Invest Like the Best with Patrick O'Shaughnessy
· William Hockey
[00:00:00] S1: Structurally, we look exactly the same as a high growth startup. We go after the same people. We have all the same perks, if not more. So we operate very much like a high growth Silicon Valley startup. We happen to also be quite profitable. What I can tell people is – our profits every year – imagine that's our funding round. Each year on January 1st, we raise a massive amount each year. That's how I view it. There's part of it that's going to be used as a tender, that we're gonna buy back company shares. And the rest of it, we're gonna put to growth. Oh, by the way, you also haven't diluted at all. By the way, you also don't have any pref stack. By the way, we get to make our own decisions. That's super compelling. So I can hire someone and say over a 10 year period, you're not gonna be diluted. I think what some people forget is if you're an early stage founder, you're gonna lose probably 50 to 75% of your equity value due to dilution alone. You may lose 10 to 80% of your upside by the preference stack. These are weird economic things that people don't really understand until they've been doing this for like five, six, seven, eight, nine, ten years, or they've seen an exit. With us, we say, hey, don't worry about that stuff. What I give you is what you're gonna have. And by the way, you have liquidity on a yearly basis going forward. That's super compelling to people.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: How have you honed the communication of that idea to a new employee so that they get it? Because I think so often people just say, oh, I got this many shares and this is the valuation. And if it goes to this valuation, I can just do the math, but that's not actually the math of what they'll take home. So how do you frame it to people? [00:00:00] S1: We're far from perfect. I think one of the things we do is we target people that this is their second company. We are probably not the best place for a new grad to land. Because for a new grad to land, they're gonna go through this calculation of where are all of my friends going? What is the number one company on Hacker News I read all the time? What are all the thoughtfluencers talking about on Twitter? And it's actually not a bad strategy. Like if you're a new grad, that's probably relatively fair. But you aren't really gonna be thinking about some of this kind of nuance. And it's honestly not as hard as you think. It's actually quite refreshing. We go to people and we're like, hey, we are super fast growing, but we provide you the liquidity. Oh by the way, here's some very basic math on preference and dilution. And here's why you can actually make way more money for the same equity value. It's a hard story for a 21 year old. It's actually a pretty easy story for a 25 year old that's been through like six rounds and four pivots at their previous company and doesn't have anything to show for it. [00:00:00] S0: Does this empirically show up in employee retention numbers versus Silicon Valley norms?
· William Hockey
[00:00:00] S1: We have almost close to no regretted attrition, which means people that we'd like to stay end up staying. I think there's a couple of reasons for that. I think one is, second time around – it's a lot easier. I think I learned from a lot of mistakes at Plaid and I know where to spend time and where not to. And so I think generally, it's probably a more mature company than your average Silicon Valley startup. So that’s helpful. We're probably better at picking talent, but also I think we know what matters to people. I think sometimes as founders or VCs, we think that people would join companies because they want to become billionaires. Maybe that's true up to a point, but a majority of people join companies because they hit their late twenties or the early thirties and like, what are they optimizing for? "I want to send my kids to a good school and private school. I want to not live with roommates in a one bedroom apartment until I'm 35." Housing and education, that's super important. You can't feed that on illiquid stock. So how do you think about optimizing for that? Basic things like team, culture, all that stuff. People want to work for somebody who feels like they are taking care of – not just a 20 year period where like, here's your path to being a deca-millionaire – do they understand my short-term needs? Can you take care of me in the short, medium and long-term? And I think sometimes we are maybe too long-term oriented. Sometimes we say yes, of course, come with me. We'll work on this for 20 years and you're going to be a deca-millionaire after that. That resonates with a certain type of person, but it doesn't resonate with everybody. And so building a company, building a culture that actually optimizes for every single point of an employee's journey and employee's life, that's actually quite unique. And that actually can lead to really good numbers.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: How much of this was just possible because you were already rich at the start and had money to fund something like this? Is this portable advice? Could someone else that hadn't had the experience you had with Plaid do something like this without taking outside money? [00:00:00] S1: I think it's hard. I think I was definitely successful at first, but what I would say is, without going into too much detail, yes I started a very large company. I think I was probably less liquid and less rich than probably everybody thought at the time. When I started this – Plaid's a funny story – we attempted to sell it to Visa for like $5 billion. And that's the point when I left to go start something. It didn't go through. We got blocked by the DOJ. And I did not sell my company. Thus, I did not have any money. And so my liquidity versus paper wealth was pretty extreme. And so I think I got a lot of credibility from people being like, oh, this guy's rich. [00:00:00] S0: Easy for this guy to say.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Easy for this guy to say. [00:00:00] S1: Yeah, easy, yeah. But I did not have any money. Without going into too much of the details of it, I pretty much funded the entire company with debt. Went to a bunch of banks, and I said, here's a bunch of Plaid shares. Please give me money. And the best I got was a SOFR plus 10% loan at 5% LTV. And so I pledged over a billion dollars of stock to get $70 million. And I bought the bank for $70 million. I haven't had a lot of money in my bank account for a long period of time. And yes, and I ended up, the business became profitable. I got to pay off that loan in a period of time. But in the process, I practically got margin called three times and almost went bankrupt multiple times. [00:00:00] S0: Talk about that stress. Let us in the room on that.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Talk about that stress. Let us in the room on that. [00:00:00] S1: Yeah, I mean, the first three years were definitely the most stressful in my life. Because I had a fundamental thesis that we could pull this off and we could build a business that 100% of employees and myself owned. But to do that in a world where you need to invest and not make money for multiple years is very, very challenging. And with the regulatory climate at the time, it was intense. And I have this loan I have to pay off. It was probably the most intense period of my life. And as a founder, you have to shelter that from everybody. You need to be transparent, you need to bring people in, but you also need to not bring people all the way in. I had pretty extreme conviction myself, and I thought, I knew 100%, over a multi-decade period, I can pull this off. But there's that crazy quote of, "Markets can stay irrational longer than you can stay solvent." And it's true. And I'd look at that quote and I'm like, which side of that equation am I on every day? And we ended up making it through and I got an amazing place now, but I think the idea of like, billionaire buys a thing and self-funds it, it's probably a little further from the truth than people think. [00:00:00] S0: What's it like getting margin called? What is the literal thing happening? How do you manage through that?