Startup Founder Pay Packages Keep Ballooning – Tech News Briefing

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Zoe Thomas: This is your Tech News Briefing for Tuesday, October 26th. I’m Zoe Thomas for the Wall Street Journal. Launching a tech startup can be a risky prospect. For the founders who take that bold step and for early investors who fund them, there’s a real possibility of collapse. But if the company is successful, the payout can be great. That prospect has helped create a mystique around Silicon Valley founders, and it’s led to many getting huge pay packages tied to the potential of their companies. On today’s show, reporter Elliot Brown, who covers startups for the Wall Street Journal joins us to discuss the growth of these payouts, who benefits, and who ends up paying for them. That’s after these headlines.
It was a big day for Tesla yesterday. The electric car maker now has a market value of more than $1 trillion. Tesla stock price has more than doubled in the past year thanks to strong and profits. It was pushed past the trillion dollar mark after the car rental company Hertz, said it would order 100,000 Tesla vehicles to be put into service starting in November. For its longer term goals, Tesla came a step closer to getting more powerful batteries for its vehicles. Its battery supplier Panasonic, showed off for the first time its new larger 4680 lithium ion battery cell. Tesla CEO, Elon Musk, said the new battery should help boost EV’s power, help them drive longer on a single charge, and even charge faster. We report exclusively that Secretary of State Antony Blinken is expected to announce changes to the State Department later this week, aimed at helping the agency confront cyber security challenges and a decline in global digital freedom.
Officials say changes will include a new bureau of cyberspace and digital policy, and a special Envoy for critical and emerging technology. Our reporter Dustin Volz says ransomware continues to be a major national security issue for the administration.

Dustin Volz: They very much see attacks on critical infrastructure, whether they come from criminal groups in Russia or elsewhere, that’s sort of a huge 21st century problem that’s likely only going to get worse unless serious steps are taken to address it. And so the State Department actions coming later this week are designed in part to deal with ransomware, but really to sort of deal with all sorts of international engagement, whether it’s with Moscow or Beijing or other nations, trying to deter them from doing activity that the U.S believes is squarely out of bounds of what should be acceptable cyber behavior.

Zoe Thomas: To hear more, check out yesterday’s PM edition of our sister podcast, What’s News. The Facebook whistleblower, Frances Haugen, encouraged British lawmakers to pass laws reigning in social media platforms. The former Facebook employee gathered documents, including internal research about the company’s impact on users, which she shared with lawmakers. Speaking before a UK parliamentary committee yesterday, Haugen said Facebook has struggled to balance user safety with its own profit motive.

Frances Haugen: Mark Zuckerberg has unilateral control over 3 billion people, right? There’s no will at the top to make sure these systems are run in an adequately safe way. And I think until we bring in an a counterweight, things will be operated for the shareholder’s interest and not for the public interest.

Zoe Thomas: On Monday. We also heard from Facebook CEO, Mark Zuckerberg, about the leaked documents that formed the basis of the Journal’s Facebook File series. Speaking on an earnings call with investors, he said the information in the documents was being misconstrued.

Mark Zuckerberg: It makes a good sound bite to say that we don’t solve these impossible trade offs because we’re just focused on making money. But the reality is these questions are not primarily about our business, but about balancing different, difficult social values. And I’ve repeatedly called for regulation to provide clarity, because I don’t think companies should be making so many of these decisions ourselves.

Zoe Thomas: Haugen testified before U.S lawmakers earlier this month. Today, the Senate Committee she spoke in front of will question executives from other social media platforms about their impact on children. We’ll have coverage of that hearing on tomorrow’s episode. And PayPal says it won’t buy Pinterest after all. Shareholders balked at the potential multi billion dollar deal, leading PayPal shares to fall nearly 12% in the three days after deal talks were reported in the Journal and elsewhere. After the announcement calling off the deal, PayPal shares regained 2.7%.
All right. Coming up, startup founders and their investors take big risks in return for possible big rewards. But are those founder pay packages getting out of sync with reality? We’ll discuss after the break.
The founders of Silicon Valley startups off often make very little money when they build up their companies. Instead they get the majority of their compensation when the business is bought or goes public. But compensation packages for founders have been growing by a lot, despite some high profile failures from well known venture backed founders. So what does this trend mean for entrepreneurs and for everyday investors who one day might buy shares in these companies? Our reporter Eliot Brown has been looking into this, and he joins me now. Hi Eliot.

Eliot Brown: Hey, how’s it going?

Zoe Thomas: I’m doing well. We’re used to hearing about large company leaders, CEOs taking home huge pay packages. Why has it been different for tech and tech founders in the past?

Eliot Brown: Yeah. One of the things that Silicon Valley actually used to be pretty good at, depending on your perspective, is having founders who didn’t take any pay at all. Somebody like Jeff Bezos just kind of sat on his enormous amount of holdings in Amazon, the shares he got from founding the company, and then would pay himself or had the company pay him less than $2 million a year between a tiny salary and then security. And the main reason that someone like him or Mark Zuckerberg would do something like that, is quite simply they didn’t need the extra motivation. The reason we pay people is to give them incentive to do what we want them to do. And if you already own 20% of a giant company, you’re pretty invested in having that share price go up.

Zoe Thomas: But presumably, that incentive for founders didn’t change. They still want their companies to do well. They have the stock in the company. So why have their pay packages been changing?

Eliot Brown: The short answer is because they can. And what’s happened there is essentially demand for founders has gone up. Because there’s this money rushing into Silicon Valley and trying to get into all these hot companies, and the notion of a founder has become something that investors are kind of obsessed with rationally or not. The second issue, a lot of these founders actually control the companies. So as they’ve been growing over the years in the private markets when they’re a startup, every share that they own can carry 10, 20 times the votes of a standard share. And so even if they own 20% of the company or 10% of the company, they actually control the thing. So then you have a really friendly board that’s the one that’s determining how they’re paid. And so the board, which is really friendly and sometimes controlled directly by the founder, gets asked, “Well, how much do we want to pay this founder?” And the answer is often, “A lot.”

Zoe Thomas: Sure. But you had folks like Mark Zuckerberg who have a lot of control over Facebook and has had a lot of control over Facebook, but they didn’t take those pay packages, as you say. So when did we start to see that change? When did the money start rushing in to get these founders and to pay them these exorbitant amounts?

Eliot Brown: Yeah. Basically in the mid to late 2010s is when this started to take off. And one of the early ones to like the fuse was Snap, where the board at Snap paid Evan Spiegel over $600 million in stock, largely just to take the company public and keep growing it. But that was how the award was structured. And so then I think a lot of other people saw that and were like, “Wow, maybe the game has changed.” And then Elon Musk got a huge package, the biggest kind of on record for a founder or any CEO, to kind of grow Tesla. And as he hits various targets, the company will increase in value by X percent. Then he gets a huge amount more stock. So he’s gotten billions of dollars in stock as a result of that. And so basically in 2020, things really kind of went crazy as the pandemic pushed up all the prices of tech stocks.

Zoe Thomas: And I guess it’s worth touching on for a bit how this compares to public companies that are already public, or to a non-founder CEO.

Eliot Brown: Yeah. So I think the thing that was most surprising to me is just how enormous these pay packages are. The short version is the best paid CEOs in America right now are the CEOs of unprofitable startups. So Alex Karp, the CEO of Palantir, which is 17 or 18 years old. It never turned a profit. It’s a data analysis company that made something like $600, $700 million in revenue last year. He got a package valued at 1.1 billion, almost all in Palantir stock. That is nearly three times the size of Tim Cook. So Apple is obviously a much, much, much bigger and a profitable company, and yet Palantir awards one of the largest awards of all time.

Zoe Thomas: A lot of what they’re getting paid is about the future value of the company. They’re getting these stock options. What do public investors think about these pay packages? What are their impressions when these companies finally do go to the public market?

Eliot Brown: Basically what’s happening is these companies are saying future investors, future shareholders are going to be the ones to be paying this, that we award today. And so you have venture capitalists, who are largely the ones on the board at the time these decisions are made, they often sell their shares about six months after their company goes public, within a year. But then it is the future shareholders, essentially the ones they’re selling to, who are bearing the cost of these things. Because these are multiyear awards and they only give them stock over time. And so then those future shareholders basically are paying out of the percentage of their company. It’s because you pay in stock, they are taking a smaller chunk of the pie and giving some of their chunk of the pie to the founder.

Zoe Thomas: So then I wonder for the rest of us who aren’t going to be making millions of dollars from our startups going public, why should we care that these people are making so much money? I think in Silicon Valley we’ve expected founders to be making a lot of money from their startups.

Eliot Brown: Well, because it’s actually taking from the other shareholders. So if you’re a founder and you’re getting an extra 5% or 10% of the company, which is what some of these awards give them, then that doesn’t come from nowhere., You’re taking that from the other shareholders. So that means your shares are going to be worth less. And shareholders aren’t just Wall Street oligarchs. These companies attract the investment of retirement plans for all of us. So it is something that is a redistribution of stock from everyday investors to founders.

Zoe Thomas: I want to circle back to something you brought up at the beginning about founders being this hot commodity. The idea of the founder in Silicon Valley has been kind of this well publicized myth. They’ve got this mystique around them. But there have been some really public, I don’t want to say failures, maybe some slipups that have happened in the last few years. We had the collapse of blood testing company Theranos, WeWork failed to go public, or had to pause its plans to go public in 2019. I wonder if those are denting at all the mystique of the founder, or if that’s just set to last?

Eliot Brown: I think there was a thought particularly after WeWork, which followed Theranos,. that for a brief while that the founder mystique was injured and maybe they wouldn’t be given so much deference and control over their companies. But I think really what we’ve seen in the past year and a half or so is the market really, really is interested in the concept of a founder and keeps giving founders more control over their companies. So that’s still alive and well. And I think it’s based largely on the kind of data points of the biggest companies on the planet, which is, well, Jeff Bezos was founder and Steve Jobs brought Apple to great success and he was its founder.
And one of the things that people don’t often mention today is that neither Jeff Bezos, nor Steve Jobs had control over their companies. They just had one vote per share. And particularly in the case of Bezos, got paid again very little. But now today’s founders want 10 votes or 20 or 50 votes per share, and they want to get huge pay packages from their boards. So it is a different world. Now that the investment world is sort of fawning over founders.

Zoe Thomas: All right. That’s our reporter Eliot Brown. Thanks for joining us, Elliot.

Eliot Brown: Thanks for having me.

Zoe Thomas: And that’s it for today’s Tech News Briefing. But before we go, a reminder that we’re opening our phone lines for your questions about out the Facebook Files. What questions do you have about the investigation, the future of Facebook, or combating its effects in your own life? We’ll have a member of the Facebook Files investigative team on the show to answer them. Leave us a voicemail at ‪(314) 635-0388. We might include your question or story in an up episode. Again, that’s ‪(314) 635-0388. I’m Zoe Thomas from the Wall Street Journal. Thanks for listening.