455 “Only Idiot Startup Founders Will Stay In California.” – Mark Cuban | Different

0:16Thanks for pressing play. This is Christopher Lochhead and welcome to a very special episode. I'm hoping we can have a fact-based discussion about a potential change in California that could affect almost everybody in California and could make a very meaningful change to everyone who's involved in the startup ecosystem. From founders to people who work at startups to investors to people who are dreaming of working at startups and ultimately everybody who owns anything in California. You see, recently Mark Cuban came out and said something that caught a lot of attention. He said, quote, only idiot startup founders will stay in California, end quote.

1:00powerful words. You may or may not like Mark Cuban, but there's no doubt that he's not stupid. And there's no doubt that he's not a very big hearted entrepreneur. Most people don't know that Mark Cuban has arguably done more for bringing down drug prices in this country than anybody in the drug industry or anybody in politics. And look, I like Mark Cuban. I don't know him. I agree with some of the things he says. I don't agree with all the things he says. We have of political differences, it doesn't matter. What matters is most people would consider Mark Cuban to be a, let's just call it, decent billionaire and certainly one of the legendary startup founders of all time.

1:38So why would a man like that say only idiot startup founders will stay in California? Well, if you understand what California voters are being asked to vote on this coming election, that's where it starts. It's called Prop 40. And if you're in California, even if you're outside of California, this is important to pay attention to because this will be a first time tax like this in America. Now, this Prop 40 is being marketed as a one-time billionaire tax. And there's a great old Tom Waits. Tom Waits is one of my favorite artists of all time. And he has this song about marketing called Step Right Up.

2:16And it's the greatest song about marketing ever written. And then step right up, he says, and the large print giveth and the small print taketh away. And once we get into the facts about this proposal, you might agree with me that's what's happening. But here's what's being marketed. One-time billionaire tax. Billionaires have shit tons of money. There's a shortfall in California on the budget. We wouldn't want to consider cutting spending. So we need to increase taxes. so let's do a one-time 5 % asset tax on billionaires. What's the problem? They can afford it. Well, you could argue, some people, that the premise of what I just said to you is not a problem.

2:59Maybe you agree with that, maybe you don't. But when you begin to look at the fine print, what you begin to see is what the premise of this tax is. Because it turns out, this isn't just a conversation about billionaire assets. It's a conversation about ownership, what you own, what I own, and if what we own is allowed to be taxed. So if you're a startup founder, you're a startup employee, you're a startup investor, you have stock or stock options in that company. You own a part of the dream. This is a big part of what made Silicon Valley. It was foundational to Silicon Valley. And what's being proposed here is a tax on any valuable asset, anyone potentially who owns stock, owns bonds, and owns stock options.

3:48This new law opens the door to that. And if enacted, Prop 40 would be the first, as I mentioned, the first U.S. tax that is specifically structured as a state-level tax on individual accumulated assets and wealth. Anything you own, that's what's written in the proposal. We'll get to that in a second. Okay, so what's on the table? As of this recording, Prop 40 has about a 10 % lead in the polls, according to the UC Berkeley Institute of Governmental Studies. It's showing right now, and we're recording this on August 19th, 2026. Right now, the polls say a 48 % yes to a 41 % no, with 11 % undecided.

4:40Now, interestingly, the prediction markets are betting very different. People putting their money where their mouth is say Prop 40 is a 64 to 75 percent no, which is kind of interesting. So a very big difference between the prediction markets where people bet on future outcomes and polls where people ask questions about what they think about future outcomes. Regardless, this is on the table. And if you're in California, and even if you're outside of California, you're probably going to be hearing a lot about this very soon. We've been writing about this since the spring, and we think now is the time to do our best, do my best, to engage as many people as possible in a dialogue about this.

5:23Now, I want to try and do this as best as possible and keep politics out. Let's look at the facts about what's being proposed. I don't care whether you're a Democrat, you're a Republican, you're an Independent. I don't care. Just so you know, I'm an Independent. On social issues, I tend to lead more Democrat on fiscal issues on military and law enforcement. I tend to lead more Republican. All right. So let's ask what happens if we give the California state government the ability to start taxing assets, because that's what this really is. It opens the door and it changes the constitution for the first time in California history and American history to allow a state government to tax existing assets other than, of course, your property, which we all pay property tax.

6:08Okay. So what happens now? Imagine this. Imagine you join a startup. Imagine you're 27 years old. You're super excited. You join maybe your employee number 20 something. Now you went to that startup, but you also got a job offer at Google, Meta, Apple. You could have made a pile of cash there. Always fun. But instead, you take less cash and you bet on the dream of a small group of people. And in exchange for that often much less cash, you get a piece of the dream. You get stock options in the company. Why? Because you believe. And if you know about category design, one of the things you know is the most important product that any company ever ships is belief.

6:57belief in what they do is a value that they've that they solve a problem that matters and belief ultimately in a solution that solves an important problem that leads to a different future in the way we live work and play that's what entrepreneurs do so if you believe in this crazy little dream you believe in this group of founders you join the company and then what happens things start to go well the company raises some more money the company has some traction in the market the category starts to show signs of maybe tipping. All of a sudden, the valuation increases. Maybe it explodes. And potentially on paper, you are now worth$100 ,000 or hundreds of thousands dollars or maybe even millions on paper.

7:40And now you've been there four or five years and the company is still not public. So you have an unbelievable achievement that you're now part of and you have materially changed your net worth on paper. But you see, you haven't sold anything yet. Most startup employees don't sell any equity in the company for very long periods of time, particularly the ones that are there early. You haven't actually made millions. You will be able to potentially, if the stock holds its price and you're able to sell either in an IPO or an acquisition or through private sales, what have you, that stuff tends to come later on if you're lucky, very, very lucky.

8:16but on paper you have this wonderful gain. You can feel good about it. You can tell your spouse that you're working real hard and on paper we're making great progress. And yeah, you have no, none of that money, none of it. You're paper rich and cash normal. Now, this is not some weird edge case, by the way. This is actually how Silicon Valley works. This is what happens for people who come here, who move from Boston or who move from India or who move from wherever they move to come here to pursue the dream. This is exactly how it works. Founders, employees, investors have equity. The founders and employees take equity in lieu of much less cash.

8:56And of course, the investors swap their cash to own stock equity. All right, as a result of all of this, everybody involved is taking an enormous amount of risk for the possibility of enormous value creation in a different future. We got to underscore here, this isn't a very different approach to historically how most people have pursued their careers. Most people look for the most amount of security. When I was growing up, a lot of what I heard was, what you need, Christopher, is a good government job. And people gravitate towards that for lots of good and very human reasons. the people who who start companies the people who believe in big dreams and are willing to sacrifice work harder than normal most people at startups work more hours than most people who work at the department of motor vehicles and so this is a different kind of thing it's a bet on the future it's a bet on the american dream and they take a lot of risk to do that well it turns out that that ownership stake, that trading time, that trading salary for bigger ownership, that's foundational to what has made Silicon Valley, Silicon Valley.

10:14Now, in the fine print of Prop 40, it introduces a fundamentally different idea than what we've had before around taxation. It says that they're going to change the constitution of the state to allow for the taxation of, quote, all forms of personal property and wealth, whether tangible or intangible, which of course includes stock, stock options in startups and equity in startups. So not simply what you earn, but what you own, your net worth, the things that you spent years and years building, but you haven't monetized by selling. You've held onto them. Okay. Now I look, I've had a lot of conversations with people about this and some people say, yeah, but Christopher, you know, it's billionaires.

11:03They don't need the money. California needs the money. And that's an obvious pushback and it's legitimate. They say, Hey, listen, it's one time. They're restricting this to one time. Calm down. This isn't taxing your 27 year old employee. The threshold is at a billion. They're not coming after the billion. They're only coming after the billionaires. There's only 200 of them. Well, you'd be correct if you said that. That is exactly the proposal. A one-time 5 % tax on net worths above a billion. And like I said, that's about 200 people. At Category Pirates, our best guess estimate is somewhere between 100 to 150 of them will leave.

11:47The reality is the ultra-wealthy are also ultra-mobile. Okay, so right now, that's what's on the table. However, Prop 40 doesn't simply collect money from some billionaires. It's a new constitutional framework, and that's very different. Today, it's a billion. Today, it's 5%. Today, it's one time. All true. And remember this. America's federal income tax, when it was originally put in place, was also temporary during the Civil War. It disappeared. And then decades later, America amended the federal constitution to authorize income tax. And, well, here we are. So, it's very unrare for a new tax to be implemented and go away.

12:36And it is almost impossible to imagine where a change in the Constitution happens to make taxing something that was heretofore illegal to tax, now legal, is only used one time. Now, am I saying California will definitely lower the threshold from$1 billion to$100 million to$10 million to$1 million to$250 ,000 to$100 ,000 to your startup equity? I don't know. Nobody knows that. And I don't want to be ridiculous here. Far from it. But the point is, nobody knows. And what we do know is that this is a change to the Constitution that opens this door in the future. The way the prop is written is it's not restricted to a one-time event.

13:22And it's not restricted to billionaires. So what happens next? I don't know. to you? Bet you can guess. We can speculate. Now, none of this is about feeling sorry for billionaires. I think this is where the conversation goes sideways and people just, you know, see red. You don't have to love billionaires. You don't have to feel sorry for billionaires. Some people don't think billionaires should exist. That's a different argument. We can have that argument if you want. That's actually not the argument I'm trying to have at all. And I'm trying to spend between now and the election trying to have a fact-based discussion that is not emotional, that just focuses on what's happening and whether or not we want to give the government this right.

14:07That's it. If people on the far left or even the medium left or the center left have something about billionaires and that makes them all angry and all that, we can have that discussion some other time. Right now, this is about do we want to open the door to taxing assets, not about do we think billionaires should exist. Do we think people respond well to incentives? Do we think founders respond well to incentives? Investors respond well to incentives. Capital responds well to incentives. They do. And there's something highly unusual about the people who are targeted for right now with this tax.

14:42They're all billionaires. A coal mine can't move to Nevada. A building can't move to Texas. But a software founder can. A venture capitalist can, a solo creator capitalist can, uh, somebody quote unquote telecommuting or zoom working can work from anywhere. I category pirates. There's three of us. Eddie lives in Chicago and sometimes in Hawaii and I'm in California and Brianna lives in Alaska sometimes. And sometimes we have no idea or a lot of times we have no idea where she is, but we're all on the calls together and always collaborating and building. It doesn't matter where you live, particularly if you're in the intellectual capital business, if you are a creator capitalist, knowledge worker type, right?

15:24A family office can move and capital moves at the speed of a wire transfer. That's why we think that, you know, roughly half to maybe even 150 billionaires might move because 5 % of your net worth, it would be a hard thing to do for most people. Most people don't have 5 % of their net worth laying around in cash. Anyway, I don't, we don't have to talk about them. But here's the thing that we do need to talk about. It's not just about potentially many billionaire entrepreneurs leaving, which is, like we said, going to happen. It's about what if the next generation of great founders don't have to leave California?

16:04What if they don't come? That's the much bigger problem. Okay. So, So the Hoover Institute has done some work on this and they propose what you could call the$24.7 billion question. You see, Stanford's Hoover Institute has created a model that they say this change will create a$24.7 billion negative fiscal impact for California. That's what the Hoover Institute says. You can believe them or not, but you can't call them stupid. Okay, so this tax is designed to fix a budget shortfall. And yet Hoover says it will create almost a$25 billion hole. How could that be? Well, it comes down to that migration.

16:52If enough extremely wealthy taxpayers leave, California doesn't simply risk losing the wealth tax, it can lose the future. Income taxes, capital gains, business activity, investment, philanthropy, tax bullying activity, etc. etc. If 100 people who are insanely wealthy leave, that's terrifying from an economic tax perspective. Now, this is not a model. It's not a fact about what will happen. It's what we should be very crystal clear about. Models are only as good as their assumptions. If almost nobody leaves, the economics will look one way, much better. If a substantial amount of wealth leaves, things in California will look very different, which is exactly why the important question isn't do billionaires deserve to pay more tax?

17:43The question is, are we sure California makes any money doing this? Those are two very different questions. Now, let's look at what California already has. And this is where things get kind of bananas. Before California starts experimenting with these incentives. Let's just take stock of what's been going on here and understand the massive amount of value created. As you may know, the Magnificent Seven, now the Magnificent Eight with SpaceX coming public, are basically driving the vast majority of the growth of the entire S &P 500 in the United States. So if you have a retirement portfolio, if you set up accounts for your children's college and so forth, and you're invested in a stock market in any way, and particularly the S &P 500 and the NASDAQ 100, your net worth and my net, just like mine and everyone else who owns stock in the United States has been positively affected by now the MAG-8.

18:47And specifically, here's the aha. Six of the MAG-8 are California startups. Six of them. Apple, NVIDIA, Alphabet, a.k.a. Google, Meta, a.k.a. Facebook, Broadcom, and Tesla. Those are six California companies. And together, they're roughly, as of right now, about$18.5 trillion in market value. Now, when you step back and you say, hey, wait a minute, that sounds like a big number. It is. especially when you consider that the entire S &P 500 is worth in the mid 70 trillions, 70, seven zero trillions, and the six California Mag-6 are worth 18 and a half-ish trillion, which basically means that six companies, six startup companies founded in California represent roughly 25%, a quarter, of the total market of the S &P 500.

19:48Six startup companies that took off, built legendary categories, legendary value, are now 25 % roughly of the S &P 500, and they come from one state? It's pretty incredible. I'd say it's fucking legendary. And of course, that doesn't count the thousands and thousands and thousands of other technology startups in Silicon Valley, companies that are doing 150 million a year, companies that are doing a billion a year, etc, etc. And many, many, many other legendary California publicly traded tech companies. so make no mistake the incentive structure that created that was called ownership in companies stock ownership equity ownership and the incentive was to build for the future because when you first get stock options if you're very early they're in the pennies they're not really worth very much and if the dream comes true they're potentially worth a tremendous amount okay so this is a very different lens I'm talking about.

20:55This is where category design gives us some tools to look at the problem in different ways. As you probably know, of the 22 laws of category design, the first law is thinking about thinking is the most important kind of thinking. So the political conversation is should billionaires pay more? Again, we could talk about that. Another conversation we could be having is what kind of ecosystems are we designing? Because California isn't competing with itself. Now, the future for where legendary new products, companies, categories get built is a competition. It's game on now. California is now competing with Texas, Florida, and other places, some other parts of the world.

21:42I know a lot of people who are moving to Nashville. Boy, Nashville's nice. One of California's most iconic companies in an out-burger, for all practical purposes. Their CEO just moved there, CEO and primary owner. And for all practical purposes, the bulk of their headquarters is now not in Southern California, but moving on its way to Tennessee. So it's that startup ecosystem that California has that is now beginning to disperse. The people California wants to most attract are precisely the kinds of people with the greatest ability who can choose where they want to live and the people who have chosen to make their life's work betting on the future, believing in different futures, creating new categories, the founders, the creators, the engineers, the builders, the investors.

22:36These people take tremendous risk and they can pretty much be anywhere and they don't need to be in Silicon Valley. it. Okay, so is Mark Cuban right? Only idiot startup founders will stay in California. Well, there's a lot of good things in California. Very hard to leave. I don't want to leave. Very few people I know want to leave. I know many who have left. I know billionaires who have left. They did not want to go. But here's the question that I can't get out of my head. How many bad incentives can you stack on top of the world's greatest startup ecosystem before the flywheel starts spinning somewhere else?

23:20That's what I don't know. And so I encourage you to take a really good look at this. The way the law or the way the prop is written today, on one hand says this is a one-time billionaire only, but on the other hand, it makes it very clear that the door is open and they can expand the people who this is targeted at and their wealth level. Because for the first time, not just in California history, and in American history, the door is open to taxing things you own. Now, I want to be very clear. In order for the state government to do that, they would have to do one more thing, which is they would have to take it to a vote in Sacramento and they would need the governor's approval and a two thirds vote in Sacramento.

24:14If they were to do that, this would shift from being one time billionaire only to whatever new criteria that they set. This is the one part of this whole proposal that screams, that says, the ability to tax, quote, all forms of personal property and wealth, whether tangible or intangible. Today, that's restricted to the billionaires. But with a two-third vote in Sacramento, the state government can change it by themselves. They don't have to go back to the people. So look, you may trust the California government. You may think the people who are in charge today and the people who will most likely be in charge after the November election are trustworthy people.

25:05and you may not be concerned that the fact that this door is open, maybe they'll never walk through that door. I would point you to the quote from Joshua Rao from the Hoover Institute who said, Nothing is more permanent than a temporary government program. The California billionaire tax would amend the California Constitution, making it unlikely to be a one-time tax and doing nothing to solve California spending problem. That's an extraordinary statement from the Hoover Institute. And I encourage you to read their assessment of what's going on here. And so what am I trying to tell you? So we need to have the conversation around, do we want to give the government of California the opportunity to tax our assets?

26:01It's not going to happen right after the next election. It might not happen for several years, but it could happen. And if you believe Joshua at the Hoover Institute, nothing's more permanent than a temporary government program. So I'm encouraging you to talk about this, learn about this, educate yourself about this, spend some time on the AIs about this, make sure you understand what's happening and not happening, the facts about this. And if you care about the startup ecosystem in California, if you care about innovation, category design, new products and different futures, I think we all must understand and appreciate that a foundational building block is the ability to make a bet on the future, own a portion of a company and build value over time.

26:53That's the financial incentive for taking all that risk. I think that needs to continue. We can have a conversation about taxation. We can talk about how to do it. But in my opinion, we need to talk about this because this is not how to do it. Most importantly, I'm begging you, please learn about this and have conversations about this. Right now, we're having an inane conversation about should billionaires pay more or not. That's not the crux of what's happening here. The real crux is, do we want a tax on everybody's assets, potentially, in California or not? Do we want to give the government that power?

27:35All right, that's it. I'd like to thank you so much for your time and attention. It means the world to me and everybody involved with this podcast. And the thought I'd like to leave you with today comes from Teddy Roosevelt. Teddy Roosevelt, who said in a speech in 1910, property is the fruit of labor. Property is desirable, is a positive good in the world.