Is the current capitalistic structure unfair?

I have long grown up in the world of capitalism, it is therefore weird to me the world would work anyway else. If you only known one way of doing things, it is easy to assume that it is the only way of doing things.

On the surface the capitalistic structure makes a lot of sense. The owners of the business take the risk, risking assets and risking losing the money that they have invested in the company. In contrast, the employees of the company take less risk from the table. Every month, employees of the company 'cash out' their compensation, reducing the risk of losing monetary value. Even if the company does not provide any stock as compensation, the employees can also choose to buy stock of the company (if it is a public company) to become an owner of the company. This way, if the company is very successful, the employees will benefit too.

This risk to reward ratio makes a lot of sense actually. Higher the risk, higher the potential returns. Founders and VCs earn the most money because they take the most risk, they are the earliest in the game. The later in the game you are, the less uncertain the future of the company is and therefore the less amount of disproportionate upside potential.

So what is unfair in this situation? The part that is unfair is with early stage employees. Early stage employees join a company in a situation where the stock of the company is very cheap. However, if these employees are not allowed to buy the stock of the company, then they are forced to cash out their income in this sense. Most employees take a pay cut to join a startup and if these employees are getting paid less and yet not being able to buy the cheap stock of the company then it becomes a highly unfavourable situation for employees. However, we often see the other case, early stage employees typically pay the employees more stock options rather than cash, this actually allows the employees to take the upside potential of the company. If this is the case, then the choice of a employee to join an early stage startup is purely on about risk appetite. Would you join a company and getting cheap stocks that could potentially be worth loads of money in the future? Or would you join a company that pays you much higher with better worklife balance and a more predictable future outlook?

However, the story is quite different for founders. In the initial stages of the startup before the startup has any real traction, the founders have to put their own money into the business. However, once they get funding from investors, they really do not put additional skin in the game other than that they invest their time and energy. Today, in Silicon Valley, it is quite different, you can get millions and millions of funding by simply having an idea and having a personality that is likeable to the investors. Right off the bat, if you go to an incubator, you can get funding with your idea and you never really had to go into the phase of self-funding. This means that founders while owning a large chunk of the company, actually put nothing into the game to be the full 'owner' of the company. Not only that, founders can then choose to pay themselves a modest income, this means that they are also cashing out, while also yielding large amounts of the upside of the company in the future. In reality is starting a company really that risky? It seems that founders do not take that much risk and yet get exposed to a great potential for the upside.

The story of VCs is quite different. VCs have loads of money, they are really rich. In this sense, the game that they play is very different from that of founders or employees. Founders or employees really only have 1 trial in the game, the outcome is collapsed at the end of the day. If a company has 99% chance of succeeding and it fails, then the founders and employees will suffer regardless. However, this is not the same for VCs, VCs are not that suceptable to variances in individual data points. A VC that is rich enough would be able to invest in enough companies that they would get quite close to the expected value. The challenge is simply getting their long term win percentage right. This by itself is not easy because they can't really rely on luck, they need solid and good company picking skills to be able to be successful. In a way, a VC that picks the right company 1% of the time will be a complete failure while a VC that picks the right company 5% of the time might be just enough to tip the scales and make the VC profitable. In picking 100 companies, getting 1 right vs getting 5 right seems like small margins. In a sense, with enough numbers, a good VC do not really take significant risk considering that they will tend to their positive expected value in the long term.

So in this case we can see that founders don't really take too much risk, VCs don't really take too much risk, the most risk still is on the employees.

In this capitalistic structure, the people that can be rich are those that can manage risk the best. VCs and founders take highly managed risk, they are able to yield significant upside potential without taking too much risk. However, for employees, trying to yield more upside potential will lead to significat more risk being taken and risk getting burned. This is the perfect storm for massive inequality to occur.

The base employee will be stuck in their job for many years, not early too much income and not yielding significant upside potential.

Founders that fail at their startup can just start another one, raise funding again and continue to pay themselves that way. VCs that have a startup in their portfolio that failed just writes the investment off and continue investing in other companies.

Employees in their startup that fail will lose their job, in a somewhat similar situation as the founders, but yet do not yield any of the upside potential as the founders. In this sense, employees take the same risk as the founders in a startup and yet do not carry nearly as much as the upside potential as the founders.

For the founders that are actually successful, they will claim loads and loads of money and then utilise their tax evasion strategies to minimise the amount of money they have to give back to the society, they would create offshore accounts to minimise the giving back part of the story. With less taxation income, this then drives less wealth redistribution to the employees that have worked so hard and yet failed to yield any upside potential. Employees that have to live paycheck to paycheck take nothing at the end of the day. They are just another cog in the machine. Their efforts that helps to create significant value in the world are taken by the founders and investors who then utilise that capital prowess to create even stronger inequalities and protect their wealth at the disadvantage of the employees. There is no onus for the biggest beneficiaries, founders and investors to give back to the society. Employees that have sacrificed their time and energy get nothing in return, and the value that they have generated simply goes to the luxurious spending of the founders and VCs and yet fail to improve the overall society to improve the public goods that benefits them all. Tax evasion is the critical step in this inequality process.

Rethinking capitalism

How then should we think about capitalism? There ultimately needs to be some form of respect for employees. Employees are people, they are not simply tools to achieve an end. There needs to be some significant form of empathy from the perspective of the founders and the VCs. A company that pays its employees just enough to hit breakeven wouldn't last, the company needs money to expand and make strategic investments. The idea here is balancing out the upside. Strong leadership with a clear vision leads to a successful startup. Ultimately leadership is about clarity, and therefore no one should be leading if the person does not have a signfiicant clarity difference to the peers.

There is a lot of internal leadership in companies, intrapreneurship. Intrapreneurship is a unique case as where employees can innovate within companies without investing their own capital. If the project fails and the employee loses the company a lot of money, then chances are that the employee will be fired. This structure seems to be the same risk structure as that of founders. The difference is that if the employee generate significant upside potential through internal innovation, then there is no obligation for the company to share the upside with the employee. In a sense, this structure also yields a incentivisation model to be average. An average employee does enough and generates enough value not to be fired. Going further and beyond will result in significant upside potential for the company and yet this often does not translate into the upside for the employee. Mediocrity and averageness actually kills companies, and yet this is exactly what companies are optimising for. The employees that kill the company are the ones that are not bad enough to be fired but not good enough to generate sufficient value for the company to increase its margins.

There needs to be some form of greater amount of ownership within companies, greater amount of sharing of upside potential with employees to provide the right incentive structure. Employees should retain the upside potential when trying to innovate within the company. The company here then should treat the employee as a founder and the company then acts as a investor or incubator. The incubator provides the employee with funding to manage the internal startup, this funding and amount of money the company spends should be exactly quantified, and people working on this internal side project will then act as the early employees of this side company. The 'initiator' is the person that has the clearest vision of the internal innovation product, and that is the person that would be treated as the founder, who would own 100% of the internal company. In this sense, people it is still an internal project, paying the employees of the project should be done by the parent company. The amount paid out to team member and the founder should be clearly quantified. Because this amount will count towards the amount of money the company has invested into this internal startup. Moreover, the company can also choose to invest more cash into the project to get greater ownership of the company. In this sense, we can abolish the concept of most tech workers: earn enough money, quit job, and start their own startup. In fact, if we know that a lot of employees do have an entrepreneural spirit, we should maximise it and utilise to the advantage. In this case, the company has a lot to win. This is because the quality of founders intracompany should be much higher given that their interlect and ability have already been tested through entry interviews and performance review throughout the time in the company. In this sense, each comapny should become its own startup incubator, and this startup incubator has first dibbs on the investment opportunities.

There are of course many issues with this model. First is, how do we quantify the value of the internal company? The second is, to whom does the revenue of the internal company go to? And how transferable is this internal company. So for example, the person who created Github Copilot, if this technology is deeply integrated with the github and vscode toolchain, then it makes sense that it is difficult for this project to be taken out of context of the company. The project will not survive without the company. How does external investment work? This is an internal product, it is hard to think of external companies investing in Github Copilot to fund it. It has always been for Microsoft to be the sole funder of such internal products. However, this structure can make a lot of sense. In a way, it opens up an opportunity for a more distributed structure of company owners. This is beneficial in many aspect. First, we often hear the idea of people starting a company because the to do list they normally use do not have this 1 feature that they really need and they realise that a lot of people need that 1 feature. So what these people will do is that they will re-build the entire app the from the ground up and add that one feature. And then spend loads of marketing dollars to then get users to port to their new app. This competitive nature is by itself a waste of resources. What if, a better way to do this, is for this founder to join the company as an internal founder and builds the additional feature within the company, and retaining the upside potential of that feature. Remember we discussed that the key value of the founder is the clarity of vision. Sure, the company could just take the idea and build the whole thing themselves if they think it is a good idea and not follow this. But here the key is the value of the people. The person who came up with the idea should have the clearest vision of what it should be. The investor aka. the company can give it suggestions but ultimately the decision is up to the internal founder. Here, the clarity of vision of the internal founder makes the internal founder irreplaceable. Going back to the problem of quantifying revenue, for new products such as Github Copilot, this is quite easy to quantify the value because people need to subscribe for this additional feature. However, there any many new features of Apple products that do not require clear payment, the value of the internal product then becomes much more difficult to quantify. Perhaps just as how Netflix is able to quantify the value of its shows even though it has a subscription model, it might be also be possible to quantify the value added of such internal product. Moreover, product innovations that involve internal tools, this is even harder to quantify.

The vision here is to create a system, where we reap the benefits of cooperation and consolidation instead of competition. Instead of trying to compete with the company by just adding a simple feature, join the company and innovate internally. However, if the vision is fundementally and sufficiently different or if the company refuses to fund the project, then it makes sense just to leave the company and start a brand new startup with a somewhat similar structure except the funders will now come from any investor in the world.

In this case, we allow an opportunity for the basic employee (that is innovative enough and entrepreneural enough) to be able harness the upside potential of its innovations. This really balances out the upside unfairness nad allows for a better redistribution for wealth. For the companies, this is also very beneficial, it creates a culture of internal innovation with the right mindset, every employee has the opportunity to get very rich if they are innovative enough, and this also prevents employees from becoming future competitors because the company has first dibs on the investment on the internal project.

In terms revenue flow, the revenue generated from the internal project will be split between the founder and the company depending on how much the company invests in the project. If the company invest large amounts in the project, then the revenue share that goes to the parent company will be larger. We can still do a typically company process, were voting power of decision is still up to who has the greater share of ownership in the project. If the founder has the greatest ownership, then it means that the founder would call the shots. However, if the company has acquired majority of the ownership of the internal project, then the company will call the shots.

There is an important distinction between this recursive capitalistic model and that of simply having a company internal incubator. Normally, the internal startup incubator is built upon the idea that individuals come up with separate ideas and completely new areas of innovation. However, the idea of a recursive capitalistic structure is that it is deeply integrated into the core of the company. In a sense, we cannot see the company as a homogeneous entity. The company can be seen as many subclonal mini-companies, each with majority stake (or less) by the parent company, and the founders with also a significant stake, and the upside still goes to the founders if the project is still successful.

We can see this new capitalistic structure as one of subclonal capitalism, there is a recursive small companies in the big companies, each smaller companies are created by internal employees with a new innovative idea to generate value for the company. In this structure, we can see that the value and upside potential does not only flow all the way to the top to the richest people. Instead the upside potential is distributed to the internal founders and innovators along the way, based on the percentage ownership of the internal projects. This provides a better redistribution of wealth, where we enable upside potential for individual mini-founders within the company and encourage the spirit of intrapreneurship and encourage cooperation instead of competition, preventing the waste of resources.

To illustrate this, let's use Microsoft. Within Microsoft, Alex Gravely decides that it is a good idea to create Github Copilot ref. There as 6 employees on the team, which are each paid 350K a year. Initial development may take 1 year, resulting in a total cost of $2.5 million (taking founder pay in). During the idea stage, when Alex Gravely pitched the idea, the internal project valuation may be $5 million (Silicon Valley standards?). Microsoft invests $2 million taking around 40% of the company. Each initial employee might choose to take a paycut and convert it into ownership of the project too. The total cost of employees is $2.5M but Alex only has $2 mill of funding, he can choose to take a paycut and preserve capital, or choose to request for more funding by selling more capital. As Github Copilot continues to develop, if it is unable to become breakeven quickly, Alex can choose to continue exchanging his equity for funding by Microsoft (Series A, B, C). Imagine after 2 years, Github Copilot is now profitable, the valuation of the company is now $30M, Alex is left with 10% of ownership, if he exits and sells the rest of his stake, he made $1.5M per year. Imagine after 2 years, Github Copilot is a total failure, barely any revenue, Alex is left with 30% ownership but does not have enough equity or funds to keep the project running, Microsoft refuses to provide more funding given the outlook. The project gets shutdown, Alex is fired from Microsoft (for losing the investment by Microsoft), he had just taken a significant paycut with nothing to show for, the typically risk founders take. But he still was paid, and he had full upside potential unlike typical employees. On the otherhand, if Github Copilot is very successful, Alex retains his equity in the company and yields the upside. He may continue to be diluted in the future to keep the funding going, but he will keep retain a large amount of money, 1% of $1B is $10M. Within the Github Copilot team, another individual comes up with another product innovation. Github Copilot then utilises it's excess profit or funding stores to fund it. Github Copilot might end up owning 90% of new product. Alex owning 1% of Github Copilot will then benefit from the further developments too. In this sense, 1% of the upside now goes to an internal founder. In the past, the internal founder would not even have had the opportunity the yield this upside. The internal founder will only collect a monthly paycheck as usual without any real innovation incentive, and will then eventually go and start their own startup in a quest to yield more upside potential. This model actually is quite useful to retain the best in the company.

This model provides an opportunity for innovation within companies while allowing employees to retain upside potential. If we imagine a recursive capitalistic structure 20 levels deep, at each level there are some founding employees of the project that will take a yield, this allows for all these people to yield the upside.

In conclusion, good wealth redistribution neccessitates giving employees a fairer risk to reward ratio. For the longest time, investors and founders do not take significant risk but with significant upside. But rather it is the employees that have the worst deal. This new subclonal / recursive capitalistic model creates a risk reward ratio for employees similar to that of founders.