Zero to One_ Notes on Startups, or How to Build the Future ( PDFDrive )

To see misalignment at its most extreme, just visit the DMV. Suppose you
need a new driver’s license. Theoretically, it should be easy to get one. The
DMV is a government agency, and we live in a democratic republic. All power
resides in “the people,” who elect representatives to serve them in government.
If you’re a citizen, you’re a part owner of the DMV and your representatives
control it, so you should be able to walk in and get what you need.
Of course, it doesn’t work like that. We the people may “own” the DMV’s
resources, but that ownership is merely fictional. The clerks and petty tyrants
who operate the DMV, however, enjoy very real possession of their small-time
powers. Even the governor and the legislature charged with nominal control over
the DMV can’t change anything. The bureaucracy lurches ever sideways of its
own inertia no matter what actions elected officials take. Accountable to nobody,
the DMV is misaligned with everybody. Bureaucrats can make your licensing
experience pleasurable or nightmarish at their sole discretion. You can try to
bring up political theory and remind them that you are the boss, but that’s
unlikely to get you better service.
Big corporations do better than the DMV, but they’re still prone to
misalignment, especially between ownership and possession. The CEO of a huge
company like General Motors, for example, will own some of the company’s
stock, but only a trivial portion of the total. Therefore he’s incentivized to reward
himself through the power of possession rather than the value of ownership.
Posting good quarterly results will be enough for him to keep his high salary and
corporate jet. Misalignment can creep in even if he receives stock compensation
in the name of “shareholder value.” If that stock comes as a reward for shortterm
performance, he will find it more lucrative and much easier to cut costs
instead of investing in a plan that might create more value for all shareholders
far in the future.
Unlike corporate giants, early-stage startups are small enough that 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. The potential for conflict increases over time as interests diverge: a board
member might want to take a company public as soon as possible to score a win
for his venture firm, while the founders would prefer to stay private and grow
the business.
In the boardroom, less is more. The smaller the board, the easier it is for the
directors to communicate, to reach consensus, and to exercise effective
oversight. However, that very effectiveness means that a small board can
forcefully oppose management in any conflict. This is why it’s crucial to choose
wisely: every single member of your board matters. Even one problem director