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A one-percenter from Facebook: Status quo needs to change (Q&A)

Former Facebook exec Chamath Palihapitiya grew up on welfare but caught a lucky break. He has an idea how the tech industry can help people -- and profit everyone concerned.

Chamath Palihapitiya Brian Ach, Getty Images for TechCrunch

Former Facebook executive Chamath Palihapitiya is that rare one-percenter who grew up on welfare.

The 34-year-old tech executive-turned-venture capitalist says his upbringing helped inform his thinking about the nature of the social compact between state and citizen. He's come up with a 1 percent plan of his own to help bridge the growing economic gap in San Francisco caused by tech disruptors. But not everyone is thrilled with his idea. Palihapitiya's backstory fed into a verbal confrontation recently with one of the most connected angel investors in Silicon Valley. More about that in a moment.

After Palihapitiya's family asked Canada for asylum from Sri Lanka's civil war in the 1990s, his mother worked as a housekeeper and nurse's aid while his father found odd jobs. It was a struggle, but Palihapitiya says they got by thanks to government assistance.

"There was at least some social infrastructure there to support us," said Palihapitiya, whose family of five managed to keep their small apartment as he grew up. "We were able to get access to health care that was affordable, and I was able to go to what is the best school in Canada, which only cost me $10,000 or $11,000 a year because it was all subsidized by the government."

Palihapitiya matriculated at Canada's elite University of Waterloo, where he received a degree in electrical engineering before emigrating to the US in search of his piece of the American dream. It turned out to be quite a piece.

Arriving in California just after the dot-com boom, Palihapitiya joined AOL, where he eventually headed the company's instant-messaging division. Following a stint at the Mayfield Fund, Palihapitiya joined Facebook in 2007 and served as the head of the user growth, mobile, and international groups. Four years later, he left to start The Social+Capital Partnership.

When Mark Zuckerberg took his social network public the following year, Palihapitiya's insider shares turned into a multimillion dollar fortune. (That sudden wealth also allowed Palihapitiya to indulge a personal passion. He bought an ownership stake in the Golden State Warriors basketball team in 2011.)

Frustration with status quo

But although his tax bracket qualifies him for residency at the top of the social-economic pyramid, Palihapitiya hasn't forgotten the hard times his family endured. He says that political elites in Silicon Valley need to think more creatively about how to improve opportunities for people stuck on the sidelines of this latest tech boom, especially as it's being manifested in San Francisco.

"I'm acutely aware that there are many other people who grew up like me who are frankly, 1,000 times more talented then I am," he said. "We should ask ourselves, 'Can somebody like me grow up with the exact same problems and disadvantages and yet get to the equivalent place as me 20 years from now?'"

He's disappointed with the answer to the question, noting, "The odds are a lot less than they used to be."

That frustration boiled over last week when Palihapitiya complained at a conference organized by Bloomberg that San Francisco is failing to do enough to help counter the social problems created by a growing wealth disparity in the city. He blames a "really, really, really broken political system."

Palihapitiya, who argues there should be a 1 percent equity tax on San Francisco startups, also skewered San Francisco Mayor Ed Le, for presiding over "a very stupid city government" and called for his resignation. What's more, he then appeared to ridicule Salesforce CEO Marc Benioff's 1/1/1 philanthropic program, which contributes a percentage of the software makers' earnings and employees' time in the form of volunteer work to the community, as nothing more than "marketing."

Sitting in the back of the room, noted Silicon Valley angel investor Ron Conway, an early backer of Google and PayPal, jumped to his feet as the session ended. "How dare you!" Conway shouted, telling Palihapitiya "you don't know what you're talking about." The two then sparred in front of a room full of technology executives, some of whom wondered whether this would be the prelude to pistols at 20 paces. (You can view a recording of most of the fireworks in this video clip.)

I caught up with Palihapitiya to learn more about his ideas for bridging the inequality gap. The following is an edited version of our conversation.

Q: Do you know Ron Conway?
Palihapitiya: We've known each other for years. Years and years.

I was a little shocked. It seemed out of character for him. It's unfortunate because his biography is great and he deserves a lot of credit for the things he's done. But he shouldn't be tone deaf on this topic. It's a funny dichotomy when you do a side-by-side picture of who was yelling and who was receiving the yelling. I don't think that was lost on anybody. It made for a very interesting Monday.

Conway is close to (San Francisco Mayor) Ed Lee. Maybe he was standing up for a friend. But he's also a very wealthy, very connected guy. Do you think he represents those forces that you're trying to reshape?
Palihapitiya: Sometimes it can be frustrating if you're given criticism. I wasn't directing it at him because I think he's trying his best. I just think the point is that while effort is fine, at some level you need to have results. We all need to be measured on results, not effort.

What is the problem that San Francisco and the tech industry face?
Palihapitiya: We are creating unprecedented amounts of change in every single market that you can imagine. As that happens, we are capturing unbelievable amounts of wealth. I think all of that is good. What we're not doing well is creating incentive systems so that other people can participate in that wealth creation. Specifically, why, if we're willing to create subsidies and tax breaks for companies that we know are going to be worth $20 billion, $30 billion, $40 billion, $50 billion -- why aren't we asking for some quid pro quo?

What would that be?
Palihapitiya: One percent of their equity. You put that in a fund. When that eventually becomes liquid and worth something, you take that money and reinvest that in the community.

How would the 1 percent equity plan work?
Palihapitiya: Very simple. You're a startup and you raise money. And you're looking for office space. There should be a website -- -- I don't know. You go to this website and it shows you all the office space that's available and what you'll see is that relative to market rates, it's subsidized space. It's cheaper. It's located in SoMa or the Tenderloin or wherever else.

If you want to have a place here, we ask in return 1 percent of your equity so that if you do ultimately become successful, we can use some of that success to help other people -- and then let the company decide. Can you imagine how many companies would do it? When you're only worth $3 million or $4 million, what's giving away 1 percent of the company? But when that company is worth $20 billion or $200 billion, man, think of how much incremental value now is captured by the city for explicitly helping everybody else. Who would feel bad about that? Nobody would feel bad about that. People would be so proud to work at a company that would enable that. That's why I don't understand why are people getting so upset about this. I just think people are being so tone deaf to the magnitude of the problem.

Would you be willing to meet with the mayor?
Palihapitiya: If the mayor wants to meet me, I'd be happy to explain it to him. But it's pretty self-explanatory. It's really not complicated. My understanding is that these economic zones do exist in San Francisco. The question is whether they're interested in creating a quid pro quo. Otherwise, all you're doing is giving away subsidies and you're not getting anything for it.

You say that the riots in London (2011) and Paris (2013) are, basically, coming attractions for San Francisco? Why do you think the analogy is valid?
Palihapitiya: When those things happened, people tried to paint that as a racial issue. People tried to put that as Arabic unrest or ethnic unrest in London. What people are forgetting was that at the time, there was just immense structural frustration amongst a broad base of young people in both those countries. I don't think anyone wants to see that anywhere.

[In San Francisco], I think we should be proactive and put forward some really impressive, forward-thinking disruptive policies that could affect the kind of charge that could really make a dent in the problem.

Mayor Lee has put forth a plan to build 30,000 new apartment units.
Palihapitiya: I think it came out that only 6,000 of the units being proposed are for rent-subsidized. Well, if at the end of the day people feel that that's OK, then that's enough. I just think it's really naive to celebrate a bunch of piecemeal progress and Band-Aid things over.

And your plan would generate the revenue you're talking about to do those things?
Palihapitiya: The best part of this proposal is it you don't have to raise taxes and don't have to issue more debt, which is even better. For example, there was a report that came out that the city's going to have to find $1 billion to improve its water dam system because of rising sea levels. Where's that billion dollars going to come from? Is it going to be from another payroll tax? Is it going to be from another retail tax?

A bond issue, most likely.
Palihapitiya: OK, so a general obligation bond. But if you could find a way to generate revenue in a way that doesn't incur more debt or doesn't affect the taxes of the broadest class of people, then it's worth considering. But it requires courage and leadership. The question is whether the people that put people in power or the people that are in power have the ability to question things when they have to answer to also the people who put them in power. That's hard. At least for people who need to raise money to get elected.

Do you think the tech industry should take the initiative?
Palihapitiya: No, I think the city ought to take the initiative on this. Companies are largely started because people have things and services they want to build and bring to the people. Companies should do what companies are best at -- which is building products and services. If incrementally they are mission-driven enough to have an agenda where they want to give back, that's amazing. But it's not the case that every company's like that. Instead of trying to find companies and a whole swath of CEOs to be convinced they should do it, we should start where there's an expectation of it with the people who are elected. The moral imperative rests with government. That's why governments exist. Why can't we have them do it?

Isn't the tech industry being singled out because it's successful? Sort of like Willie Sutton and his "that's where the money is" quote.
Palihapitiya: What I think will happen is that it's going to uplift a broader class of people and some percentage of those are going to end up working at the next generation of great companies and tell their version of my story.

We're going to celebrate that. It's going to give inspiration to other kids who are in those same situations, and it's just about doing good. The question is whether is it worth being incrementally richer or is it worth being more incrementally in balance? Given the choice, I think being slightly more in balance is worth more than being slightly better than being more rich.