Why Good Companies Go Bad (And How to Stop It)
In a Nutshell
The core problem is that standard corporate structures—especially Delaware C-Corps with shareholder primacy—turn successful companies into targets for takeover, forcing founders out and prioritizing short-term investor returns over long-term mission. Founders can build "incorruptible" companies by adopting mission-controlled structures like Public Benefit Corporations (PBCs) and two-entity models (e.g., Novo Nordisk's nonprofit foundation overseeing a for-profit subsidiary), which legally embed a purpose beyond profit and create governance checks that outlast any individual. Evidence from Costco, Novo Nordisk, and Anthropic shows these structures attract aligned talent and investors, resist pressure to compromise, and dramatically improve survival odds over 50+ years compared to conventional setups.
These notes were generated by AI and may contain inaccuracies.
The best way to make money is to create more value than you capture by building something people want. Many ways of making money today allow people to get rich without creating any value at all.
Eric Ries, author of the New York Times bestseller The Lean Startup, is releasing a new book called Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great. The Lean Startup taught generations how to build companies, but the new book addresses how to protect what founders create.
All of Ries' books come from personal pain. He has observed many companies lose what made them special, with founders losing control and companies not becoming what they were intended to be. The Lean Startup helped create many companies worth protecting, but failed to provide tools for founders to stay in control and protect the trustworthiness of what they built.
Founders spend significant time on zero-to-one thinking, with The Lean Startup serving as a key resource. Until now, there has been no playbook for making companies last for a hundred years. Current leadership and entrepreneurship teaching emphasizes that success will protect you once product-market fit is achieved, but this view is incomplete.
The more successful an organization becomes, the more valuable it becomes as a target for takeover or theft. This represents a missing ingredient and major blind spot. Ries has witnessed this pattern across many companies and shares the story of coaching a founder referred to as "the professor" in the book.
The professor is building transformative technology at the intersection of AI and bioscience. The technology carries significant danger, including potential use for bioweapons or pandemics. He recruits talent by promising the technology will not be used for harmful purposes, which gives him a talent advantage based on trust.
Potential employees ask whether the company is for-profit and what happens if investors want to pursue harmful applications. The professor states he would tell investors no, but this creates tension. Venture capitalists dismiss these concerns, telling him that if he is serious about business, he should not worry about such issues.
Ries attended an event commemorating a founder who achieved massive success and generated enormous returns for investors, yet was betrayed and kicked out of his own company at the earliest opportunity. Approximately one thousand people attended, including former employees who flew in at their own expense. The professor initially viewed it as a celebration of the kind of company he wanted to build.
The event was not a celebration but a wake. The founder no longer works at the company, though he is still alive and attended the event. The company remains a publicly traded entity, but the original founder has been removed from his role as mission guardian.
The company was trusted because the founder served as the mission guardian protecting an important mission. With his removal, any promises made by the new CEO become conditional on investor approval. This reflects an era of temporary organizations led by temporary managers on behalf of temporary investors.
Stock holding periods have decreased dramatically, company lifespans have shortened, and average executive tenure has declined. Trust has eroded because the economy operates on this model. Founders either accept or reject this system, and by participating they provide the fresh meat required for its survival.
Delaware C-Corps are legally required to relentlessly pursue profit, creating grounds for removal if this duty is not fulfilled. This principle directly contributed to the founder's removal in the example. The professor realized he was following the same trajectory by adopting standard corporate governance best practices.
Shareholder primacy holds that the company is merely a financial instrument for investment returns rather than a living entity that creates products and delights customers. This is not a natural law or pillar of capitalism dating back to Adam Smith, but rather an idea that emerged in the 1980s.
It is possible to build an incorruptible company through deliberate choices made early in the founding process. These choices can shift the company's trajectory so that longevity is measured in decades or centuries rather than quarters. However, the professor had already taken steps in the wrong direction by incorporating as a Delaware C-Corp.
The professor's lawyer had provided standard best-practice documents that required the company to maximize shareholder value. Under these documents, the founder would be obligated to sell the company to the most evil buyer if they made the highest offer. Employees would likely quit if they understood this structure.
Every concept and technique in the book faces pushback from advisors who will attempt to talk founders out of implementing them. The book includes a dedicated section on how to discuss these ideas with lawyers and investors, based on a running log of objections and passive-aggressive comments collected from the ecosystem.
There is substantial evidence that so-called best practices are value-destroying. The Long-Term Stock Exchange represents one effort to change the ecosystem so that all participants make more money through different structures.
Jeff Lawson built Twilio from nothing to $4 billion in revenue, with stock up 390% since IPO. He agreed to dual-class founder control that would sunset after seven years as part of the IPO process. Seven years represents only a handful of quarters in the public market context.
The seven-year period included pandemic years with significant runups in telecom and tech stocks. When the bubble burst, the stock declined substantially. At the time of Lawson's removal, the stock was down approximately 80% from its peak. However, revenue measured from the IPO or pandemic peak showed growth, with no fundamental business problems identified.
Lawson was removed less than one year after the expiration of his protections. The question arises whether he had earned so little grace to continue running the company after generating billions in value for investors.
Case studies spanning 200 years demonstrate a recurring pattern: when founders make mistakes, the standard response is to fire them. Edwin Land was removed from Polaroid, a company Steve Jobs admired as an R&D powerhouse with 1,500 research scientists. Jobs called the firing the dumbest thing he had ever heard. Polaroid never invented another significant product after Land's removal.
Rather than building investor-controlled or founder-controlled companies, a third approach exists: mission-controlled companies where the mission itself holds sovereignty. These companies can endure significantly longer.
Super-voting shares that do not expire would represent an improvement over automatic sunsets. However, more comprehensive structural protections are required.
Sol Price is considered the father of modern retail. When Sam Walton was planning Walmart, he named it as a tribute to Price's company, FedMart, which originated in San Diego in the 1950s. Price was previously a lawyer trained in fiduciary duty to clients.
Price asked who his client was when he became a retailer and determined that customers were the client. He established a clear fiduciary hierarchy: customers first, employees second, shareholders third. Peter Drucker suggested employees should come first, customers second, and shareholders last. Johnson & Johnson's credo places doctors, patients, and nurses first, employees second, communities third, and shareholders last.
Shareholder value functions as the exhaust from the engine of a business. When the exhaust pipe is redirected to the intake as the explicit goal, the company no longer stands for anything substantive. Product quality, design quality, and customer health all become expendable in service of shareholder value. No company can endure with this structure, or if it does, it resembles Philip Morris.
Philip Morris generates approximately $8 billion in annual net income. However, studies estimate the company creates $600 billion in annual costs in the United States alone, split between $300 billion in direct healthcare costs and $300 billion in lost productivity. The tobacco industry generates approximately $6,000 from every customer who dies.
If founders do not establish proper governance at the startup stage, no other long-term decisions will matter because they will not be present to make them.
FedMart embodied the fiduciary-to-customer principle. Sol Price would post signs in his stores directing customers to competitors offering lower prices and providing instructions on how to get there. He understood trust as an asset. Customers drove miles out of their way to shop at FedMart.
After taking FedMart public, Price faced constant pressure from investors who wanted higher prices, lower wages, and faster growth. He brought in a new controlling shareholder to buy out public investors and take the company private, believing the new board would support his vision.
In 1975, the new board changed the locks on Price's office, removing him from the company. FedMart's investors converted the company to traditional business practices, and it went bankrupt within seven years, destroying in seven years what Price had built over twenty.
Price took two weeks off before leasing office space above FedMart to start a new company called Price Club. A former FedMart employee who had risen from stock boy to executive quit in protest when Price was fired and started his own company. The two companies later merged to form Price Costco, now known as Costco.
Costco continues to embody Sol Price's fiduciary-to-customer principle and is protected by a governance fortress. The board's job is to protect the mission rather than simply maximize shareholder returns.
Ethos plus integrity equals incorruptible. An ethos represents a higher principle committed to maximizing human flourishing. Structural integrity provides the ability to protect that principle from temptation and outside pressure.
The first and hardest step is being willing to state that standard best practices are a normative consensus that founders do not need to follow.
Everyone agrees that this is the right approach and that founders need to be punk rock about their governance decisions. Costco came under attack in the early 2000s for having non-standard governance practices and routinely receives the worst possible governance ratings. Kroger decided to go all in on best practices. Costco has been incredibly successful since this moment despite having bad governance, while Kroger has not had the same level of success. One analyst called Kroger's performance like Costco in reverse.
When someone suggests adopting some best practice, consider that best practice equals Kroger practice. The goal is to be one of the greatest performing stocks of all time rather than the alternative. The most important thing is to create selection bias by attracting investors and board members who choose to be with the company because they believe in the mission, not just because they think they are going to make a quick buck.
Founders often run into problems when they put an awesome person on the board who appears to walk on water. When taking venture investment, founders are taking investment from a company rather than an individual person. When that person leaves, the company becomes stuck with a new person who has all the veto rights and control rights. Founders generally do not know who these new people are, whether they are aligned, or what their incentives are based on the LPA of these funds.
Founders are generally much too naive and credulous about who will be a good long-term partner. They are easily bamboozled by people claiming to be founder friendly and aligned, while still needing the ability to fire the founder at will. Belief in a vision means more than supporting it only as long as the investor likes what is going on.
For YC companies that have a SAFE and have not yet converted equity, the normal path with pure founder shares involves getting super voting or writing it in from day one. Many AI companies have chosen to be PBCs or public benefit corporations on day one. The PBC is an absolute must-do and an utter no-brainer. It is the easiest thing to do from the book and involves a two-page legal filing in Delaware.
If the company only has SAFEs and no equity investors, it can turn into a PBC immediately without needing anyone to agree. Most people confuse PBCs with the little B in a circle seen at farmers markets, which is something completely different. The PBC restores what is called purposeful incorporation. For the vast majority of the centuries that joint stock corporations have existed, everybody understood that companies should be incorporated to do a specific thing or have a public benefit.
Nineteenth century company charters never said maximize shareholder value, as that would have been considered a crime. Charters would specify creating a railroad or building a canal from place to place. The board's responsibility and fiduciary duty had the first and highest priority to defend and protect that purpose. When the shift to shareholder primacy occurred, this important lesson was forgotten.
In the 19th century, one of the richest men in the world tried to buy and take over the Erie Canal Company to convert it to what he wanted it to do. Unlike modern boards that are told to become an auctioneer and sell, the board directors fought back by whatever means necessary. Both sides went to extreme lengths, including bribing the same state legislators. The board fought off the takeover using a poison pill tactic.
If the takeover had prevailed and converted the legal purpose from making a canal to maximizing shareholder value, that would have been considered a crime and the courts would have voided the company's charter, giving it the corporate death penalty because it would have been beyond the scope of what was authorized to be in the public benefit.
This was the rule throughout the US through the end of the 19th century. To get a charter, a company had to get the state legislature to grant one, which was very cumbersome. There was a big fight over the 19th century to create general incorporation, allowing anybody to form a company for any reason. Every state eventually came into compliance, with Delaware adopting this in 1899.
Even in 1899, the Delaware rule said a company could have any purpose but still assumed there would be a purpose. Over the course of the 20th century, companies were advised by lawyers to put a general purpose in the charter instead of a specific purpose. Most founders have never read their corporate charter. When they read it, they see the company is incorporated to pursue any legal act or activity.
In the 60s and 70s, a very small group of academics, judges, and legal scholars decided that any lawful activity actually means shareholder primacy. Unlike general incorporation, shareholder primacy was never put to any kind of vote, referendum, or legislative action in the history of the world. There is no law for shareholder primacy in the traditional sense of how a bill becomes a law.
Directors on boards across America will say their first duty is to maximize returns for shareholders. Milton Friedman wrote op-eds famously stating the social purpose of a corporation is to increase its profits. The trick was convincing everybody that this is how it has always been. Legal scholars have had to write papers explaining why shareholder primacy is the law if it is not technically the law. They describe it as a legal obligation not a legal duty, or that it is okay for the court to enforce it like a law even though it is not technically a law.
The board of Twitter was forced to sue Elon to complete the transaction because they felt they had this fiduciary duty. They were not wrong about their requirement, but the question remains why companies would be built this way. The papers conclude that shareholder primacy is what is called a normative consensus, meaning everyone agrees that everyone agrees that this is how companies should act.
Founders who are asked if they are part of this normative consensus typically say they are not. However, they have often never told even one other human being that they are not part of this consensus because they believe they cannot say such things out loud. The PBC tools allow founders to declare this formally and legally for their company.
The builder's intuition holds that the best way to make money is to create more value than you capture by building something that people want. Tim O'Reilly, PG, and the legends of the industry all agree on this. Yet everyone is supposed to pretend that all kinds of making money are equally good, even though there are many ways of making money without creating any value at all.
Founders should stop pretending they think this is good and reclaim their sense of identity as builders who are not part of this normative consensus. If investor control is not working, founder control is not necessarily better because some founders become trapped and can never quit their company because they are literally the human shield blocking everything.
Truly long-term solutions require structural solutions that do not depend on the goodwill of any one individual. This involves thinking about building a government with checks and balances about how to balance faction against faction.
Becoming a PBC with a specific mission means a company is no longer subject to being removed if it works against or makes choices that are not maximizing shareholder value. However, this protection does not work both ways. Directors, especially under Delaware law, have extremely wide latitude to do whatever they want as long as they can justify it as being in line with what is said in the charter.
The PBC can be a shield that directors use to protect themselves from investor pressure to fire a founder. Unfortunately, if directors decide to fire the founder anyway, the founder cannot sue them because directors still get to make their own judgments.
The best practice is taught as having a combination of investor directors and independent directors, with good governance meaning more independent directors. The theory is that independent directors are independent because they literally have no stake in the outcome, have no equity in the company, and are random eminent people.
The problem is that independent directors have no financial incentive for the mission to endure. They do have a financial incentive to be seen as pro-investor because they get recommended by investors for independent director jobs. Founders never recommend anybody for director jobs, while investors do this very effectively.
A classic Silicon Valley board has two VCs, two founders, and one independent, which is supposed to be fair because it is two and two balanced. This is basically just investors controlling the company. Research shows that independent directors do not accomplish the goal they are supposed to have because they have an actual conflict of interest despite their nominal independence.
Investor directors are doubly accountable because a GP of a venture fund has a duty to the company and a duty to their LPs. Independent directors do not have this because they are not really accountable to anybody except themselves.
The solution is to create a second entity like a two-branch government with outside trustees who have the responsibility of appointing directors, sometimes just the independent directors and sometimes all the directors. This structure has been proven to be more stable than the so-called best practice of a single entity run as a Delaware C Corp.
In the 1920s, Marie Crowe was living in Denmark and received a fatal diagnosis of diabetes, which had no known cure at that time. Her husband August, who later won the Nobel Prize, asked her to accompany him on a lecture tour of North America despite her illness. At dinner one night, scientists told them that someone in Canada had figured out how to isolate insulin for the first time.
They went to Canada to see this possibility themselves and wanted to commercialize this technology in Denmark. The Canadians worried that a for-profit company selling life-saving medicine might one day charge whatever it wanted. When they went home to Denmark, they built the Nordisk Insulin Laboratorium as a for-profit subsidiary of a nonprofit foundation, creating two entities instead of one. The nonprofit had trustees and the for-profit had directors.
This structure worked well. They had the first insulin and produced it within three months of getting back to Denmark. This company is the predecessor to what is now called Novo Nordisk. The company has been going for more than a hundred years with its scientific integrity intact.
In the early 2000s, there was a big wave of new best practices for pharmaceutical companies to combine into M&A to get bigger. The for-profit board of Novo Nordisk was going to merge with another company and had a signed merger agreement for a huge premium. The last due diligence item was getting permission from the foundation.
The nonprofit trustees asked what the purpose of the transaction was. When told their job was to look after the mission and they could only approve a merger if necessary for the survival of the company, the trustees asked what problem was being solved exactly. Novo Nordisk had been profitable for 10 years in a row and growing like 20% a year. The trustees said no to the merger.
If they had not done this, all of the major R&D programs of Novo Nordisk would have been cancelled. The company they were going to merge with was bought by Merck two years later, and that is what happened to its research programs. One of those research programs was in year 11 of 13 of inventing GLP-1. Because the trustees interfered, the research program was allowed to come to fruition.
This intervention caused Novo Nordisk to have for a time a market valuation greater than the GDP of Denmark. At one point, their valuation crested at $600 billion. This demonstrates the delta between what they would have sold for and what they actually are worth over the long term.
Most founders have never read their corporate governing documents. Everyone assumes their lawyer will take care of it.
Governance issues are often dismissed as boring, similar to how people initially react when told a book is about management. Founders and builders have historically delegated these matters to lawyers and bankers, leaving them unprepared when problems arise. There's a need for founders to become more knowledgeable about what they're signing and to actively resist structures that don't align with long-term company building.
The current economic system has been dominated by shareholder primacy for 40-50 years, and younger generations are increasingly frustrated with its outcomes. We're living through a period of institutional collapse and weakness. When companies experience ethical or moral failures, these are also economic collapses that destroy value. The case for better structures can be made on economic rather than purely moral grounds.
Companies with industrial foundation structures, like the Novo Nordisk model, demonstrate superior longevity. This structure has existed since at least 1885 when Zeiss adopted it. Companies with this structure are six times more likely to reach year 50, with a 60% survival probability compared to 10% for conventional structures.
Founders are typically presented with a limited set of options, usually told that a Delaware C Corp is the only standard choice. This represents a deprivation of options that should be available. Many founders remain unaware of alternative structures because investors, lawyers, and MBA programs don't present them. The book contains evidence and examples of these alternatives.
Standard LP agreements for venture capital funds are structured around 10-year cycles, which creates pressure for companies to exit or go public within that timeframe. This made more sense historically when companies went public within three years of founding, as Amazon did. Today's reality involves 20-year timelines to success, making the 10-year fund structure increasingly mismatched with actual company development.
Companies like Stripe have resisted going public because the current system creates gravitational pressure toward early exits. Founders need better tools to resist these pressures rather than grabbing whatever control mechanisms are immediately available.
Founder control is preferable to investor control, but it has significant problems. Founders with dual-class share structures often lack a backup plan when those protections fail. Dual-class shares are defeated more frequently than founders realize—through stock price drops, investor pressure to remove protections, or simply the death of the founder.
A recommended approach is to write into corporate documents that if founder control is ever defeated, an alternative structure automatically activates. This can be established at the seed stage and doesn't require waiting until later rounds.
The perception of invincibility from dual-class shares creates unhealthy psychological effects. Hubris syndrome, documented in psychological literature, makes leaders less generous, less compassionate, more selfish, and more fearful of losing power. Some public mental breakdowns by high-profile founders may reflect this dynamic rather than healthy leadership.
Building a 50 or 100-year company requires structures that outlast any individual founder. One of the most meaningful reasons to start a company is creating something that endures beyond one's own lifetime.
Public Benefit Corporations (PBCs) offer one mechanism for embedding long-term mission priorities. The first encounter with this structure came through Scott Phoenix, who founded Vicarious as a PBC specifically to avoid being forced into short-term optimization if AGI were achieved.
The long-term benefit trust designed for Anthropic is a perpetual purpose trust rather than a nonprofit foundation. It places outside trustees with the power to appoint directors to the for-profit board. This structure was developed over multiple conversations and defended through two years of term sheet negotiations before being finalized at the Series C stage.
Anthropic's structural choices contribute to several advantages: superior talent attraction because people want to work at a company they perceive as aligned with positive values, stronger internal alignment around mission, and greater resilience against external pressure to compromise on core principles.
Even carefully curated cap tables can face unexpected challenges. Anthropic experienced a situation where a significant stake ended up in bankruptcy proceedings involving Sam Bankman-Fried, despite initial investor alignment. This illustrates that even thoughtful selection of investors doesn't eliminate all risks, reinforcing the need for structural protections beyond just choosing the right people.
Companies with strong structural protections can act consistently with their stated values even when facing significant external pressure. Anthropic declined a $200 million contract based on their principles, which generated unexpected positive public response including sidewalk thank-you messages near their headquarters. Claude subsequently reached number one, demonstrating that mission-aligned decisions can produce business benefits that aren't immediately predictable.
The early evidence suggests that investing time to establish thoughtful governance structures provides substantial value to long-term company success and resilience.
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