?" And so many companies get this wrong. He was just like, "This is very simple. I am a fiduciary to my customer. Customer is the client." So he had this clear fiduciary hierarchy. Customers first, employees second, shareholders third. The great Peter Drucker said he got it wrong. It should've been employees first, customers second, shareholders last. The famous Johnson & Johnson Our Credo is doctors, patients, and nurses first, employees second, communities third, shareholders last. You notice the pattern?

Garry Tan 13:21 Hmm.

Eric Ries 13:21 Not because shareholders aren't important, but because everyone who's ever studied this and looked at it seriously understands that shareholder value is like the exhaust that comes out of the engine. When you take the exhaust pipe and voot, put it in the intake and make that your explicit goal, now you don't stand for anything anymore. Now you, now product quality suffers, now whatever, you know, whatever thing you think is important, the thing that's gonna make you money, design, quality, health, health of your customers, whatever, everything becomes expendable on the altar of shareholder value. And, and no company can really endure with that structure.

Garry Tan 13:55 Or they do, and it looks like Philip Morris.

Eric Ries 13:57 Or you wind up being the kind of company that your grandkids are embarrassed to be related to you 'cause that's what you did.

Garry Tan 14:02 Yeah.

Eric Ries 14:02 And, um, we know a lot of current tech companies are on that trajectory right now, and it's sad. Like, I don't wanna name names, but, like, think about companies where having that on your resume used to be, like, the gold star, and now people are like, "Why did you stay there?"

Garry Tan 14:14 Yeah. I think there was a stat in your book that really jumped out at me. It's, like, $8 billion in profit, but was it 300 billion?

Eric Ries 14:21 Yeah.

Garry Tan 14:21 In ... Or 600 billion.

Eric Ries 14:23 600 billion, yeah. $300 billion in direct healthcare costs. Yeah, so when people say that Philip Morris is profitable, in order to call it profitable, you have to take this incredibly narrow view of profit. They have something like $8 billion a year in net income. But there's been all these studies. They create $600 billion a year in costs just in the US that have to be borne by others. I think it's 300 billion in direct healthcare costs and $300 billion in lost productivity, and obviously the mortality of people dying and therefore not being able to work. It's like, it's grim. And there's a zillion different studies. I think someone calculated recently that the tobacco industry makes $6,000 from every customer that dies. Do you want that to be your future? Like-

Garry Tan 14:57 Right

Eric Ries 14:57 ... like, if you don't get the governance of your startup right, no other decision you make in the long term is gonna matter because you're not gonna be there to be the one making it. So if someone's like, "I have an idea. Let's turn this company into Philip Morris," what are you gonna do? Back to Sol Price. FedMart embodied this principle of fiduciary to the customer. You think about the way, like, Steve Jobs would obsess about design. Steve Jobs used to get into fights with people about the, the visual design layout of the cables inside computers, where he didn't even want customers to be allowed to open the case. And his engineers would be like, "Why do you care? No one's gonna see it." But he was like, "We're gonna see it." Right? Like, "I, this is my principle. This is not shareholder value. If we stand for this principle, good stuff's gonna happen to

Eric Ries 15:38 us."

Garry Tan 15:38 Yeah.

Eric Ries 15:38 Now-

Garry Tan 15:38 How you do anything is how you do everything.

Eric Ries 15:40 Now, Steve Jobs got fired because of this exact thing. So spoiler alert, so will Sol in a second. So he built this company. Fiduciary to the customer meant if you try to undercut him on price, he would literally put up signs inside his own store being like, "Don't buy this product from me. You can get it cheaper at a competitor," and he'd have, like, instructions on where to go-

Garry Tan 15:58 Oh, wow

Eric Ries 15:58 ... to get it, right?

Garry Tan 15:59 Yeah.

Eric Ries 15:59 Like, he just, he was like, "I don't care. My job is to get you the lowest price."

Garry Tan 16:02 Yeah.

Eric Ries 16:02 "I don't care if it's from me."

Garry Tan 16:03 And people will come to you every single time because they'll know to go to you.

Eric Ries 16:05 'Cause they tr- they're like, "Hey, no, if it's ever so cheap or something." Can you imagine a modern retailer doing that?

Garry Tan 16:08 Yeah.

Eric Ries 16:09 Like, you have all these DTC brands where I'm just like, I gotta buy it on your price, then I gotta go check over here. Check. It's like, no, why don't you, why don't you be my ally, and then I'll trust you. So he understood trust is an asset. So customers would drive, like, miles out of their way to shop at FedMart. It was a huge success, huge private company success. He took the company public. Everyone made a lot of money from this IPO. And as a public company, you know what happened. Investors kept being on him. He felt this, like, gravitational pull. He wanted low prices and high wages. Investors seemed to want high prices and low wages. So he just was always battling investors, battling investors. Now, Sol was a really stubborn SOB. In order to try to get out of this situation, he brought in a new controlling shareholder to buy out public market investors to give him this protection. And he got a new board, and the whole thing is he's gonna take the company private. That was the whole plan. And he thought the new board, 'cause they really understood retail, they understood him. They, like, looked him in the eye and said, "I see you, man. You're the..." They'll surely back him up. But no, the new board didn't solve anything because they were still under this gravitational, hypnotic power of these best practices. So they wanted higher prices and lower wages and faster growth, and they didn't care about the collateral damage to employees, customers, or anything else. They just wanted to see the number go up. So one day in 1975, Sol comes into work, and these guys have changed the locks on his door.

Garry Tan 17:26 Oh my God.

Eric Ries 17:26 He can't even get into his office. He doesn't work there anymore.

Garry Tan 17:29 Wow.

Eric Ries 17:29 So it's just like, just like Jeff Lawson, just like so many people lose control. So what happened? This is like a, a natural A/B test experiment in business history. You don't get this that often. In branch A, FedMart's investors got what they wanted. They got Sol out of the way. They converted FedMart to tra- traditional business practices. It was bankrupt within seven years.

Garry Tan 17:47 Oh, wow.

Eric Ries 17:48 They destroyed in seven years what he took 20 years to build. Sol was a classic entrepreneur, like so many people we know. He took exactly two weeks off after this happened to him to lick his wounds.

Garry Tan 17:57 Yeah.

Eric Ries 17:58 And then he was back at work. He leased the office upstairs from FedMart-

Garry Tan 18:02 Nice

Eric Ries 18:02 ... for his new company. It was just like, "F you, I'm doing it again." He created a new company called Price Club, and when I was a kid- Price Club was like a major retailer. My family shopped there all the time. But most people today don't know Price Club because of what happened next. One of the FedMart employees, a guy who had worked his way up from stock boy to executive, he quit FedMart in protest when Sol was fired, and he created his own company because he understood, as Sol understood, the engine. Later, the two companies merged to form a company they called PriceCostco, but we just call it

Eric Ries 18:33 Costco.

Garry Tan 18:33 Makes sense.

Eric Ries 18:34 This is the deep cut backstory of how Costco came to be. Costco today still embodies that Sol Price fiduciary to the customer idea, but it is protected by this thing I call a governance fortress-

Garry Tan 18:45 Yeah

Eric Ries 18:45 ... that protects it from outside attacks so that its board understands its job very differently than most companies' boards. Instead of saying, "My job is just to maximize returns for shareholders," the board understands that our job is to protect the mission. And so when we talk about being mission-controlled, this is what we're aiming for. Now, the book is loaded with techniques. Like, I promise it's not just a manifesto. There's a lot of detail to it. You're not gonna learn it from some guy on a podcast, obviously. Like, we'll, we'll get into some of it. But, like, overall, if you zoom way out, the, the pattern is this: we need an ethos like Sol Price had, some kind of higher principle that we're committed to, that we understand we're going to make money by maximizing human flourishing by doing this thing. And then we need the structural integrity, the ability to protect that precious thing that we've created from any kind of temptation or outside, outside pressure. So that's kind of the, the short formula. If you don't take much away from this, ethos plus integrity equals incorruptible.

Garry Tan 19:40 How do you find the right board members for something like that? I mean, there's sort of like the docs, which, you know, founders when you're starting out, you do have control over that. All the, the best docs in the world without the right people, like, you still can't keep it going, so.

Eric Ries 19:53 Yeah. The first step, and the hardest step by far, is to be willing to say that you are not in line with these best practices. They are what's called a normative consensus. Everyone agrees that everyone agrees-

Garry Tan 20:05 Yeah

Eric Ries 20:06 ... that this is the right way.

Garry Tan 20:06 You gotta agree that you're gonna be punk rock.

Eric Ries 20:08 Yeah. So you gotta-

Garry Tan 20:09 You're not gonna be-

Eric Ries 20:09 So, so if you're willing-

Garry Tan 20:10 ... Main Street

Eric Ries 20:10 ... Yeah, you gotta just be like, "This is not for me." Because, like, I tell this story in the book about Costco versus Kroger, the grocery store. Costco came under attack in the early 2000s for having these non-standard governance practices. In fact, Costco routinely gets the worst possible governance rating [chuckles] from governance rating people. And Kroger decided to go all in on best practices. So we have this, like, natural experiment where, like, Costco has been, like, incredibly successful since this moment being, having bad governance, and Kroger has not had the same level of success. In fact, one analyst called Kroger's performance like Costco in reverse. So I always tell people, "The next time someone says to you, 'I want you to adopt some best practice,' you just, in your mind, you don't have to say anything out loud, but just best practice equals Kroger practice."

Garry Tan 20:50 [laughs]

Eric Ries 20:50 This is someone who wants to be more like Kroger and less like Costco.

Garry Tan 20:53 Yeah.

Eric Ries 20:53 Why would you want that? Again, no, no shade on Kroger-

Garry Tan 20:55 Yeah

Eric Ries 20:55 ... but you could be one of the greatest performing stocks of all time, or you could be this thing. We have to master these techniques, and the most important thing is to create selection bias. So you want investors and board members who are choosing to be with you because they believe in this mission, not just because they think they're gonna make a quick buck from it. Even if they're investors who are-- they are gonna profit from you, you wanna make sure their interests are truly aligned with you. I just was talking to a founder today that ran into this common problem where you put some awesome person on your board who you just think this person walks on water, and you forget that you take a venture investment from a venture firm. You're not taking investment from that individual person. You're taking investment from a company. Then that person leaves, and now you're stuck with some new person. Like, and you've given all these veto rights, all these control rights to someone. You don't even know who they are. You don't know if they're aligned with you. You, you've never read the LPA of these funds. Like, you don't really know what their incentives are. So I think founders are generally much too naive and much too credulous about who's gonna be a good long-term partner, and they're so easily bamboozled by people who are like, "I'm founder-friendly. We don't need to worry about this stuff. We're aligned. It's gonna be good. But I also do need to be the ability to, to fire you at will, you know, whenever I want." It's like, I thought you said you were, you were a believer in my vision. It's like, "Well, as long as I, as long as I like what's going on." That's not actually what belief means.

Garry Tan 22:11 YC Startup School is back. We're hand selecting the most promising builders in the world and flying them out to San Francisco for July 25th and 26th to discuss the cutting edge of tech and startups. Apply now for your spot.

Garry Tan 22:26 What about on the doc side? Let's say you get into YC. You've got a SAFE. You know, maybe you haven't converted equity yet.

Eric Ries 22:32 Yeah.

Garry Tan 22:33 You know, the normal path, which is, like, pure founder shares, is like, "All right. Let me see if I can get super voting," or, "Let's write it in-

Eric Ries 22:39 Yeah. Yeah, for sure

Garry Tan 22:39 ... from day one." I guess the Delaware C corp thing is actually a pretty big thing. A lot of AI companies have chosen to be PBCs or-

Eric Ries 22:46 Yeah

Garry Tan 22:46 ... Public Benefit Corporations on day one.

Eric Ries 22:49 Yeah.

Garry Tan 22:49 What's sort of best practice for people-

Eric Ries 22:51 Yeah

Garry Tan 22:51 ... starting out now?

Eric Ries 22:52 I think, I think PBC is an absolute must-do and kind of an, like an utter no-brainer. Of all the things in the book, it's by far the easiest thing. If you wanna pick one thing to do-

Garry Tan 23:00 Yeah

Eric Ries 23:00 ... it's the easiest thing to do. It's a two-page legal filing in Delaware. Your lawyers can have it done for you tomorrow. And especially if you only have SAFEs, if you don't have any, like, equity investors-

Garry Tan 23:09 You just turn into a PBC tomorrow

Eric Ries 23:10 ... and you don't... You just, just, no, you don't even need anyone to agree. You just, you just do it. What's interesting to me about the PBC, and most people get confused 'cause they think it's, like, the same as the little B in a circle you see at the farmers market, which is something totally different.

Garry Tan 23:20 [laughs]

Eric Ries 23:21 That's covered in the book, too, but that's not what we're talking about right now.

Garry Tan 23:23 Yeah.

Eric Ries 23:23 All it does is restore what's called purposeful incorporation, which for the vast majority of the centuries that we have had joint stock corporations on this planet, everybody understood and thought it was totally obvious that companies should be incorporated to do a specific

Eric Ries 23:40 thing.

Garry Tan 23:40 So literally a mission or a public benefit.

Eric Ries 23:42 It should, it, like, it have, should have a public benefit. If you look at the 19th century, like, companies that were created and you read their charter, none of them say maximize shareholder value. That would've been considered a crime-

Garry Tan 23:51 Interesting

Eric Ries 23:52 ... to have a charter that-

Garry Tan 23:52 I did not know that.

Eric Ries 23:52 Yeah.

Garry Tan 23:53 Yeah.

Eric Ries 23:53 It would say, like, "We've created this thing to create a railroad, to build a canal from place to place," to, like, to do something specific. And the board's responsibility, the fiduciary duty, their first highest priority was to defend and protect that purpose. When we shifted to shareholder primacy, we, like, forgot this really important lesson. So-

Garry Tan 24:11 So who did this? Who did this to us?

Eric Ries 24:13 Who did this to us?

Garry Tan 24:14 Yeah.

Eric Ries 24:14 It's actually super wild. You, you- We'll do a history lesson? You okay?

Garry Tan 24:17 I would love to.

Eric Ries 24:17 Oh, okay.

Garry Tan 24:17 Yeah.

Eric Ries 24:18 This is incredible to me. So, like, there's this story in the book about this 19th century situation that, like, if you know Elon's takeover of Twitter or whatever, you're like, "I know how this is gonna go." One of the richest men in the world tries to buy, take over this c- this company that was the Erie Canal Company that built and operated this canal, and he has unlimited money. So he's just like, "No matter what it takes, I'm gonna buy this company and convert it to what I want it to do." And the board of directors, unlike modern boards, who are told, uh, when that happens, you have to become an auctioneer and sell. No. They were just like, "We will fight you by whatever means necessary."

Garry Tan 24:51 Yeah.

Eric Ries 24:52 And both sides went crazy. It was like a crazy fight, and like there were no corporate governance or even ethical standards like we have now. Like, they literally, there's stories where, like, they were both bribing the same state legislatures, legislators, and people would, like, take bribes from both sides and then vote with one of them. You know, like, it was an epic fight. What was interesting, if you read the commentary about it, people were scandalized because they did a bunch of bad, illegal stuff, but nobody was like, "It's wrong that the board tried to fight this." They were all like, "Of course they tried to fight, naturally. That makes perfect sense." And like I said, if he lost in the end, they fought him off using what's called the poison pill tactic, which now today we, i- is, you could just ask your lawyer to put this in your docs, and you could just have it if you want. If you don't have it, why not? That's another tactic. So many of these things, you could just, you just have it. You don't have to, like, wait for someone to give you permission. You just do it.

Garry Tan 25:38 Yeah.

Eric Ries 25:38 So anyway, if he had prevailed, and he had actually managed to convert the legal purpose of this company from make a canal to maximize shareholder value, that would have been considered a crime, and the courts would have voided the company's charter, would have given them the corporate death penalty because that would have been considered beyond the scope of what was authorized to be in the public benefit. So this was the rule all up in the US, all up through the, the end of the 19th century. The problem was, in order to get one of these charters, you had to get your state legislature to give you one.

Garry Tan 26:09 Hmm.

Eric Ries 26:09 Imagine if, like, you had to go lobby your local state senate for permission to form a company. It was, like, very cumbersome. That part of the system was bad. So there was a big fight over the whole 19th century to create what was called general incorporation, which was the simple idea that anybody who wanted to should be able to form a company for any reason, which we are very grateful that it had to be fought. It was literally a battle, statehouse by statehouse. Everywhere over the course of the 19th century, every state eventually came into compliance. The key date for our purposes is Delaware adopted this in 1899. So, like, not 1299.

Garry Tan 26:40 Right.

Eric Ries 26:40 This is relatively recent history.

Garry Tan 26:42 Yeah.

Eric Ries 26:42 1899. But even in 1899, if you read the Delaware rule, it said that you could have a company for any purpose, but it still assumed you would have a purpose, a mission. That was considered completely obvious. And yet, over the course of the 20th century, companies more and more and more were being advised by lawyers to, instead of writing in your specific purpose, just put a general purpose in there. So most founders have never read their corporate charter, have no idea what it says.

Garry Tan 27:04 Yeah.

Eric Ries 27:04 Shame on you.

Garry Tan 27:05 [laughs]

Eric Ries 27:05 Go read it. You're gonna read it, and you're gonna say, "Eric,

Eric Ries 27:08 what are you talking about? It says here the Acme AI Company is incorporated to pursue," and there's like a blank space, like a Mad Lib, and someone has scrawled in, "Any legal act or activity." That means anything.

Garry Tan 27:20 Yeah.

Eric Ries 27:20 So it's all good. Wrong. So wrong. We'll get into why. In the '60s and '70s, a bunch of academics and judges and, like, legal scholars, like a very small group, decided that any lawful act or activity actually means shareholder primacy. Unlike general incorporation that they were replacing, they never put this to any kind of vote. In the history of the world, shareholder primacy has never been subject to any referendum, any legislative action, nothing. So it's weird. If you learned in school how a bill becomes a law, there's no law-

Garry Tan 27:50 Yeah. Interesting

Eric Ries 27:51 ... for shareholder primacy. Yet, if you ask any director on any board in America, "What is your first duty?" They'll say, "To maximize returns for shareholders." So how can it be the law and not a law? Well, the courts just decided. There were guys like Milton Friedman, and they ar- they would write these op-eds where they write very famously things like, "The social purpose of a corporation is to increase its profits." Notice they never said-- They weren't like the B Corp people, where they're like, "Well, we have ex- regular corporations, and we're gonna have E Corps, extractive companies, and there's, this is the be-" No. They said the s- the purpose of a company is. The trick was they convinced everybody that this is how it's always been, and we've all learned that. We were taught-

Garry Tan 28:29 Interesting

Eric Ries 28:29 ... well, this is just how it is. Well, it turns out we don't even need to get the law changed. We just have to start saying, "No."

Garry Tan 28:36 Yeah.

Eric Ries 28:36 "We don't actually think this makes sense, and we don't wanna be part of it." And if you read the legal papers, I'll give you one last, like, funny bit. This blew my mind reading these papers. There's all these legal scholars who've had to write papers about why is this the law if it's not the law, and they write this stuff that's, like, hilarious. They'll be like, "Well, shareholder primacy is a legal obligation, not a legal duty." You're like, "Oh."

Garry Tan 28:57 Subtle.

Eric Ries 28:57 "That really clears it up for me."

Garry Tan 28:59 Laypeople. Yeah.

Eric Ries 28:59 Like, what are you talking about? What? And so they're like, "Look, look, look, at the end of the day, even though this is not technically a law, it is the law, and it's okay for the courts to enforce it like a law." Remember, you'll be fired if you violate this law.

Garry Tan 29:11 Right.

Eric Ries 29:11 It's very, it's, it is the law. It's okay because-

Garry Tan 29:15 And if you sued about it, it would be ruled against you.

Eric Ries 29:16 Yeah, you will, you will lose that lawsuit.

Garry Tan 29:17 Yeah.

Eric Ries 29:18 The, the board of Twitter was forced to sue Elon to complete that transaction, even though they weren't that happy about it because they felt like, "We have this fiduciary duty. We have to do it." It's so different-

Garry Tan 29:28 For the shareholders

Eric Ries 29:29 ... for the shareholders.

Garry Tan 29:29 Yeah.

Eric Ries 29:30 And if they hadn't done it, they would have been sued-

Garry Tan 29:31 Interesting

Eric Ries 29:31 ... and the lawsuit would definitely have worked. So, like, they weren't wrong about their requirement, but why would we build companies like this? Who wants to be, like, taken over at the barrel of a gun? So they, they basically conclude, if you read these papers, they say, "Look, at this point, shareholder primacy is what's called a normative consensus," meaning everyone agrees that everyone agrees that this is how companies should act. So I work with a lot of founders. I love to ask them, "Hey, are you part of this normative consensus? Does this seem right to you?" Every founder I've ever met is like, "Oh, I'm not. Certainly not." I'm like, "Great. Have you ever told even one other human being that you're not part of this normative consensus until just now when you told me?" Everybody I talk to is like, "Oh, no, you can't say stuff like that out loud."

Garry Tan 30:14 [laughs]

Eric Ries 30:15 You can. You can say it out loud.

Garry Tan 30:17 You can just say it.

Eric Ries 30:18 In fact, if it's a controversy, it can't be a consensus, now, can it? So luckily, we have the PBC tools. We have a bunch of tools in our arsenal where we can declare this formally, legally for our company and defend ourselves.

Garry Tan 30:27 So

Garry Tan 30:28 we don't have to have, uh, you know, social movement per se, but we could.

Eric Ries 30:31 But we could.

Garry Tan 30:32 Because it'd be fun.

Eric Ries 30:32 But we could, and also, like- In the book, I call this the builder's intuition, that the best way to make money is to create more value than you capture, right? To build something that people want.

Garry Tan 30:42 Yeah.

Eric Ries 30:43 You know, Tim O'Reilly, uh, PG, all the legends of our industry all agree on this. They talk about this all the time. And yet we're all supposed to pretend these days that we think all kinds of making money is equally good. And there's so many ways of making money in our economy today that-- where you can get rich without creating any value at all.

Garry Tan 31:00 Yeah.

Eric Ries 31:01 And I just think, like, why don't we just stop pretending that we think that's good? No one-- none of us think it's good. We think it's all BS. So we should start, I think, as builders, reclaim that sense of identity to say, "You know what? Yeah, we're not part of this normative consensus. We don't wanna do this anymore. We would like to have a different solution." Now, I think if we just say, "Well, because investor control is not working, we should have founder control," founder control is not that great either because I know a lot of people who are, like, basically trapped. They can never quit their company because they're, like, the one... They're, like, literally the human shield blocking every-- Th- that's too much. And of course, people die. Then what? So if you wanna build a truly long-term solution, we gotta look for structural solutions that do not depend on the goodwill of any individual one person, but we start to think about almost like building a government.

Garry Tan 31:47 Yeah.

Eric Ries 31:47 Like checks and balances about how do we balance faction against faction, and luckily, like, there are good precedents for this.

Garry Tan 31:52 Interesting. So, uh, if you become a PBC and you have a specific mission, does that... You know, you, you're no longer subject to being removed, um, if you work against or make choices that are not maximizing f- shareholder value.

Eric Ries 32:06 Correct.

Garry Tan 32:06 Does that also mean that you can be removed if you're not working towards the mission?

Eric Ries 32:10 Well, unfortunately not.

Garry Tan 32:11 Interesting. Okay.

Eric Ries 32:12 It does not-- It doesn't work both ways. The problem is directors, especially under Delaware law, have extremely wide latitude to basically do whatever they want, as long as they can justify it as being, you know, in line with what it says in the charter. It's helpful, in this case, if your directors are under pressure from investors to fire you because you're not being shareholder maximizing, the PBC can be a shield that they can use to protect themselves from being sued.

Garry Tan 32:36 It's like, "Look, we're working towards this mission."

Eric Ries 32:38 Right, we're doing this thing. Unfortunately, if they decide to fire you anyway, it still doesn't help you.

Garry Tan 32:43 Yeah.

Eric Ries 32:43 You can't sue them to be like, "What the F?"

Garry Tan 32:44 Yeah.

Eric Ries 32:45 They still get to make their own judgment. So a huge part of the problem is we are being taught today that the best practice is to have a combination of investor directors and independent directors.

Garry Tan 32:53 Yeah.

Eric Ries 32:54 And today, good governance is the more independent directors the better.

Garry Tan 32:56 Yeah. Why is that?

Eric Ries 32:57 Well, the theory, it's a reasonable theory, that because independent directors are independent... What does it mean to be independent, for those that don't know? It means they literally have no stake in the outcome. They don't have-- Like, they're not aligned to you at all. They don't have equity in the company. The idea is they're gonna be-

Garry Tan 33:10 So random people. [chuckles]

Eric Ries 33:12 They're basically like you want them to be-

Garry Tan 33:13 Eminent.

Eric Ries 33:13 Yeah, supposed to be-

Garry Tan 33:13 Random eminent people

Eric Ries 33:15 ... eminent people. The problem is they have no financial incentive for the mission to endure. But they do have a financial incentive to be seen as pro-investor because how do you get independent-

Garry Tan 33:28 Yeah

Eric Ries 33:28 ... director jobs? You get recommended by investors. Okay. Founders, you gotta do a better job at this. Most founders never recommend anybody for a director job. Investors do a great job of it. So if you have a board, like classic Silicon Valley board would be two VCs, two founders, and an independent. That's supposed to be fair 'cause it's two and two balance. That is basically just investors control your company, all right?

Garry Tan 33:47 Right.

Eric Ries 33:47 Don't kid yourself. The research, by the way, this is one of many. There's a whole chart in chapter nine of this book that just is called Best Practices Destroy Shareholder Value. [chuckles] This is one of these best practices that, like, we have the evidence. Like, independent directors do not accomplish the goal that they're supposed to have because they have this actual conflict of interest despite their nominal independence. So the solution is just like investor directors are, are doubly accountable. Like, if you're, you put a GP of a venture fund on your board, they have a double duty. They have a duty to the company, but also a duty to their LPs. That doesn't bother anybody. We, we understand investors are smart enough to be able to handle that. Not a big deal. But independent directors don't have that 'cause they're not really accountable to anybody. They're just accountable to themselves. But there is a solution. We can actually create a second entity, like a two-branch government, where we have outside trustees who have the responsibility of appointing directors, sometimes just the independent directors, sometimes all the directors. So that structure has been proven to be more stable than the so-called best practice of a single entity just run as a Delaware

Eric Ries 34:47 C corp. Can I tell you a story?

Garry Tan 34:49 Yeah.

Eric Ries 34:49 This is one of my favorite stories because here I'm gonna tell you a s- I'm gonna tell you the premise of the story. You're not gonna believe me, and then I'll try to prove it to you that it's true. Premise of the story is this story about a time when the nonprofit directors of a company created more than $500 billion of shareholder value. In the 1920s, there's a woman named Marie Krogh. She was living in Denmark, and she gets a fatal diagnosis of an illness that has no known cure at that time called diabetes. Today, Marie is mostly famous because of her husband, August. He just won the Nobel Prize, so he's a pretty smart guy. He asks her if she would, despite her fatal illness, would she accompany him on a lecture tour of North America? She says sure. So they go to North America. They're meeting scientists, you know, and doing these lectures and whatever. At wa- dinner one night, one of the scientists tells them that in Canada, someone has figured out how to isolate insulin for the first time.

Garry Tan 35:35 Oh.

Eric Ries 35:35 Potential cure. So they're excited. And so it was obvious to them that they should go see. You know, they could have easily just been like, "Can you send us some doses? We don't care about..." No, they wanted to go see it for themselves. So they meet the Canadians. They see this possibility, and they say, "Look, we would like to commercialize this technology in Denmark. Can we license it for you?" And they and the Canadians had this worry decades ahead of Martin Shkreli, okay?

Garry Tan 35:55 [chuckles]

Eric Ries 35:55 They were like, "Wait a minute. If we're have a for-profit company that is selling a life-saving medicine..." Like, let's say you sell a medicine to me that I need to live. I want you to charge me a fair price, right? I want you to stay in business. I want you to have every incentive to keep producing the medicine. That's great. But I would live in fear that one day you would wake up like Martin Shkreli did and be like, "Wait a second. If Eric owes his life to this medicine, can't I charge him anything I want? He's basically my slave." So they were wor- They, they foresaw this in the 1920s.

Garry Tan 36:23 That's fascinating.

Eric Ries 36:23 So when they went home to Denmark, they made their agreement with the Canadians. What they would do is they would build this thing, they called it the Nordisk Insulin Laboratorium, as a for-profit subsidiary of a non-profit foundation.

Garry Tan 36:34 Wow.

Eric Ries 36:34 So they built two entities instead of one, and the Nonprofit had trustees and the for-profit had directors. That structure really where I th- it was a, it's a great MVP story by the way.

Garry Tan 36:43 Yeah.

Eric Ries 36:43 They had the first insulin. I think they produced it within like three months of getting back to Denmark. They got to work. They really... Like this was an urgent-

Garry Tan 36:48 Yeah

Eric Ries 36:48 ... problem for them 'cause they, they wanted Marie to live, but also they wanted to save a lot of lives. Anyway, if the Nordisk Insulin Laboratorium sounds familiar, it should. This is the predecessor company to what we now call Novo Nordisk. This company's been going for more than 100 years with its scientific integrity intact. And people hear that story and they're like, "Well, maybe they were just lucky. Maybe the Dan- the Danes are more friendly," or whatever. Like, people have all these dumb story, uh, theories about why. No. Every crazy thing, the same force that came for Jeff Lawson, the same force that came for Sol Price, the same force that has like destroyed so many tech companies, of course it came for Novo Nordisk. They're a huge company, of course it did. So in the early 2000s, there was a big wave of new best practices for pharmaceutical companies that they all needed to combine and do M&A to get bigger. So the for-profit board and all of its independent directors and everybody of Novo Nordisk are like, "Oh, I guess we have to merge." So they go around trying to find a merger to sell the company. They find this company. They g- they have a signed merger agreement. They're gonna get a huge premium on the stock price. Now at this point, Novo is a publicly traded company. They get this agreement. The last like due diligence checklist item they have to do is go to the foundation and get their permission to do the merger. The trustees are like, "Well, what is the purpose of this transaction?" And they're like, "Our job is to look after the mission of Novo Nordisk. We're only allowed to approve a merger if it's necessary for the survival of the company." And my fa- the favorite detail about this story is they had to have two meetings 'cause they were like, "We're gonna get back to you. We're gonna get the bankers." They, they rehuddle with the bankers. They bring the bankers back and they're like, "Ah, since you said it's necessary for the survival of the company, this is the new best practice in pharma. It's eat or be eaten. If we don't merge, we're gonna die, whatever." And the nonprofit trustees are like, "Okay, that's interesting, but what problem are we solving exactly? Because Novo Nordisk has been profitable for 10 years in a row, growing like 20% a year."

Garry Tan 38:29 It doesn't have to do anything.

Eric Ries 38:31 Why do we have to do... Why can't we just-

Garry Tan 38:33 Yeah

Eric Ries 38:33 ... be a great business doing our thing? Anyway, long story short, the trustees say no. Merger over.

Garry Tan 38:38 Yeah.

Eric Ries 38:39 People are so pissed at them 'cause like this is gonna be like a $20 billion merger. It was gonna make a lot of money for a lot of people. Bankers are p- everyone's pissed. Now it's rare in business that you have these moments like with FedMart where you actually get to see the counterfactual. So we know for sure that if they had not done this, all of the major R&D programs of Novo Nordisk would've been canceled.

Garry Tan 38:58 Oh my God.

Eric Ries 38:58 We know because the company they were going to merge with two years later was bought by Merck, and that's what happened.

Garry Tan 39:04 Oh my God.

Eric Ries 39:04 One of those research programs was in year I think 11 of 13 of inventing GLP-1. So because the f- uh, trustees interfered here, the research program was allowed to come to fruition. You have to understand this was, GLP-1 was such a difficult drug to, to produce that even 10 years in they had no evidence whatsoever that it was gonna work and like everyone was like, "Why are we funding this thing?"

Garry Tan 39:28 Yeah.

Eric Ries 39:28 "It seems like it's never gonna work." But they kept the faith. If you fast-forward 20 years, this intervention caused Novo Nordisk to have for a time a value cap, a market valuation greater than the GDP of Denmark. And if you freeze frame right that moment, you will have now mo- noticed the delta between what they would've sold for and what they actually are

Eric Ries 39:47 worth is more than-

Garry Tan 39:47 Short term versus long term, which is a theme over and over again.

Eric Ries 39:49 Over and over again. They became, they, like I think they, their valuation crested at $600 billion.

Garry Tan 39:54 Yeah.

Eric Ries 39:54 I think though that builders have to take some responsibility here, okay? I mentioned before that most founders have never read their corporate governing documents.

Garry Tan 40:00 Worth doing.

Eric Ries 40:01 Everyone's just like, "Well, my lawyer will take care of it." It's like governance... I hate even using the word governance 'cause as soon as I hear that people are just like, "Boring."

Garry Tan 40:08 [laughs]

Eric Ries 40:09 "Who cares?" I mean, I remember with Lean Start- Lean Startup was a book about management and I remember telling people like, "It's gonna talk about management." They'd be like, "Management, so boring."

Garry Tan 40:15 [laughs]

Eric Ries 40:15 Like yeah. So because we delegate this to lawyers and bankers and whoever else-

Garry Tan 40:20 Yeah

Eric Ries 40:21 ... we, like when it comes back to bite us in the butt, we're like totally unprepared. I think builders have to get a lot more savvy about this. First of all, make sure they understand what they're signing. But then also to, yeah, to put on the T-shirt with the fist to be like, "I don't want this to happen to me. Like, uh, this is not the kind of company I wanna build." And I think we are not that far from being able to have an economy that is about building again. Like, I really think we are close to that. The younger generations are super pissed off. This idea of shareholder primacy has had its 40, 50-year run now. People who've grown up only under that system have seen its failure. Like, we live in a time of institutional collapse and institutional weakness. And this is the thing, like when companies collapse, when they go through these ethical moral collapses, it's also an economic collapse. Like that's what's so interesting to me is it's value destroying. So we don't need to make a moral argument necessarily. We can just make an economic argument, and the book is loaded with the evidence. For example, the Novo Nordisk style of company where you have this two-tiered foundation, that's called an industrial foundation structure in academic literature. Companies with that structure, there's a lot of them. The, the German optics company Zeiss had this structure in 1885.

Garry Tan 41:31 Oh, wow.

Eric Ries 41:31 So it's not even that new. There's enough of these companies that we have a data set to see how they perform. Companies with this structure are six times more likely to live to year 50.

Garry Tan 41:40 Amazing.

Eric Ries 41:40 10% versus 60% probability. So we as founders, when we're choosing our corporate form, we're being told that there's this business monoculture. All you can do is a Delaware C corp, everything standard, best practice, best practice. Man, we've been deprived of our birthright. There's way more options out there than we're being told. And I just, I always tell founders, "Why are you having to hear about it from me?"

Garry Tan 42:01 Yeah.

Eric Ries 42:01 "Why didn't your investors tell you? Why didn't your lawyers tell you? Like how come you... If you don't know this story, why not? Why wasn't it in your MBA class? Why isn't this not in the curriculum?"

Garry Tan 42:08 Well, we need VC funds to not be 10-year funds.

Eric Ries 42:10 Well, that's a huge problem.

Garry Tan 42:12 To, just for the people, the audience, I mean, basically the V-

Eric Ries 42:15 Yeah

Garry Tan 42:15 ... the standard LP agreement for a venture capital fund is 10 years, which also means that at the end of those 10 years the money that was put out is expected to come back. So 10 years is-

Eric Ries 42:26 It's just not that long anymore.

Garry Tan 42:27 It's-

Eric Ries 42:27 Especially, I mean, it made sense. Most of these practices come from a time when companies would go public like three years after being founded. Amazon went public I think that way, raised like $20 million. Like it just, the s- the scale of an IPO was much-

Garry Tan 42:39 Yeah

Eric Ries 42:39 ... less of a big deal back then.

Garry Tan 42:40 It used to be the three-year overnight success. Now it's the 20-year overnight success.

Eric Ries 42:43 Absolutely. And of course we have companies like Stripe that are like stubbornly just refusing to go public because why should they? And I think people wring their hands about this, but it's like What do you expect, man? If you create a system that puts this gravitational pressure on companies, you have to expect people to fight back and resist. I don't think the tools we've used in our resistance are very good. I think we've, like, been desperately grabbing for whatever we can grab 'cause we

Eric Ries 43:05 feel like we're under assault.

Garry Tan 43:05 Well, more and more founder control, which is, I mean-

Eric Ries 43:07 Yeah

Garry Tan 43:07 ... honestly, like what we advocate for.

Eric Ries 43:09 It's better than nothing. I mean, it's certainly better than investor control, which really is self-defeating. Founder control has all these problems, and what's interesting to me is people who do founder control have no bridge. They're stuck. So, like, for example, one of the things I advocate for is that, um, if you're gonna do founder control, just write into the docs that if the founder control is ever defeated for any reason, there's an alternative thing that springs up in its place. You can, you can just write this in your docs right now. You can have this at the seed stage. It's not that hard. Just say, "Yes, I'm gonna have the Novo Nordisk industrial foundation structure," or, "I'm gonna have one... I'll..." There's a bunch of structures that I, I, uh, explain in the book. What's cool about that is founders think that, um, having dual class shares makes you invincible, but it really doesn't. Dual class is defeated all the time. Uh, I give a bunch of examples in the book, like, you know, stock price drops, everyone panics. Founder gets f- forced out anyway because at the end of the day, like, having the votes is not the only thing that matters. There's a bunch of things that matter, including, like, investors being like, "Well, we won't give you any more money unless you turn this protection off." So I think the perception of being invincible and, like, being emperor for life, not only is it not true, you... Those people still get betrayed, but you also... It has a psychological effect that's not healthy. Um, it's called hubris syndrome in the-

Garry Tan 44:18 Mm-hmm

Eric Ries 44:18 ... in the s- in the psychological literature. It makes you less generous, less compassionate. It makes you more selfish. It makes you more afraid, conversely, of losing your power. So if you notice some of these, like, emperor-for-life billionaire types out on social media, like, having a mental breakdown in front of us all, like, part of what's going on is that, like, this is a mental illness.

Garry Tan 44:37 Mm-hmm.

Eric Ries 44:37 This is not actually a good structure. Because we have these better structures, there's really no reason to do it, or at least do it as a backup for after your dual class shares get, uh, get defeated, which if, you know... And generally speaking, they eventually do get defeated, including by the death of the founder. So what then? Like, I think if you wanna build a 50-year or 100-year company-

Garry Tan 44:53 You gotta last longer

Garry Tan 44:54 than that

Eric Ries 44:54 ... one of the more profound reasons to start a company is actually wanting to create something that outlives you.

Garry Tan 45:00 I think so. I think that's actually part of why entrepreneurship is so awesome, like, as

Garry Tan 45:03 a career. Well, the first time I ever heard of a PBC actually was from my friend Scott Phoenix. Uh, he started a AI lab called Vicarious, and he very explicitly said, "I'm gonna do it as a PBC. We're going to try to create AGI, and, uh, if we create AGI, we don't want to be, uh, pa- you know, sort of forced into a paperclip maximization world-"

Eric Ries 45:26 No kidding

Garry Tan 45:26 ... where you have AGI, and it's self-improving, and then anyone, uh, any shareholder could come and say, "Actually, we're not maximizing enough." And then you helped, um, design the long-term benefit trust for Anthropic.

Eric Ries 45:41 Yeah.

Garry Tan 45:41 So I'm curious. I mean, what was that like? And-

Eric Ries 45:44 Oh, it was wild.

Garry Tan 45:45 Yeah.

Eric Ries 45:45 Yeah. Listen, I do not take credit for Anthropic's success, okay? Just for the record.

Garry Tan 45:49 Yeah.

Eric Ries 45:49 Like, I played only a bit part, and all credit to Dario and Daniela and the whole team. They're on such a run. Love them. But if you talk to people about why is Anthropic so successful, they'll often say something like, "Well, their inference costs are lower."

Garry Tan 46:01 Oh, that's definitely not true right now. [laughs]

Eric Ries 46:03 Yeah. Or whatever, you know, whatever it is, right? They, they have, they have better, superior focus.

Garry Tan 46:06 The models are fantastic.

Eric Ries 46:07 The models are better. Why... But, like, if you ask why, you'll be like, "Well, they have better technical architecture." But why? "Well, 'cause they're better at doing this thing or that thing." But why? Well, eventually-

Garry Tan 46:15 It's nothing without its people

Eric Ries 46:16 ... Yeah, it's like, because they have the best talent. Why is that? Well, 'cause the best people wanna work there. But why? 'Cause they think they're the good guys. That's, like, a huge recruiting talent advantage. It's unbelievable. So many incredible people wanna work there 'cause they are... They... You ask for the focus. Why are they so aligned? 'Cause everyone's on mission, 'cause the mission is primary. But why hasn't Anthropic been able to be bullied from the outside? People certainly have tried. I think part of the reason is they have that magic formula, ethos plus integrity. They have this ethos of AI safety. Whatever you... Whether you agree with it or not, they really believe it. I remember I met them, you know... Now they're world beaters, I know. But I remember meeting them when they had just left OpenAI. Their team was very aligned. The people that were leaving, people who were leaving a really lucrative job behind to do this, so people really were there for the mission. They had what they thought were really aligned investors, including Sam Bankman-Fried, so actually it turned out not so much to be. But they thought, that's what they thought at the time.

Garry Tan 47:08 It would've made that whole situation whole, apparently. [laughs]

Eric Ries 47:11 The stake that the bankruptcy has of those shares is worth more than the whole.

Garry Tan 47:15 Yeah.

Eric Ries 47:15 Than all the, all the-

Garry Tan 47:16 By far

Eric Ries 47:16 ... the entire fraud by a lot.

Garry Tan 47:17 Yeah.

Eric Ries 47:17 And it's gonna be worth even more when, when the time comes. Yeah, it's, like, one of the most bizarre situations in history.

Garry Tan 47:22 It's pretty wild.

Eric Ries 47:23 And in spite of having so carefully curated their cap table, like, one of the most tightly curated cap tables I've ever seen for a company like this, a huge chunk of the company wound up being sold at auction in a bankruptcy auction.

Garry Tan 47:34 [laughs]

Eric Ries 47:34 Like, how crazy is that?

Garry Tan 47:36 Yeah.

Eric Ries 47:36 So anyway, people always think, "If I just curate, if I just choose the right people..." Well, they thought they had, but they were also really worried about this paperclip maximizer thing. Like, what happens if we're sold to the highest bidder? What happens? Well, they understood this technology is gonna be worth trillions if it works. The incentive to take it over is gonna be unbelievable, so we need a structure strong enough. And so we talked just like we're talking now. We had the same conversation then that we're having now. Again, credit to them for actually doing the work. But I remember working with them on their charter, and they had to defend this idea for two years, 'cause they kept writing it into the term sheets that they would do it, would do it, would do it, but it took time to, like, figure out what they wanted to do. I think it was the series C when they finally established this thing called the long-term benefit trust, which is not a nonprofit foundation. It's actually what's called a perpetual purpose trust, which is a different legal category, but the same idea. Outside trustees who have the power to, uh, appoint directors to the for-profit board. People very frequently ask me, "Why is Anthropic the most courageous of the, uh, AI labs?" And I think this is part of the reason why. They have this structural strength to stand up for what they believe. And if you notice, when companies stand up and do the right thing, we live in such a polarized time. It's like, well, what do you mean the right thing? Are you saying they're absolutely right? They're the morally perfect? No. You want me to criticize Anthropic, I can think of lots of things. When I say they did the right thing, they acted consistent with their own values. Those values are consistent with human flourishing, and they have the strength to defend them. So I know a lot of people, even in San Francisco, like, San Francisco's having a lot of turmoil right now. Tech companies are not the most popular here right now. AI companies maybe even less so. When Anthropic, um, turned down that $200 million contract, someone sent me a video. The sidewalks around their headquarters had been chalked up with people saying thank you.

Garry Tan 49:14 Oh, wow. Yeah.

Eric Ries 49:15 Man, when I tell you that a San Francisco tech company had its sidewalk chalked up-

Garry Tan 49:19 Mm-hmm

Eric Ries 49:19 ... thank you is not-

Garry Tan 49:20 Yeah. [laughs]

Eric Ries 49:20 ... which, not the kind of language you're expecting.

Garry Tan 49:21 That's right.

Eric Ries 49:21 So, like, because they have the strength, they get all these counterintuitive benefits. Claude went to number one when they did that. They couldn't have known that was gonna happen. They couldn't... Like, they... Who, and who knows what's gonna happen next? Obviously, long way to go with Anthropic and with the question of AGI. But I think the early returns are very promising, that just taking a little bit of extra time to set this structure up in a thoughtful way has been incredibly valuable, uh, to their success.

Garry Tan 49:45 Eric, thank you so much for joining us. This is-

Eric Ries 49:47 Oh

Garry Tan 49:47 ... truly epic. It's an honor. I, I, I really think this is a message that YC founders need to hear and pay attention to, so I'm just, I'm really excited to see this finally get out in the world. [upbeat music]