Support Worker-Led Start-Ups

Trevor Pels is a technologist, writer, activist, and Aspen Tech Policy Hub Fellow focused on advancing the rights of working people.

“Don’t be evil.”

It was once the most famous motto in Silicon Valley. Today, the company that created it has faced billions in fines for anti-competitive practices; endured internal revolt over doing business with the Pentagon; has censored itself in order to appease authoritarian regimes; and has faced controversy over its handling of issues including race and ethical AI research. This isn’t because the people who work there are “evil;” on the contrary, Google still has a reputation for being generally socially-conscious and remains an attractive employer. But the structure of the business and its incentives sometimes go against the collective conscience of its workers. This was best demonstrated when some employees did try to organize, in response to these and other ethical issues, and were promptly fired. This all took place shortly after that idealistic motto was quietly abandoned.

This isn’t to pick on Google – it appears to invest an unusual amount in addressing these ethical issues, relative to most firms. But it is emblematic of the journey many start-ups take: they begin as the principled projects of values-focused founders, slowly cede control to institutional investors, and finally shed their initial ideals in favor of maximizing shareholder value. This shift in power is the norm, with four in five start-up founders eventually fired or removed as CEO. Some try to prevent this by insisting they maintain total control of the business forever, but this concentration of authority can create its own serious problems (you might have heard about some at Theranos, WeWork, Uber, or indeed Facebook).

Instead, start-up founders should consider a new governance arrangement: let the company’s employees vote on leaders, rather than reserving that privilege for only for founders and subsequent investors. The people who do the work can democratically decide how that work is structured and directed. New governance mechanisms powered by blockchain technologies can help make such an approach reality.

If this sounds like a radical change, that’s because it is. But we do have some idea of how the results will play out: worker-led businesses have existed in other fields for centuries. In fact, some of the longest-running companies in the US are worker cooperatives, a form of worker-led business which is also owned entirely by its employees. Since they don’t take on outside ownership or investment, cooperatives haven’t been part of the venture capital or high-growth start-up ecosystem. However, they give us a chance to see the potential benefits of worker leadership. And as it turns out, there are quite a few.

First, worker-led businesses are built for the long-term. The incentives of a normal public company are to increase its share price as quickly as possible, typically at the pace that investors need to provide returns on their funds. This often means sacrificing the long-run prospects and reputation of a company in favor of immediate wins. On a small scale, this can look like accepting an unsavory contract; on a large scale, it could mean hiding a product's environmental impact for decades.

But worker-led businesses are different: relative to institutional finance, employees are just as invested in the success of the company, but on a much longer time horizon. They benefit from a steady income over many years, or even decades; not a big one-time pay-out. As such, successful worker-led businesses have incredible longevity, far outlasting their conventional peers. As a values-centric founder, this is the perspective you want your business to take. It provides a chance to leave a real, lasting legacy.

Another advantage: worker-led businesses are socially responsible. Since worker-led businesses are steered by the collective decision-making of their employees, it's actually possible for them to give up a short-term opportunity in favor of maintaining long-term values. Historically, worker-led businesses have a record of doing exactly that. Founders start organizations to represent a certain set of principles, and hire people who are aligned with them. A worker-led business helps ensure that those principles stay at the heart of the company's decisions, making some appropriate compromises without turning entirely towards profit maximization at the expense of all else.

A third benefit: worker-led businesses are more efficient. Studies have consistently shown that existing worker cooperatives are more productive than their traditional, investor-led peers. Why? Workers have more information about day-to-day operations than investors or executives, so they're better able to spot key inefficiencies. And when they have a voice in choosing leadership, they're much more likely to care enough to surface these issues; and to actually be listened to, when they do. This tends to streamline core processes significantly over time.

Finally, worker-led businesses can attract and retain better talent. Most start-up founders agree that the majority of their job is hiring the very best people. Talent isn't just key to the company's success; at this early stage, when product-market fit is still shaky, talent is the company. And employees at worker-led businesses rate virtually every aspect of their jobs as more fair and fulfilling, both materially and psychologically. If democratic workplaces become more widespread, it will be harder and harder to recruit without one. It doesn't take many of these organizations to siphon off the most effective top performers; those on the correct side of this brain drain will have a massive competitive advantage in implementing their visions.

Given all the advantages enjoyed by worker-led businesses, why don’t more start-ups take this route? Historically, the answer was often simple: these structural decisions were made by founders and investors, who would rather not give up their control. But this is changing quickly. With the rise of blockchain technology and the decentralized web, it’s increasingly possible for workers to start businesses that are democratic from the start, without traditional founder or investor control.

These companies (called “decentralized autonomous organizations,” or DAOs) are growing at breakneck pace, doubling in total size every three months while currently controlling $15 billion in assets. Conventional start-up founders and investors can prepare to fend off these new, efficient, values-focused, long-lasting, high-growth challengers; or they can embrace and shape this bold future themselves.