Yesterday, I shared what I read in the Netflix biography That Will Never Work about how cofounders Marc Randolph and Reed Hastings divided equity and how the first financing round led to Reed owning 68% of the company to Marc’s 30%. I shared all the math in this post.

The interesting outcome of that scenario was the ownership, voting control, and control of the board. Marc was CEO, but he owned a minority 30% stake in the company and didn’t have voting control. He also didn’t control the board because he wasn’t the board's chairman. Reed wasn’t an employee of the company but owned a majority 68% stake in it, which meant he had voting control. He was also chairman of the board, so he effectively controlled the board, too.

Marc and Reed were friends and had worked together at another company. They spitballed ideas until they landed on the idea that became Netflix. So they were used to working together and being brutally honest with each other.

In the fall of 1998, about a year into the company’s life, Reed sat Marc down and told him that he’d done some good things. Then he added, “I don’t think you’re a complete CEO” and “A complete CEO wouldn’t have to rely on the guidance of the board as much as you do.” Reed proposed that he join the company full-time and become the CEO. He suggested Marc become the president and that they run the company together as a team.

Reed had voting and board control, so technically he could have forced this decision on Marc. Instead, he left it up to Marc. Marc thought about it and in the end decided that Reed was better suited to be CEO and that he himself was better suited to work alongside someone disciplined like Reed. They divvied up duties. Reed focused on what they called “back-end” functions such as finances, operations, and engineering. Marc handled customer-facing things like PR, web design, movie content, partnership relations, and customer service.

With the changes agreed to, there was one last issue: compensation. Reed surprised Marc by requesting that the two cofounders redivide their ownership. Reed wanted 2 million more shares—and he thought they should come from Marc.

Marc doesn’t share exact numbers in the book, but he does say, “In the end, I’d agreed that a third of the shares Reed wanted, if he was to come on as CEO, would come from me. The other two-thirds he was going to have to ask the board for. Which he did – and which he got.”

In the end, roughly one year after the birth of the company, Marc relinquished the CEO title to Reed and Reed received additional shares. By this point, they’d raised an additional $6 million from Institutional Venture Partners, a prominent VC firm in Silicon Valley at the time. I’m not sure what the exact ownership split between the cofounders was, but I’d assume Reed had a significant, majority ownership stake in the company.

That’s the story of how Reed Hastings became the CEO of Netflix, as told from Marc Randolph’s perspective.

I’m making my way through That Will Never Work, a biography about Netflix’s origin. I finally got to the part I’ve been curious about. Marc Randolph is the author and was the first CEO and cofounder of Netflix, along with Reed Hastings. I’ve always considered Reed the founding CEO, and this book is helping me understand why.

A little bit of background first. When they started the company in 1997, Marc and Reed each received 50% ownership. They valued the company—an idea and two guys—at $3 million (pre-money). They issued 6 million shares, with each share valued at $0.50. Here’s how the ownership looked at this point:

• Reed: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake
• Marc: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake

To capitalize the company, they raised $2 million from investors. The company was worth $3 million (pre-money) and raised $2 million from investors, so its post-money valuation was $5 million (pre-money plus cash raised). For their $2 million, investors were buying 40% of the company. Here’s the math:

• $3 million pre-money valuation + $2 million raised from investors = $5 million post-money valuation
• $2 million raised from investors / $5 million post-money valuation = 40% ownership

Six million founder shares already existed. To give investors 40% ownership, the company issued 4 million investor shares, increasing the total to 10 million: 6 million founder shares split between Reed and Marc and 4 million investor shares.

Marc had a young family and was working full-time in the business, while Reed was part-time and had ample liquidity from selling another company. Reed believed in the idea and invested $1.9 million of the money they needed, and angel investors contributed the other $100k. Marc didn’t invest any capital. Here’s how the 4 million shares issued to investors were split between Reed and the angel investors:

• Reed: 3.8m shares ($1.9m / $2m = 95%) * 4m investor shares
• Angels: 0.2m shares ($0.1m / $2m = 5%) * 4m investor shares

This is where the ownership between the two founders changed drastically. Reed was a cofounder and investor, while Marc was just a cofounder. Here’s how their ownership changed after this fundraise was completed:

• Reed: 68% = 6.8m total shares (3.8m investor shares + 3m founder shares) / 10m total shares
• Marc: 30% = 3m founder shares / 10m total shares
• Angels: 2% = 0.2m investors shares / 10m total shares

Even though they were cofounders and Marc was CEO, Reed had a majority 68% ownership position in the company and was also the Chairman of the Board. Marc was CEO but had only a 30% ownership.

In the next post, I’ll detail how the ownership and other dynamics led to changes in leadership titles.

I’m still reading That Will Never Work, a biography about Netflix’s origin. The author, Marc Randolph, shares his perspective on the early days as cofounder and the first CEO of Netflix.

Netflix is a household name worldwide. It’s the go-to streaming service for people to watch movies, shows, and other television content. The company is publicly traded and has a market capitalization (valuation) of over $410 billion.

But things didn’t start that way. The company was born in 1997. Users could buy or rent DVDs by placing an order on its website. The orders were all fulfilled via snail mail from its small office in Scotts Valley, California. The launch of Netflix was a big deal that included tons of press. It was so successful that on the first day, the company servers crashed multiple times and the team had difficulty keeping up with and fulfilling all the orders.

What surprised me was how many orders the company processed that day: 137, which seemed low to me. Given the amount of publicity they'd generated before launching, I expected them to have done hundreds or even thousands of orders. But it was only 137, and that exceeded their initial expectations. They thought 15 to 20 people would order DVDs that day.

When I read this section, I thought about where the company is today and that first launch day. My takeaway is that everything starts not just small but really small. It takes time to make people aware you exist, even if you have a great solution. It’s the discipline to get a little better and compound your learning and growth consistently every single day that leads to massive outcomes over a long period. Being a breakout success on day one is the exception, not the norm. Most companies we consider wildly successful started small and got better every single day, year after year.

For the last year, I’ve been enamored with media entrepreneurs and biographies about them. This week, I started reading That Will Never Work, a biography about Netflix’s origin story. It’s written by Marc Randolph, the cofounder and first CEO of Netflix. I always think of Reed Hastings as the first and only CEO—I had no clue Marc was the founding CEO.

I’m early in the book, but I’m enjoying Marc’s recounting of the early days and how he overcame early obstacles.

One thing that resonated with me was his approach to naming the company and the concept of a beta name. Fun fact: the company was originally named Kibble. The logic behind the name was based on an old advertising and marketing saying: “It doesn’t make a difference how good the ads are if the dogs don’t eat the food.”

Marc chose this name because he wanted to remind the team that if the product was lackluster, it wouldn’t matter how well they sold it. He picked “Kibble” as a placeholder to remind his team to focus on building an amazing product that people would love.

Marc realized that picking the right name can take months and that you must give yourself time for serendipity to kick in. Instead of forcing a name at founding, he chose a beta name—a working name you use to get the company up and running (email, bank accounts, website, etc.). The key to a beta name is that it must be something so bad that there’s zero chance you’ll keep it. If you pick something tolerable, he said, your exhaustion and familiarity six months down the road may lead to your just keeping it. But, if you pick something awful, you’ll be forced to rename the company.

Ultimately, his team wanted one word that combined movies and the internet: Net . . . flix.

Marc detailed how hard it is to pick a good name. Here’s what to think about:

• A good name rolls off the tongue. One- or two-syllable words are best; ideally, the emphasis is on the first syllable. His examples: Google and Facebook.
• Too many syllables, too many letters, and people might misspell your website. Too few and they might forget the name.
• A name isn’t great if someone else already owns the domain or the trademark. Double-check before settling on a name.

Even a good name might not be an immediate slam dunk. Marc’s team didn’t initially like “Netflix” because “flix” made some team members think of “porno” or “skin flicks.” When the team was down to the wire and had to decide, they slept on it for a night and agreed it was their best option.

Naming is hard, but it shouldn’t stop you from moving the company forward or building your product or solution. Beta names give you a placeholder and time to find the right name. Marc’s beta name approach is great, and I plan to use it.

I had a great conversation this week and gained some unexpected insights. I was catching up with someone I worked with years ago and haven’t talked to in a few years. He’s a talented software engineer, and I love getting his perspective because it’s so different from mine. Part of our conversation was about my latest project and his projects. He asked some good questions about my project, and I asked him a few about his perspective on my project. One of my questions was about his reading and learning habits.

He shared that he isn’t a big reader of books, but he sees the value in the wisdom recorded in books and he’s interested in the software I'm building. I asked more questions about how he’d use it. Here’s what I learned:

• He has no desire to start reading whole books; it’s too time-consuming.
• The ability to access a repository of solutions would reduce his need to create solutions from scratch. He could leverage what others before him figured out to create better solutions in less time.
• Using a tool like this could accelerate how he learns about specific things without needing to spend hours reading books. He would learn more without materially increasing the time he applies to learning.

This is an interesting use case because I didn’t anticipate nonreaders seeing value in what I’m building. But this conversation showed me that there are likely countless use cases I haven’t anticipated. When you present people with a way to save time, they quickly see the value in it. This software shouldn’t make people change their behavior but should complement what people are already doing (or not doing).

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 54
• Total book digests created: 15
• Total blog posts published: 343
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read Empire: The House That John H. Johnson Built, a biography about publishing entrepreneur John H. Johnson
• Got feedback from five people regarding alternative layouts for a list of entrepreneurs on my blog
• Selected one of those layouts

What I’ll do next week:

• Mainly, focus on helping my family resolve the medical situation
• Read a biography, autobiography, or framework book
• Make it possible for software to be hosted in the cloud instead of locally

Asks:

• If you know any full-stack developers interested in working on the software for my current project, please introduce us!

Week two hundred fifty-nine was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• No material struggles this week

What I learned:

• This week, I helped one of my parents with a medical situation. I learned a ton about medicine, but not much related to this project.  

Those are my struggles and learnings from the week.

A friend sent me a video that Andrej Karpathy made about how he uses large language models (LLMs). According to his website, Karpathy was “a research scientist and founder member at OpenAI” before spending several years at Tesla as Senior Director of AI.

Karpathy shares lots of good info in his video, but it was one use case that prompted my friend to send it to me—and that stood out to me. Karpathy uses LLMs to help him read and understand books and research papers. Here are my takeaways:

• Nowadays, Karpathy mostly reads books using LLMs.
• Here’s his process:
  • Pull up the content (i.e., text) of the book.
  • Find the chapter he’s going to read.
  • The LLM likely knows what the book is about but won’t remember what specific chapters are about.
  • Remind the LLM about the chapter by pasting the chapter text into the LLM context window.
  • Ask the LLM for a summary of the chapter.
  • Read the summary.
  • Read the chapter.
  • If he has questions about what he’s reading, ask the LLM those questions.
• Reading a book with an LLM dramatically improves his understanding and retention of each chapter. It enhances his ability to understand material in fields he’s unfamiliar with or books written long ago.
• No tools exist that make it easy to do this, so he uses a “clunky and back-and-forth” process.
• He mentions that having the ability to highlight text and ask questions about the highlighted parts doesn’t exist but would be useful.
• Final thought: Don’t read books alone.

I’m glad my friend shared this video with me. It was useful to hear a detailed explanation of how someone leverages LLMs to understand book content. Although he has extensive experience with LLMs, his process is still cumbersome. The fact that he’s following this cumbersome process tells me that the value he’s getting from it must be immense.

The software I’m building will greatly enhance my understanding of the books I read with LLMs. Karpathy’s video confirmed I’m going in the right direction, that other readers are leveraging LLMs, and that they’re experiencing pain when doing so.

If you want to see this section of Karpathy’s video, it’s here. If you want to watch the entire video to see how he uses LLMs in life and work, see here.

Early this year, I read the updated version of Poor Charlie’s Almanack, a collection of Charlie Munger’s speeches on mental models and psychology. The book was a masterclass on decision-making. Since then, I’ve reread sections of the book and found recordings of the speeches. What Charlie Munger shares in those speeches is knowledge and insight that he spent decades acquiring. His wisdom feels like a cheat code, and I want to leverage it fully.

I wanted a cheat sheet of Munger’s wisdom to reference as I make decisions. During my research, I found something pretty helpful. It’s an animated video that condenses the most important lessons from Munger’s 1995 speech “The Psychology of Human Misjudgment,” which lasted about 75 minutes, into 14 minutes.

Tiny, a publicly traded Canadian holding company that acquires and owns businesses long-term, created the video. Here’s what its cofounder, Andrew Wilkinson, said this week in his newsletter about why they created the video:

In 1995, Charlie Munger, Warren Buffett’s longtime business partner, gave an incredible speech about why humans do stupid things.

In it, he breaks down all the key psychological effects that warp our thinking and cause bizarre behavior.

In 2014, I made it my mission to memorize this talk. I listened to it every single day on my drive to work and tattoo’d it into my brain.

It has been one of the most durable and important pieces of content I’ve ever consumed, and a few years ago, Chris and I decided to make it more accessible.

We took the original hour long scratchy audio recording and turned it into a shorter and more accessible animated video.

I’ll still create a cheat sheet, but I’m going to test Wilkinson’s approach and listen to this video daily to see if doing so accelerates my understanding of the concepts Munger discussed in this speech.

If you want to watch the 14 minute animated version of Munger's speech, you can find it here.

On January 27, 2020, I had lunch with an entrepreneur friend. He encouraged me to share what I’d learned from scaling my bootstrapped company to over $10 million in annual revenue. I’m private and was reluctant, but I wanted to help others who were just like me when I started my company—people who didn’t know what they didn’t know. I agreed, and we began a 60-day challenge. We both posted content daily to help other entrepreneurs (see our challenge details here). That challenge began on March 9, 2020, and ended on May 10, 2020. I didn’t miss a day—and I learned to enjoy the habit of reflecting and writing every day.

That was five years ago. Since then, I’ve written and shared a post every single day. That’s over 1,825 consecutive days of sharing my thoughts. When I agreed to the challenge, I had no idea I’d still be posting five years later, but I’m glad I am.

Every March, I reflect on my writing journey. Here are a few reflections:

• Strike zone – I read a book a week, mostly biographies. I used to think of reading and writing as independent hobbies. But writing about the books I’m reading has enhanced my learning and thinking. Combining them feels like it’s put me in my strike zone.  
• Format – I’ve played with a few different formats for creating posts about biographies I’ve read. The format I like best is a deep-dive series about a biography (see examples here and here). I’m aiming to get back to that format, and I’m building software to help with the creation process.
• Luck – Bringing value to others by writing has increased my luck surface area and led to magnetic luck (more on luck types here). When I focused more on writing about biographies, it led to more magnetic luck. Entrepreneurs want to know what other entrepreneurs have figured out but don’t always want to read an entire book.
• Audio – Last year, I tested doing a solo podcast about the books I was reading. It was really an audio version of this blog. I did 100 episodes to get reps and learn. Audio is a powerful format but requires significantly more work than writing. Publishing a podcast episode daily wasn’t sustainable. I’ll revisit doing a podcast, but I’ll need more support next time, and I’ll test different formats.
• Level up – I want to take this blog to the next level and create more value for others. Adding a page detailing all the books I’ve read and creating a profile page for each book (see here) is an experiment and just the beginning.
• Annual contract – Every March, I’ve asked myself if I’m enjoying this and want to keep doing it. If yes, I re-up for another one-year contract with the option to renew. I’ve now signed through 2026.

Those are my reflections. I’m looking forward to the next year. I feel like year six will be epic!