The Founders

The PayPal Story

It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. —Niccolò Machiavelli, The Prince…

“Calling us a mafia is an insult to mafias,” joked John Malloy, an early board member. “A mafia is far better organized than we were.” During its first two years of existence, PayPal cycled through three CEOs, and its senior management team threatened to resign en masse—twice.

…the company’s office featured both an indicator called “The World Domination Index,” which tracked the day’s users, and a banner bearing the words “Memento Mori,” Latin for “Remember that you will die.” PayPal’s oddball team was out to dominate the world—or die trying.

On the eve of its IPO, a prominent trade publication declared that the country needed PayPal “as much as it does an anthrax epidemic.”

PayPal was the first company to file for its IPO after September 11, 2001, as the country and the financial markets were only just beginning to recover from the attack.

Employee after employee described the era as a “blur”—a haze of exhaustion, adrenaline, and anxiety. One engineer slept so little during this period that he totaled not one but two cars driving home late at night from the PayPal office. The company’s CTO described the group as feeling “like veterans of an intense military campaign.” Still, PayPal’s former employees waxed nostalgic. “It was crazy exciting,” observed Amy Rowe Klement, “I don’t think we even fully realized the rocket ship we were on when we were on it.” Several said they did their life’s finest work during this period. “I felt like I was part of something grand, and I’d never had that before,” said one quality assurance analyst, Oxana Wootton. “To this day,” remarked a fraud analyst, Jeremy Roybal, “I still bleed PayPal blue.”

The British musician and producer Brian Eno once said that as a visual art student he was taught that artistic revolution came from solitary figures—Picasso, Kandinsky, Rembrandt. But as he looked into these revolutionaries, he discovered them to be products of “very fertile scenes involving lots and lots of people—some of them artists, some of them collectors, some of them curators, thinkers, theorists… all sorts of people who created a kind of ecology of talent.” Eno called it “scenius.” “Scenius,” he said, “is the intelligence of a whole… operation or group of people.

…many of PayPal’s signature achievements emerged from the productive friction of the group—the tension among the product, engineering, and business teams yielding pearls of innovation.

Max Levchin’s Origins

“Max” Rafailovych Levchin was ten years old, and he was sleeping ninety miles away when Chernobyl exploded.

Not taking the easy way out was a Levchin family tradition. As Jewish people living in an anti-Semitic state, they worked doubly hard for their achievements—and faced obstacles others did not. One morning, Levchin’s father awoke to find a Star of David graffitied on their front door. They told their son that because of his religion, becoming valedictorian of his high school would be his only shot at getting into a top college.

The year Max was born, Lukatskaya was diagnosed with a rare and aggressive form of breast cancer. “She basically said, ‘I can’t die. I have my grandson here.’ So she willed herself to live for another twenty-five years,” Levchin said. “I had this living example of someone who’d never surrender under any circumstances.”

Lukatskaya applied for funding from a Jewish refugee agency and made arrangements for the Levchins to immigrate to America. The family’s departure was kept a closely guarded secret. “It was one of these crazy years where I knew for about twelve months we were going to leave the country and I couldn’t tell anybody,” Levchin recalled. The family left for the airport, pared-down possessions in tow. Despite the balmy July weather, the Levchins arrived at the terminal wrapped in down winter coats to avoid having to declare them. After a final exit interview with a Soviet border agent—who reminded them, in no uncertain terms, that their emigration would be final—they boarded their flight to the United States.

They sold the coats to an underground dealer for just pennies on the dollar. But the limited proceeds made a big difference. Just before leaving Ukraine, the value of the ruble had collapsed, reducing the family’s few-thousand-dollar nest egg to just several hundred dollars.

Shortly after arriving in America, he fished a broken television out of the trash, which his physicist family fixed up. He could now watch the sitcom Diff’rent Strokes, and as he told journalist Sarah Lacy years later, he modeled his English on Gary Coleman’s Harlem-raised Arnold Jackson. “Where did you learn English?” one of Levchin’s teachers asked him, curious about Levchin’s New York–meets-Kiev lilt. “Watchu talkin’ ‘bout, Mr. Harris?” he replied. The teacher gently suggested Levchin broaden his media diet.

Levchin wanted to go to “MTI.” “I said, ‘I really want to get into MTI. You have to get me into MTI.’ She’s like, ‘What the hell is MTI?’ ” Levchin was referring, of course, to MIT.

“I came to U of I because of Marc Andreessen,” admitted Jawed Karim, a future PayPal employee and later cofounder of YouTube. In high school, Karim was a Mosaic devotee, and when he learned the browser’s origins, he trained his sights on UIUC for college.

With his two close friends California-bound, Levchin had designs on dropping out as well to pursue entrepreneurship full-time. Of course, there was the matter of telling his education-oriented family. The conversation was short: “Your grandma’s already dying,” his parents told him. “Do you want to accelerate the process?” For the Levchins, a bachelor’s degree was simply the first rung on the educational ladder. “Higher education in the Levchin family is… a PhD,” Levchin told the San Francisco Chronicle, years after his parents’ admonishment. Shut down, he returned to UIUC to finish his degree.

“We did zero sightseeing anywhere. I just wanted to get to Palo Alto as quickly as possible,” Levchin said.

Early Ventures

SponsorNet did bring in revenue, though, enough that the team hired employees and signed a lease on office space at the bottom of Huntington Tower, a minor Champaign landmark. “We were students. And so for us to actually go and get an office,” Banister remembered, “was… a fairly big deal.” To focus on SponsorNet, Banister took the semester off from classes. Levchin and Nosek moonlighted, precariously balancing studies with their SponsorNet duties.

Despite its failure, SponsorNet was formative, their first go at hiring a team, creating a product, selling it, and making—or in this case losing—money. “I don’t think PayPal would have been possible without it,” Nosek said.

Levchin binged the three-hour-twenty-seven-minute black-and-white film with abandon. “All you’ve got is you, the TV, and air-conditioning… I watched Seven Samurai at least twenty-five times during the course of that summer. I got addicted.” As of this writing, Levchin claims to have watched Kurosawa’s classic over one hundred times—and calls it his sole source of “management training.”

Levchin did eventually manage to “acquire a girlfriend,” but his devotion to coding complicated the romantic commitment. “I remember once coming over to her house and, right when I got there, going into the bathroom to write code.” Knocking on the door, his girlfriend asked, “What are you even doing here?” “What? We’re dating,” he replied, confused at the question. “No, this is not dating. You are coding in my bathroom.”

NetMeridian’s success was both a blessing and a curse. As users grew, infrastructure had to keep pace, but Levchin didn’t have cash for ever-bigger servers. So he revisited a funding model he first used during the lean SponsorNet days: he daisy-chained credit cards to finance the company’s growth, which saddled him with high-interest debt and marred his credit rating for years.

His idea was called Smart Calendar, a digital upgrade for the dead-tree relic of yesteryear, and Nosek persuaded Thiel to invest. “In retrospect, just about everything was wrong with it,” Thiel later said of Smart Calendar. The saturated e-calendar space had “like two hundred companies” competing for dominance. Facing headwinds from without and conflict within—Nosek had a falling out with his cofounder—Smart Calendar shuttered.

Nosek agonized over Smart Calendar, in part because it had cost his new friend Peter Thiel money. “In my mind, it hurt my relationship with Peter, because I lost his money,” Nosek recalled. But for Thiel, the value of Smart Calendar wasn’t as an investment so much as a crash course in start-ups. Nosek had shared the blow-by-blow account of the company’s rise and fall, walking Thiel through the intricacies of internet marketing, customer acquisition, and product design. Thiel would later cite his Smart Calendar investment as a rich vein of learning, a failure whose lessons—including choosing cofounders wisely and minimizing competition—paved the way for PayPal’s success. For Nosek, Thiel’s willingness to continue to speak to him in the aftermath of Smart Calendar’s demise was a lesson, too: it illustrated that losing money in Silicon Valley wasn’t like losing money elsewhere. Here, you earned points for effort—not just for an exit.

Peter Thiel

But then came a consequential failure: Thiel interviewed for a Supreme Court clerkship and was turned down. For Thiel, the court’s rejection was cataclysmic. “It seemed just like the end of the world,” he later said.

Howery was impressed—not just by Thiel’s depth of knowledge, but also by his range. Howery returned to his dorm and said to his girlfriend, “Peter might be the smartest person I’ve met in my four years at Stanford. I think I might work for him for the rest of my life.” To Howery’s girlfriend, friends, and family, this was a ridiculous declaration. Howery had received lucrative offers from top East Coast financial firms and he would turn all that down for… what? Thiel’s fund had no employees other than Thiel himself. It didn’t even have an office. But Howery was intrigued nonetheless—if more by the man than his nascent firm.

Ford led Howery inside 3000 Sand Hill where he pulled out a building schematic. He slid his fingers over the rows of already-filled offices but paused over what looked to Howery like a blip on the page. “Well, I don’t have an office,” he said, “but there is this broom closet that might work.” Ford walked Howery to the closet. A broom, a mop, several buckets, and assorted cleaning supplies lined the walls. Howery accepted on the spot, and Ford put together an unfussy, one-page lease. Howery set to work decorating Thiel Capital’s new headquarters. “We got some metal numbers from a hardware store and nailed them to the outside wall,” Howery recalled, “so it looked a little less like a closet.” In lieu of windows to connect them to the outdoors, Ford gifted his new tenants two wildlife posters to gaze at.

Levchin turned to Thiel to handle the sensitive negotiation, and Thiel did so. “I thought, Wow, that’s what a hard-core Jedi mind trick looks like. I basically said nothing for three hours, and I just watched Peter explain why [John] has to have less equity.” Levchin began to wonder whether Thiel might play a bigger role than just as a Fieldlink angel investor.

That left Levchin with Peter Thiel—“The only guy I knew who wasn’t currently busy and could be CEO.”

But Thiel could also see the value in operating experience—time in the CEO chair could fine-tune his investor antennae.

Throughout the negotiation, George observed, Thiel had seemed eager to offload the business: “He seemed like he really wanted out of what he was in.” Thiel abhorred bureaucracies, and now that Confinity was growing, he risked being ensnared by the very things he had abandoned upon leaving law firm life—management, paperwork, meetings. “Peter is even less tolerant of bullshit than I am,” the famously administrivia-averse Musk remarked. “My bullshit tolerance is low, but Peter is like zero.”

“There was a very high probability that only Peter could have been successful as CEO, because people needed to respect him. Max needed to respect him. Reid, the others… people were there because Peter was,” Hurd said. “Was Peter a good manager? Absolutely not. And he would tell you that. But no one else could have been successful at it.”

Thiel was both an example of and a proponent of putting talented neophytes in charge. Early on, Thiel appointed Reid Hoffman as COO—cutting against his board members’ advice. He installed Sacks as VP of strategy—despite concerns about Sacks’s collegiality. He promoted a fresh-out-of-business-school Roelof Botha to CFO and put a young attorney named Rebecca Eisenberg as the first legal chair on the IPO. Later, talk of Thiel’s contrarianism would focus on his decisions in markets and politics. But during the PayPal years, his instinct to cut against the grain focused on human beings, as he placed unexpected bets on unconventional people.

“The great thing about Peter and his group is that they really didn’t care about the other stuff. That I was this outspoken columnist. That my face [was] on a bus before that. That I spoke my mind. That I was a woman—and known as a feminist. That I admitted a history of bisexuality,” she said, “He didn’t give a shit. He cared about smart people who worked hard.”

Thiel presented a solution: the company should take the $100 million closed in March and transfer it to his hedge fund, Thiel Capital. He would then use that money to short the public markets. “It was beautiful logic,” board member Tim Hurd of MDP remembered. “One of the elements of PayPal was that they were untethered from how people did stuff in the real world.” The board was uniformly aghast.

With his theatricality on full display, Moritz “just lost his mind,” a board member remembered, berating Thiel: “Peter, this is really simple: If this board approves that idea, I’m resigning!"

"We would have made more money [investing] than anything we did at PayPal.”

The famous rationalist also caught himself laughing at the feelings involved. “I aspire not to be this competitive,” he said, “but I’m not always successful. I don’t think it’s emotionally healthy to be this competitive, but that’s the honest part of what drove it.”

The team recalled their amazement at seeing both CEO Peter Thiel and general counsel John Muller performing keg stands. “People doing keg stands,” Jeremy Roybal recalled, “who have clearly never done a keg stand before.”

The employees’ most vivid memory of the day was Peter Thiel playing ten simultaneous games of speed chess in the parking lot. Each game included a cash bet, the bills tucked neatly under the sides of the chess boards. A large crowd huddled, as Thiel played each board and moved to the next in rapid succession. During one stretch, Thiel won nine out of ten games. “Peter doesn’t drink much… and we made him do a keg stand that day,” Janardhan recalled. “And after that, he was half-drunk—and still beat nine out of ten people! It’s crazy.” David Sacks earned lifelong bragging rights for being the only player to beat Thiel during the simultaneous chess match.

Elon Musk

For Musk, the Scotiabank internship proved “how lame banks are.” Fear of the unknown had cost them billions, and in his later efforts at X.com and PayPal, he’d return to this experience as evidence that the banks could be beaten. “If they’re this bad at innovation, then any company that enters the financial space should not fear that the banks will crush them—because the banks do not innovate,” Musk concluded.

Musk admitted to studying business as a hedge. “I was concerned that if I didn’t study business, I would be forced to work for someone who did study business, and they would know some special things that I didn’t know,”

Musk’s passion for physics predated college. “I had an existential crisis when I was twelve or thirteen,” he later said, “and trying to figure out what does it all mean, why are we here, is it all meaningless—that sort of thing.”

“A lot of times,” Musk explained, “the question is harder than the answer, and if you can properly phrase the question, then the answer is the easy part.”

Musk didn’t receive a reply from Netscape—but he also wasn’t rejected outright. So he decided to venture to Netscape’s offices and loiter in the lobby. Perhaps there, he could start a conversation that would lead to something. This didn’t pan out either. “I was too shy to talk to anyone,” he later told Digg founder Kevin Rose. “So I’m just, like, standing in the lobby. It was pretty embarrassing. I was just sort of standing there trying to see if there was someone I could talk to and then I was too scared to talk to anyone, so then I left.”

Though cast today as one of business’s consummate risk-takers, the Musk of 1995 was conflicted about abandoning grad school. “I’m not a born risk-taker,” he told an interviewer for UPenn’s Pennsylvania Gazette just years after. “I also had a scholarship and financial aid, which I’d lose.”

The general-purpose programming language Java launched in January 1996; by September, Musk and his technology team had put Java at Zip2’s core.

“By mid-1997… Zip2 had become an entity that, in effect, functioned as a kind of mini-Microsoft,” wrote one industry observer.

“He’s one of the greatest salesmen I have ever met,” Fricker said of Musk’s entreaties. “Like a Steve Jobs. When he articulates something, he tends to find the kernel that will appeal to a broad mass intuitively.”

At Musk’s home one day, Payne walked into the bedroom. “The room was literally filled with books—biographies or stories about business luminaries and how they succeeded,” Payne said, “In fact, I remember sitting there and at the top of this stack was a book about Richard Branson. It kind of clicked to me that Elon was prepping himself and studying to be a famous entrepreneur. He had some superordinate goal that was driving him.”

Musk gave employees ample freedom—“the room to be everything they could be”—but set palpably high expectations for performance. “I have never worked so hard and fast in all my life,” she said. Bezona enacted Musk’s preferences around salaries, benefits, H1B visas, and severance packages, and she found X.com “very generous in its benefit packages”—and its CEO gracious even when individuals exited. “If somebody couldn’t cut it—if somebody wasn’t doing their job—Elon always let them go with dignity and grace.”

His interview with Musk was memorable. “I remember that I used the words ‘change management.’ And he said, ‘Stop using bullshit words,’ ” Lal recalled.

Narratives like Musk’s played well in the media, successfully tapping the public’s perennial interest in underdog stories. But Musk also had a special knack for capturing the press’s attention. He discovered that his willingness to veer into exaggeration often did the trick; X.com wasn’t even in existence yet, and it was already earning breathless press mentions.

Musk demanded as much of himself as he did of his team. “We slept under desks,” Catlan said. “Even Elon slept under his desk. He didn’t pull himself away from that sort of thing.” The engineers recall their CEO working elbow-to-elbow with them through knotty technical challenges. “Most CEOs are not very transparent with their staff,” Spikes said. “Elon was like, ‘We’re in the trenches together. Let’s do this’… It was powerful to work with him because of that.”

When Musk took delivery of his F1, CNN was there to cover it. “Just three years ago I was showering at the Y and sleeping on the office floor,” he told the camera sheepishly, “and now obviously, I’ve got a million-dollar car… it’s just a moment in my life.”

“The people that saw it happen thought we were going to die,” he recalled. Thiel had not worn a seat belt, but astonishingly, neither he nor Musk were hurt.

Post-near-death experience, Thiel dusted himself off on the side of the road and hitchhiked to the Sequoia offices, where he was joined by Musk a short while later. X.com’s CEO, Bill Harris, was also waiting at the Sequoia office, and he recalled that both Thiel and Musk were late but offered no explanation for their delay. “They never told me,” Harris said. “We just had the meeting.”

Musk echoed this sentiment. “If there were two paths where we had to choose one thing or the other, and one wasn’t obviously better than the other,” he explained in a 2003 public talk at Stanford, “then rather than spend a lot of time trying to figure out which one was slightly better, we would just pick one and do it. And sometimes we’d be wrong.… But oftentimes it’s better to just pick a path and do it rather than just vacillate endlessly on the choice.”

Musk saw the company’s North Star as the accumulation of total user dollars—not just the total transactions. “Whoever can keep the most money in the system wins,” Musk explained. “Fill the system, and eventually, PayPal will just be where all the money is because why would you bother moving it anywhere else?” Musk walked the talk, of course, keeping millions of his own fortune on the platform.

Musk historically the company’s biggest individual shareholder and had acquired even more equity as time went on. By the time the company’s ticker blinked on Nasdaq screens, Musk owned more PayPal stock than even institutional backers like Nokia Ventures and Sequoia Capital, and with his holdings, Musk’s grub stake was now worth more than $100 million. In the space of four years, Musk had expanded his fortune from eight figures to nine—and laid the foundation for his future efforts.

“Steve Jobs made Pixar great because he was fired from Apple,” observed early X.com engineer Scott Alexander. “Elon did SpaceX and made Tesla great because he was fired from X.com.”

Founding X.com

“Under the looming shadow of Y2K, we were approached by Elon Musk,” they said. This time, the deal terms proved more interesting. They sold X.com to Musk in exchange for cash and 1.5 million shares of the company’s Series A stock.

Despite the venture capitalists’ enthusiasm, Musk stuck to his own funding for the time being. His commitment to self-funding had two virtues. First, it gave Musk full ownership and operational control over X.com—this time (at least for now), there would be no investors to sideline him. Second, Musk’s personal investment made for a winning recruitment pitch. “I’d make a phone call for recruiting or whatever,” Ho remembered, “and say, ‘Oh, he’s got thirteen million in.’ ” With the competition for engineers reaching a fever pitch, every bit of buzz mattered—up to and including a high-profile founder betting his fortune on the company.

Revolution and regulations didn’t mix well. Musk wanted to fuse retail banking with investment banking, for example, which the Glass-Steagall Act of 1933 expressly forbade. Only in April 1999 was legislation introduced to allow the two entities to mix, and it would still be months before President Bill Clinton signed the bill into law.

Fricker took exception to his hiring of a public relations firm to generate headlines for the fledgling company and his use of equity to purchase the X.com domain. To Fricker, these were expensive extravagances that didn’t advance the core work of the business. To Musk, these were essential costs to compete successfully in a crowded market.

Musk had learned that start-up success wasn’t just about dreaming up the right ideas as much as discovering and then rapidly discarding the wrong ones. “You start off with an idea, and that idea is mostly wrong. And then you adapt that idea and keep refining it and you listen to criticism,” he’d tell an audience years later. “And then engage in sort of a recursive self-improvement… keep iterating on a loop that says, ‘Am I doing something useful for other people?’ Because that’s what a company is supposed to do.” Too much precision in early plans, he believed, cut that iterative loop prematurely.

“A company with zero assets under management and no branch offices plans to eat your lunch,” wrote Ignites.com. “What gives its claim credibility is its leaders.”

X.com was a taste of scrappy start-up culture. “I didn’t really have an office or a desk,” Mark Sullivan—the big finance transplant—said. “I had a chair and a milk crate.”

Musk spared no expense if something helped get X.com to market quickly. While desks, for example, wouldn’t speed up the release of a website, a better server might.

“We configured the most expensive, most powerful server that we could literally buy,” Carroll said. The price tag arrived in the tens of thousands of dollars, but Musk approved the purchase.

One morning, Branden Spikes discovered a homeless person asleep on the office couch. “He was the nicest guy,” Spikes remembered. “He was just looking for a place to sleep.”

…by mid-February, X.com’s rapid user growth drew media attention away from the uncomfortable fact that, for a moment, the company had built a digital bank robber’s dream.

…the extensive coverage left X.com with more sign-ups than before the negative headlines.

Founding Confinity

Levchin decided it was time to change the company’s name. He had never loved Fieldlink and decided to blend the words confidence and infinity to form Confinity. Soon, Levchin had naming remorse. “Everybody I told about it was like, ‘Con… So, is it like a great con? Like a company that’s going to con people out of money?’ That was the last time I named a company,” Levchin said.

On February 26, 1999—the day after closing its investment round—Confinity sent Davison, Linnett, and its other investors an eighteen-page document outlining a strategy shift. Selling business-to-business mobile security was not working; instead, the company would pivot to become consumer-facing. Confinity would launch a “Mobile Wallet” for handheld devices, an attempt to obsolete physical wallets.

…revived after multiple rejections, the company now boasted an angel investor with a closet-office (Thiel), a CTO without air-conditioning (Levchin), and a CEO with a 2,100-mile commute (Powers).

Powers arrived in a blue blazer, khaki pants, and a necktie. Levchin strolled into the meeting sporting shorts, flip-flops, and a T-shirt bearing the words “WINDOWS SUCKS.” Before the meeting, Powers expressed concern about Levchin’s attire—but Levchin pushed back on substantive grounds. “John, you don’t understand,” Levchin replied, “they don’t like Microsoft either.” Indeed, they didn’t—the Palm Computing office hosted many ex-Apple employees, who shared Levchin’s dim view of Microsoft.

Confinity and X.com occupied adjoining office suites at 394 University Avenue in Palo Alto. After the fact, much was made of the two companies’ cohabitation, but it started as mere coincidence.

Each company thought the other was misguided.

Despite divergent approaches to financial technology, the companies’ CEOs shared an obsession: getting noticed. Just as Musk courted media attention for X.com, Thiel made generating headlines a top priority.

“They were so excited about being able to send device-to-device payments by infrared that they wouldn’t stop doing it! I’m trying to have an adult conversation with them, and it was crazy. It was like ‘Guys, okay…!’ ” Malloy said. “I called them ‘the Beamers.’ ”

Far more impressive to Buhl and Malloy was the team itself. “There was a unique energy about them.… They just so stood out,” Malloy said.

When Thiel asked Levchin how he did, Levchin answered honestly, “I don’t know. I think I did fine, but I wouldn’t know if I failed.”

Product Evolution

“Unfortunately, with dial-up internet access the norm,” a historian at the bank later admitted, “the colorful stagecoach pictures downloaded one line at a time and took several minutes to load the whole site.” Wells Fargo customers lodged complaints—and asked a sensible product question: “When can I check my account balance on the website?”

In order for a programmer’s code to work, it had to be compiled—the process that turns coded commands into a language machines can comprehend. It’s during compiling that programming errors are discovered and fixed. Mere days before the Buck’s event, Russ Simmons discovered that Yu Pan hadn’t compiled his code—for months. “And of course, we try to compile, and he has something like a thousand errors,” Levchin said.

Afterward, one of the television crew members came over to ask Thiel and Levchin if they could repeat the transaction—his camera hadn’t quite caught it. “No! We cannot do it again,” Levchin cried. “It’s millions of dollars moving from one bank to the other. We can’t just do it again.” At the cameraman’s request, Thiel and Buhl playacted the exchange.

“This was one of the lessons we had about PR early on,” Nosek remembered. “It was much more important for recruiting and for perception among investors than it is about actual product adoption.”

Master was sold on Paypal, but many on the Confinity team, including Thiel, were not. “I remember all of us talking about it… and thinking, Paypal? That sounds like the dumbest name ever,” engineer Russ Simmons remembered. “It was definitely not a unanimous decision,” Jack Selby, employee number eleven, said. Board member Pete Buhl believed it sounded too playful for a financial product. “People are not going to trust ‘Paypal.’ I thought it was the stupidest idea,” he said. “Guys, a Paypal? You’re going to trust your money with a Paypal?”

The verb form—“Just Paypal it to me”—won them over, as did its simple spelling.

Because the domain www.paypal.com was unclaimed, the team would face no protracted, expensive negotiations to acquire it. They did so on July 15, 1999.

“We are living in the heaven of PalmPilots,” observed Reid Hoffman, a Stanford friend of Thiel’s and early Confinity board member, “and we could walk into every single restaurant and go to each table and ask how many people have PalmPilots.” He guessed the answer was between zero and one per restaurant. “And that means your use case can only be used between zero and one times, per restaurant, per meal cycle! You’re hosed! It’s over on this idea.”

Hoffman raised another critical stumbling block: What if one of these hypothetical PayPal users forgot their PalmPilot and needed to execute a transaction? Levchin proposed a workaround, suggesting the PayPal.com website be set up to send money via a user’s email address.

When emailing money was first suggested, few recognized it as a eureka moment. Quite the opposite: Levchin intended it to be a throwaway demo—buried in a corner of the main site for the unlucky souls who forgot their PalmPilots. To him, emailing money was a far cry from PayPal’s primary use case. This feature, if it could even be called that, was a concession to Hoffman’s critique, not a core product.

Within weeks, Levchin had become an avid user of the afterthought product, even as he remained committed to the vision of the original. “That should have been a clue,” he said.

“Sacks definitely didn’t pass the aura test,” one early Confinity team member said. The team objected, in part, to Sacks’s total dismissal of the PalmPilot product. “It was a dumb idea,” Sacks remembered. “There were two problems: one is that there are only five million Palm users, so unless you’re with somebody who also had a PalmPilot, the app is useless. And then there’s the other problem: even if you’re with somebody who’s got a PalmPilot, what would you use it for? Nobody could really come up with anything better than splitting dinner tabs.” Sacks told Thiel he’d join the company—if the email product was given primacy. “I said, ‘If that’s what the company’s going to do, I’ll quit my job at McKinsey tomorrow,’ because that sounded to me like a killer idea,” Sacks said. Thiel assured him that email would take precedence over beaming, and Sacks agreed to join the company. But that assurance was unknown to most of the rest of the team—who still thought beaming was the priority. When Sacks arrived and began deprioritizing the PalmPilot product, the engineers were surprised—and incensed. “[Levchin] knew, but no one else on the team knew,” Sacks said, “so I think their perception of me was that I was the guy coming in there and telling them everything they were doing was wrong.”

In hiring David Sacks, Thiel pulled rank and overruled the team’s objections. This was a rare move for Thiel, who believed Sacks a rare candidate: After all, few people would come into an interview guns blazing against their prospective employer’s flagship product. Thiel valued bracing honesty, and he trusted that Sacks would speak candidly. “Peter said, ‘I need people here I can scream at,’ ” Sacks remembered.

“We worked seven days a week, twenty-hour days, just writing code, trying to get this thing to work,” Levchin remembered of that summer.

“It’s kind of funny in retrospect because we didn’t know anything about payments… we had never written code that had interacted with a database.… We didn’t know well enough to know that we should be more intimidated by the problem,” Simmons said.

The team’s inexperience showed in other ways as well. At one point, Levchin and his team learned that they neglected to use double-entry accounting in the PayPal system. Double-entry accounting is a centuries-old cornerstone of bookkeeping, by which any credit or debit has an equal and opposite record.

“Even in the current work I’m doing, we’ll be in standups talking about the situation we’re in, and your mind goes to How can I solve this situation? What is some invention? You learn to ‘invent’ instead of ‘research and implement,’ ” Erik Klein observed.

In moving hard drives from one server to another, Confinity’s system administrator inadvertently wiped out the codebase. No problem, Levchin thought, let’s just fire up the backup. That’s when the team discovered, to its horror, that the same system administrator had failed to retain a backup.

Then another engineer, David Gausebeck, spoke up. He had replicated the company’s entire source code. “We were all developing on a shared server, and we were running out of space there,” Gausebeck explained, “and we had set up a new one where people could move everything over. I did that—and I was apparently the only one who had done that at the time the original one died.”

…neither team had set out to build the world’s foremost email payments system. For X.com, like Confinity, the feature emerged as an afterthought. In the fall of 1999, Musk and another X.com engineer discussed the concept of emailing money from one user to another, and they determined that an email address could function as a unique identifier, not unlike the digits of a checking account number.

Carroll and Musk alike found the feature’s success surprising. “It was totally an add-on,” Carroll admitted. Amy Rowe Klement recalled that the X.com team thought of the person-to-person payment product as simply its “user acquisition engine… it wasn’t the core business. That was the online financial superstore.” Indeed, Musk was frustrated that X.com’s other products didn’t generate the same excitement. “We would show people the hard part—the agglomeration of financial services—and nobody was interested. Then we’d show people the email payments—which was the easy part—and everybody was interested,”

With his red-hot focus on the company’s product, Sacks fell into a role missing from Confinity’s original org chart: Sacks became, in effect, Confinity’s first head of product. He soon discovered that product management was as much about avoiding distractions as producing breakthroughs. “As I took over product in the company,” Sacks remembered, “I kind of became, like, ‘Dr. No.’ Because I’d always have to say no to everyone’s stupid ideas… it was really important that we not squander our precious engineering bandwidth on ideas that didn’t make sense for the long-term strategy of the company.”

Sacks’s pursuit of simplicity emerged as a rallying cry for the product team.

He pushed back forcefully against what he saw as extraneous technological creations with no practical application for users. It wasn’t enough to build cutting-edge technology, which was the engineering team’s focus; Sacks wanted to ensure that users could derive value from it.

Hiring & Culture

One engineer, Santosh Janardhan, could see the pros and cons of live-action puzzle solving. “We probably lost out on good people, because somebody was having a bad day. But the people we ended up hiring were at least extremely high IQ and thought like us. So we might have lost out on some really good talents, but the people who ended up coming in… instinctively gelled. So maybe it was groupthink, but for a small group of people to achieve something and achieve it really fast, it was actually, in hindsight, a masterful thing to do.”

Thiel’s view was that trust among teams was hard to build, and that friends-turned-employees came preinstalled with trust.

Santosh Janardhan didn’t join the PayPal team until 2001, but he got a fast education in how the company’s senior leaders trusted even fresh hires. In the first few hours of his first day on the database team, Janardhan was given the root password for PayPal’s database. “[His boss, Paul Tuckfield,] was like, ‘Play around with it and let me know if you have questions.’ ” Soon thereafter, Janardhan saw Tuckfield and the company’s CTO, Levchin, approaching him. “So Paul and Max walk over, and they’re like, ‘Hey, what are you doing?’ [And I said,] ‘I’m looking around trying to understand the layout of the databases, looking at the tables and stuff. I was doing some database queries.’ They’re like, ‘The site just had a blip. Did you just take it down?’ I’m like, ‘Fuck no.’ And they both look at each other and go, ‘Cool.’ And walk back.” Janardhan was amazed. “If you think through this… five minutes into me joining, they gave me the root password for the site. The amount of either foolhardiness or trust it takes is amazing, right? On the flip side, when I said I didn’t [take the site down], they just said ‘Okay’ and walked away. There was no grilling. There was no ‘Show me what you’re doing.’ In a weird way, I felt more in the trust circle than anything else they could have ever done.”

“They hired really good people, gave them a lot of trust, and so people ran at their own pace, just made sure that they checkpointed to make sure we were in sync occasionally. And then we would just keep on running. So they got the best out of some very, very smart people.”

“We had to recruit our friends because no one else would work for us,” PayPal’s future COO David Sacks would later say.

Engineers are very cynical people. They’re trained to be. And they can afford to be, given the large number of companies that are trying to recruit them in Silicon Valley right now. Since engineers think any new idea is dumb, they will tend to think that your new idea is dumb. They get paid a lot at Google doing some pretty cool stuff. Why stop indexing the world to go do your dumb thing? So the way to compete against the giants is not with money. Google will outbid you. They have [an] oil derrick that spits out $30 billion in search revenue every year. To win, you need to tell a story about cogs. At Google, you’re a cog. Whereas with me, you’re an instrumental piece of this great thing that we’ll build together. Articulate the vision. Don’t even try to pay well. Meet people’s cash flow needs. Pay them so they can cover their rent and go out every once in a while. It’s not about cash. It’s about breaking through the wall of cynicism. It’s about making 1% of this new thing way more exciting than a couple hundred grand and a cubicle at Google.

Levchin kept the bar for talent exceedingly high, engineer Santosh Janardhan noted, even if that came at the expense of speedy staffing. “Max kept repeating, ‘As hire As. Bs hire Cs. So the first B you hire takes the whole company down.’ ”

When Sacks pitched the concept, Lee noticed a problem: “I’m like, ‘But it’s not beaming actual money. Because you’re just syncing on the desktop, right?’ ” She was right, of course, as technically a transaction only took place once a PalmPilot was nestled into its desktop cradle. “I thought I was missing something,” Lee recalled. Sacks confessed that Lee wasn’t missing anything and that her questions were justified. Despite the lengthy late-night interview and the limitations of infrared money beaming, Lee left intrigued by the team. “I can’t really put words on it, because I go by my gut,” she said, “but the energy there, I hadn’t felt that before. And I’m like, ‘There’s something here.’ ”

Sacks invited Listwon to lunch at Confinity. “Lunch turned into seven hours,” Listwon recalled. The spontaneous several-hour jam session about design practices hooked him. “I already feel like I’m actually in the room whiteboarding… if this is their interview, imagine what working here must be like!” he remembered thinking.

Early on, Thiel instituted an informal no-firing rule. “Firing people is like war,” he explained, “and war is bad, so you should try not to do it.” The no-firing rule set a high bar for talent, but it also caused underperforming employees to be shuffled around the company, rather than efficiently dismissed. “We probably should have fired more people,” one early employee admitted.

“A good rule of thumb is that diversity of opinion is essential anytime you don’t know anything about something important. But if there’s a strong sense of what’s right already, don’t argue about it.”

Karim, was a junior in college when he interviewed with Levchin for what he assumed was a summer gig. “And then I said, ‘Yeah, I’m just interested in, like, a summer internship thing.’ And [Levchin] just ignored that—and just sent me a full-time offer.” Karim accepted the offer, began his professional life at the age of twenty, and counted himself among several college dropouts on the company’s roster.

Without a formal internship program, the pioneering PayPal interns defaulted to performing the work of full-time employees—and were rewarded accordingly. Frezza was given a small amount of company equity, unusual for a temporary role.

In fall 2000, PayPal employees at every level felt agency and urgency. “At that time, at PayPal, every little thing you did, and every second, mattered. You—you!—could single-handedly be the bottleneck. And you felt it, and you understood it,” Oxana Wootton recalled. “And that sense of urgency would drive you. You would skip your meals. You would skip going to the bathroom. And you would just get it done.”

…even as of November 2000, the company’s 150-person phone list was one-third female…

The management team at PayPal was very frequently incompatible. Management meetings were not harmonious. Board meetings were even worse. They were certainly productive meetings. Decisions were made and things got done. But people got called idiots if they deserved it. The next time around, at Slide, we tried to create a nicer environment. The idea of having meetings where people really liked one another seemed great. That was folly. The mistake was to conflate anger with a lack of respect. People who are smart and energetic are often angry. Not at each other, usually. Rather, they’re angry that we’re ‘not there yet,’ i.e., that they have to solve x when they should be working on some greater problem. Disharmony at PayPal was actually a side effect of very healthy dynamics. If people complain about people behind each other’s backs, you have a problem. If people don’t trust each other to do good work, you have a problem. But if people know that their teammates are going to deliver, you’re good. Even if they are all calling each other idiots.

Sacks observed that PayPal’s culture of tension was also a culture of truth. “It was ‘truth-seeking’… there was a lot of friction. We all respected each other and that’s why it worked. There was a lot of yelling, and we just cared about getting to the right answer,” he said.

Growth & Virality

“Attention is finite,” Draper and Jurvetson wrote. “Rising above the noise of a thousand voices requires creativity. Shouting is not very creative. Just hanging up a web shingle and hoping for visitors is not very creative.

Too many referral programs had failed because of one-sided incentive structures. Here, they saw an opportunity for a two-sided program with the power to turn customers into advocates.

Confinity employees joked that the bonus program represented “the largest transfer of venture capital to college students in history.”

X.com had independently arrived at a similar conclusion about referrals and incentives.

The giveaway shocked some members of the X.com team. “You have to take your hat off to Elon for being willing to take his own money and basically give it away to build this new thing, when there is no way to know if it’s going to work,” Catlan said. “He was willing to take whatever he had left and put it on the line.”

If an eBay seller sold an item and signed up the buyer for PayPal through the seller’s referral link, the seller earned an extra $10. As a result, inexpensive sales became profitable—the margins on Beanie Babies were suddenly 100 percent or 200 percent larger than before. And as often as not, the buyer’s $10 PayPal bonus covered the cost of whatever they bought.

“It wasn’t us saying, ‘Oh my God, eBay! That’s the genius idea!’ ” Technology thinkers frequently urged founders to build companies that solved problems in their own lives, but X.com’s and Confinity’s eBay-driven success offered a powerful counterpoint: solving a problem could be just valuable as solving your problem.

Botha judged X.com to be far from a sure bet. “It didn’t have a natural advantage,” Botha said of the company’s late-1999 outlook. “There’s no network effect. The cost of customer acquisition was high. It was unclear if the unit economics were great.” But Botha saw potential in X.com’s email payments product—specifically how its virality could drive scale.

The eBay Ecosystem

“eBay was such a sketchy company,” Thiel later told a Stanford audience, “multilevel marketing people selling junk on the internet.”

When eBay acquired the payments start-up Billpoint in May of 1999, Confinity assumed that the purchase would turn Billpoint into eBay’s default payments system.III…

But eBay soon experienced delays integrating Billpoint into its payment flow, and by late in the year, eBay’s buyers and sellers were still sorting out auction payments on their own.

Sacks recalled the precise moment the team discovered PayPal’s use on eBay. An eBay user had emailed Confinity customer service seeking permission to use the PayPal logo on her auction page. She also wanted the team’s help resizing it. David Wallace forwarded the email on to the team, not thinking much of it amid thousands of more urgent complaints. The team wondered if the user’s logo-resizing ask was a one-off request—or if there might be more users like her. Luke Nosek, Chad Hurley, and David Sacks huddled together and searched www.ebay.com for the term “PayPal.” Thousands of auction listings popped into view. “It was one of these holy shit moments,” Sacks said.

…the sight of thousands of eBay auctions advertising Confinity’s PayPal service was a welcome surprise for Sacks—proof that PayPal was solving a real problem. Given the team’s distaste for eBay, however, his was not the dominant opinion. Levchin, for one, was horrified. “I had a fairly vague idea of what eBay was,” Levchin recalled. “Oh isn’t that the ‘echo bay’ thing that that guy Pierre Omidyar started? That seems like a whack idea.” Levchin even resisted helping the eBay user who had asked for assistance with the PayPal logo.

Like Confinity, X.com hadn’t set out to facilitate low-dollar, person-to-person auction payments via email. “We thought we would compete with Western Union—like if you had to send money to your son at college or to pay the landlord rent or something. It was going to replace big, clunky transactions that you would otherwise have to do at a bank,” X.com engineer Doug Mak recalled. “It turns out people are sending ten or twenty bucks for little Beanie Babies.” Leadership worried that small-dollar buyers and sellers on eBay couldn’t be counted on to embrace X.com’s checking and brokerage services—where the real profits would be made.

Though its users found the PayPal product useful, eBay’s executives felt otherwise—seeing the budding payments service as a competitor to Billpoint, the payments firm they had recently acquired. Early on, eBay took steps to hamper Confinity’s efforts, including blocking the scripts that Confinity engineers ran to scrape eBay pages—blocks that Confinity scrambled to overcome. “It was kind of adversarial,” Confinity engineer David Gausebeck remembered.

As Musk followed the Confinity team’s machinations, he began to respect the team’s ingenuity. “I thought, Well, these guys are pretty smart,” Musk recalled.

Shortly after joining PayPal, Kothanek found himself facing a language barrier. Writing to the entire company, Kothanek searched for help: “Does anyone at X.com speak/read Russian?

“They were like, ‘Max does. Don’t you know that?!’ And I was like, ‘I have no idea who the hell Max is.’

…eBay now stood a real chance of reclaiming payments and each change it made sent executives—particularly Thiel and Sacks—into paroxysms of anger. “David and Peter would get totally hysterical and say things like They can’t do this! and How dare they?” an executive observed. “And we’re like, ‘It’s their platform. They can do whatever they damn well want.’ ”

“We went through the database, we looked at the top 150,000 eBay sellers, and we just started sending them debit cards without them even asking for it,” noted product team member Premal Shah.

Most eBay-PayPal moves and fights in 2000 and 2001 flew under the media radar—that is, until an early 2001 eBay salvo. eBay altered its “Sell Your Item” form so that when a seller used the form to create an auction listing, the payment field defaulted to Billpoint.

Virtually overnight, Billpoint’s total share of the auction market soared by 5 percent. The PayPal team discovered that because high-volume sellers used automated tools to post hundreds or thousands of auctions, they rarely visited the “Sell Your Item” page. Thus, those sellers were unaware that Billpoint had been made their default auction payment mechanism.

“We were really reluctant to do something that was against the community’s wishes,” eBay’s Rob Chestnut remembered. “The community liked PayPal. The community was successful with PayPal. We didn’t like it—but it was what our community wanted.”

Shortly after he started working, one of Botha’s Stanford business classes welcomed a guest lecturer: Meg Whitman, CEO of eBay. As Botha sat watching, Whitman was asked about PayPal’s emergence on eBay. Would this third-party company, a student wondered, be permitted to nest within eBay’s auction ecosystem? Botha remembered her answer: We’re going to crush them. Botha was stunned. “It was like, Don’t tell me that!” he remembered. This precariousness haunted him and many others for the duration of their time at the company. “David [Sacks] said that we had the sword of Damocles hanging over our head the whole time,” Botha recalled. “And that was my first exposure to the sword.”

…the T-shirt gambit was a powerful reminder that the two companies should have been considered more symbiotic than competitive. Moreover, fighting over T-shirt convention market share illustrated the inanity of it all: users loved both eBay and PayPal, but the companies hated one another.

“Reid had a pithy means of describing the challenge: ‘Just because someone shoots five bullets at you and misses… does not preclude the sixth one from killing you,’ ” Keith Rabois wrote on Quora years later.

The Merger

Yahoo broached the idea of acquiring one of the companies. Here, too, Confinity was at risk. If Yahoo acquired X.com, then the portal could use its billions in market capital and its clout to finish Confinity off. It didn’t help matters that X.com’s lead investor, Mike Moritz, served on Yahoo’s board.

Thiel worried that Confinity might not survive the bursting of the internet bubble. He thought back on the “excruciating” process of raising money, during which he and the Confinity team had been turned down over one hundred times. If the market soured, raising capital would become even more excruciating.

“We would have destroyed ourselves competing.” He saw the writing on the wall: two payment networks catering to the same market couldn’t achieve scale simultaneously. “True networks are a naturally monopolistic business,” Harris explained.

I really like this Elon guy, Levchin remembered thinking. “He’s obviously completely crazy, but he’s really, really smart. And I really like smart people.”

While Confinity would remain the junior partner, what had begun as a 92–8 acquisition had been hammered into a 55–45 one. Levchin was still “bummed” that the terms remained weighted against Confinity, but Thiel had convinced him that this was the right course—and better than an almost-certain death.

“Mike Moritz came in to tell me that this was a merger for the ages,” Levchin remembered, “that it was going to be the most important merger in the history of Silicon Valley.” Moritz told Levchin that if the merger went through, he would never sell a single share of the combined company.

Musk’s simmering frustration slipped out. Levchin was visiting the X.com office when Musk blurted out that Confinity was getting “a fucking deal.” “My blood just boiled, and so I thought, It’s off,” Levchin remembered. “If it’s a partnership, it’s a partnership. If you think I’m getting a steal, it’s not going to work.” Levchin called Thiel, saying the deal was off. He didn’t want to be treated as a charity case or as a junior partner.

Harris asked him where he was, and Levchin replied that he was at home doing laundry. Harris told him to stay there. “I’ll help you fold,” he promised.

“What if it were fifty-fifty?” Harris said. “What if we were equal partners?” “Then it would be hard to claim afterward that anybody got a steal,” Levchin admitted. “If that works for you, I’ll make it work,” Harris replied.

”I was like, ‘Fuck you. We’re just going to kill [Confinity].’ ”

Harris responded by dropping the bomb: he told Musk that absent a deal between the two companies, he would resign as X.com’s CEO. Musk remembers saying, ” ‘Bill, we need to raise a round. And you’re basically putting a gun to my head. And saying that if we do not do this deal, then basically the CEO of the company is departing. And we are literally raising a round right now. That’s a very difficult situation. Like this could kill the company.’ ”

“The reason I agreed to the fifty-fifty is because Bill Harris said he would resign if I didn’t,” Musk said. “Otherwise, I was going to pass on the deal.”

The value of a network grows by the square of the size of the network. If a computer network contains five machines, the total network has a value of 25—5 squared; if it has a thousand machines, the network has a value of 1,000,000—1,000 squared. Per Metcalfe, the bigger network has 200 times more machines—but its value is 40,000 times bigger. True for telephones, faxes, and the world wide web, Metcalfe’s law also applied to payments. “Volume wins,” Harris explained. “Nobody wants to be on a payment system where there’s no one to pay. And no one wants to be a recipient on a payment system where there’s no one paying. And so it’s all about getting size.” Despite Musk’s protestations, Harris felt merging was the only answer—even if it took an ultimatum to get it done.

“A merger isn’t two companies joining together,” Luke Nosek remarked. “It’s actually closer to hiring fifty people, sight unseen.”

…eBay’s users may have been pleased with the merger of X.com and Confinity, but eBay corporate sensed a threat. They also had a response in the works. Just after the merger announcement, eBay announced a partnership with Wells Fargo to manage its payment platform Billpoint. It also introduced a partnership with Visa, promising three months of free payment service for its users. This was welcome news to many eBay users. “The primary objection that sellers have had to the Billpoint system has been its cost,” said Rodrigo Sales, the cofounder of AuctionWatch, one of the internet’s hubs for auction news. “That’s why companies that offer free payment services, like PayPal and X.com, have been well-received by the eBay community.” Indeed, eBay’s partnerships with Visa and Wells Fargo seemed designed for a sole purpose: reclaiming ground from X.com and Confinity’s PayPal.

Bill Harris

Musk had reservations. Everything looks great, but my gut feel is uneasy, he remembered thinking. Musk posed a question to Moritz in his kitchen: Moritz had seen start-up CEOs come and go, Musk said, so what rating would he give Harris on a scale of 1 to 10? Moritz replied: “A ten.” Musk was astonished: “I was like, Wow… Okay, I’ll override my feelings of uneasiness and let’s move forward, because you know how to hire CEOs.”

Harris has largely been written out of PayPal’s history. In part, that’s because of a tenuous tenure.

…however brief and rocky, Bill Harris left a lasting imprint on both X.com and Confinity—as the linchpin in a hard-fought deal to fuse the two firms into one.

…shortly after X.com’s launch, a new customer named “Peter Thiel” appeared on his screen. Thiel, he recalled, ran the money-beaming company that had formerly leased the office next door. This sign-up was worth looking into. He picked up his phone and gave Thiel a call.

Madden worked in business development and joined calls alongside Hoffman. “He’d sit, and I’d sit in the second chair, meaning taking notes. And he would go through, and he would constantly mute. And then he’d say, ‘He’s gonna say this. I’m gonna say this. Then he’s gonna say this. Then I’m gonna say that.’ ” Hoffman unmuted the phone, Madden remembered, and the negotiation played out precisely as Hoffman predicted.

Financial Pressures

The joint company was on track to spend almost $25 million that quarter alone, with salaries, bonus payments, credit card fees, and fraud tearing through its balance sheet. “If we were standing on the roof of our building throwing wads of hundred-dollar bills over the side of the building,” remarked Reid Hoffman, “we’d be spending money less [quickly].”

“If the fraud thing is not solved, we’re gonna die. If customer service is not solved, we’re gonna die.… If we didn’t have a revenue model—if our business consists of only costs and no revenue—we were obviously dying.”

On a trip to Korea, Thiel’s corporate credit card was declined as he tried to purchase a return ticket home. The investors he had met with were only too happy to furnish a first-class plane ticket—which they did on the spot. “They were excited beyond belief,” Thiel remembered. “The next day, they called up our law firm and asked, ‘What’s the bank account we need to send the money to?’ ”

“This is the longest peacetime expansion in history,” Musk said, “and for young people who’ve never really seen a serious recession—and anyone who’s studied history knows they happen—a downturn will be a rough experience.” This prediction contrasted with his usual bombastic optimism—if Musk preached caution, it meant something. Musk also had the sense to know that X.com’s $500 million valuation was “ridiculous.” When his earlier company, Zip2, sold for $300 million, it had paying clients and millions in revenue. X.com was now valued at almost double that, even though its principal achievement was trading investors’ money for email addresses.

The timing was auspicious: just days after X.com closed its round, US public markets entered a downward slide that would ultimately wipe out $2.5 trillion in market capitalization and sour the mood on technology stocks.

“People thought we were keeping their money hostage,” Skye Lee recalled. “So there was somebody who drove, with a gun, and came to the PayPal offices demanding his money.

McCray, who remained in tech for the rest of her career, drew a lifelong lesson: “To this day, I do not wear company logos on clothes outside my house.”

“[Mike] Moritz arrived at the June board meeting and said, ‘Look, you guys have seven months of runway left,’ ” Botha recalled. ” ‘You’re not going to raise money again. The market is gone!’ ” Moritz’s comment was bracing but clarifying. “It was really helpful because he just drummed into us that we should not assume we could raise any more money,” Botha said.

In haste, he had presented the company’s cash flow incorrectly—the final line in an otherwise impeccable spreadsheet. Mike Moritz spotted the error. Botha, a perfectionist, turned red with embarrassment. Once the meeting dispersed, Botha returned to his desk and wept. Levchin, a fellow perfectionist, came over to console him.

“We had about $65 million dollars left in the bank in September,” Thiel recalled, “and I believe the burn rate was $12 million in September of 2000. There was sort of a sense that we had to try to dial things back—super fast.”

…growing organizations often made a crucial mistake: employee happiness became a bigger concern than output.

…to avoid it, company leaders set a cultural tone of impatience. They sacrificed solidarity for speed and made decisions by fiat when necessary. “It wasn’t an open democracy of ideas,” recalled early X.com engineer and later Yelp cofounder Jeremy Stoppelman.

Business Model

While Musk continued to boast of his huge personal stake in the company, he, like Thiel, was also aware of the signaling value of outside investment. “We didn’t need the money,” Musk said, “it was more like the imprimatur of a top VC.”

X.com stood out from the crowded field. Moritz found its story interesting, and its chief salesman—Musk—convincing. “Elon, as the world knows today, is a very gifted storyteller,” Moritz said, smiling. “And some of the stories even come true.”

…enough customers kept money in their X.com accounts, the team realized, then the company could transfer dollars between users at no cost. “The internal transaction… costs like a millicent,” Musk explained. “Basically zero. And this is why you want to maintain balances.”

“We gave back one hundred percent [of our profits on savings accounts],” Sacks noted. “We weren’t trying to make money.… We were trying to incentivize people to keep money in their accounts.”

When he pitched the cross-border email payments business, his Citibank bosses had a tepid response. “They kind of liked it,” he recalled. “But then there was this moment of saying, ‘Why should we be the innovators? It will cannibalize our business.’

Bhargava left Citibank to pursue the concept on his own. At the beginning of 1999, he cofounded a company called ZipPay. Then Bhargava was forced out. When it happened, Bhargava was forty-two, and he planned on simply returning to his successful banking life.

“I said, ‘Okay, next time I’m in the Valley, we’ll meet,’ ” Bhargava remembered. “And [Musk] said, ‘No, no, I’m buying you a ticket, you’ve got to come down right now.’ ” Their planned ten-minute meeting turned into dinner at a nearby burger joint called Taxi’s Hamburgers. “We met at around eight o’clock, and we talked ‘til about four in the morning,” Bhargava remembered. “And then Elon told me to come in at seven that morning and collect your offer.”

Bhargava had a thought: What if X.com generated its own onetime equivalent? Specifically, the company could manufacture four-digit passcodes by sending two random deposits of under $1 to a user’s bank account. If a user received $.35 and $.07, for example, they could now enter the code “3507” on the PayPal website. Entered successfully, the onetime code confirmed bank account access—and without grainy faxes or snail-mailed checks.

Musk was unreserved in his praise for random deposit: “That was a fundamental breakthrough.” David Sacks captured the idea’s elegant simplicity in his launch announcement, calling it “an idea that, like Velcro, you wish you had thought of.”

Outside of work, Chan had been training as a magician, performing at children’s events and doing tricks in the office for his colleagues. “I was making more doing kids’ birthday parties in Silicon Valley than I was at PayPal,” he admitted. Once he had deposited all the X.com customer coins he could take, Chan quit—and went on to a successful life as a professional magician.

X.com would initially charge 1.9 percent on payments received, with no additional flat fee—a bargain relative to its primary competitor. The announcement bragged that its pricing was “less than half of what you’d pay with other payment services (for instance, Billpoint starts at 3.5 percent plus $0.35 per transaction).” X.com knew its audience: explicitly undercutting Billpoint’s rates appealed to price-sensitive eBay PowerSellers.

Of the roughly 30,000 people who had seen the upsell page thus far, almost 20 percent had converted to fee-bearing accounts, a rate that surpassed the team’s most optimistic projections. Perhaps more importantly, only a handful of users jumped ship. “Despite the ruckus on the message boards,” the weekly company newsletter reported at the end of the upsell campaign, “there were only 158 users who actually closed their accounts (only 0.004% of our user base!).”

“We found that the pricing was completely inelastic,” explained Thiel. “As we increased prices, none of our customers could leave. People said, ‘We refuse to pay,’ and they left, and there is no other place they could get paid online so they came back.”

They realized that once embedded in users’ lives, dislodging a product or service took meaningful effort. “Human beings are creatures of momentum,” observed Amy Rowe Klement, “and finding ways to change the default (behaviors, thinking, narrative, etc.) can result in massive change.”

But the word freemium didn’t exist until 2006—and in this, as in much else, the team relied on instinct, improvisation, and iteration to find answers.

“The onset of the freemium model is probably the best thing that has ever happened to the world wide web.” Within a single month of the campaign’s late October launch, 95 percent of targeted personal accounts had upgraded to either Business or Premier status.

David Sacks took the product unit on a rafting retreat, which he had promised he would do if “the lines crossed”—referring to the blue and red payment mix indicators.

During what he called “the most long, drawn-out interview process ever,” Braunstein watched chaos unfold. When he first started interviewing, Bill Harris had been the CEO; by the time he received his offer, Musk ran the company; and just weeks after he joined, Thiel replaced Musk at the helm. During this period, the Nasdaq also lost over a third of its value.

PayPal was bringing in roughly $600,000 per month from Thaigem’s transactions, but the real coup de grace was the gem seller’s evolution: “They have migrated 95% of their business from Amazon and eBay to their own website.”

In a column for the company newsletter, David Sacks outlined his thinking about breaking into new payments markets. “As a practical matter, PayPal can only pursue a very limited number of markets, because payment products need to be specifically tailored to the needs of different kinds of customers,” he wrote. Sacks estimated that it took the company three months of pre-launch preparation and an aggressive post-launch sales and marketing effort to conquer a new market. Thus, whenever possible, PayPal would explore markets that “(1) are relatively proximate to our existing territory in terms of functionality and (2) have a strong need for our service because they are under-served by existing options.”

PayPal would choose its conquests selectively. “World domination,” Sacks concluded, “will not be achieved by indiscriminately parachuting into hostile lands.”

Tech Architecture

X.com did break with Silicon Valley orthodoxy in one critical respect: it used Microsoft products as the backbone of its technical architecture rather than building atop an open-source operating system like Linux.

“We had done some research and concluded the only framework that was really commercially viable—one that could handle an enterprise system—was Microsoft’s framework,” engineer Scott Alexander said. “And that was blasphemy in Silicon Valley.” Speed mattered to the team, and unlike Linux, Microsoft offered a set of plug-and-play frameworks available to simplify the engineering workload.

“If you fast forward like ten or twelve years, now Linux has a lot of tools,” Musk said. “But not then.” With Microsoft’s prewritten software libraries, he noted, three X.com engineers could do the work of dozens.

He estimated that Microsoft’s off-the-shelf solutions would allow fewer engineers to accomplish more work. “The evidence for this, by the way, is that we had maybe forty or fifty engineers working on the Linux system,” Musk said, referring to the Confinity contingent working on the original PayPal.com codebase. “And [X.com] had four engineers replicate all of that functionality in three months on Microsoft C++… Four people versus forty.”

Musk also pointed to Microsoft’s use in the most advanced gaming code as evidence of its superiority. “The stuff that was being done in video games was way more advanced than any other field,” Musk explained. “The best programmers are in video games.” He observed that feature-rich video games were technically complex—far more so, in some ways, than websites of that era.

In July 2000, the X.com team traveled to Redmond and met with Microsoft’s top brass, including CEO Steve Ballmer.

Musk spoke of X.com as a company for the ages—not unlike the Seattle giant. That ambition demanded an architectural overhaul. “He would say that if you’re building a company that is going to last for decades, you want to build it on top of a foundation that you know would be around decades from now,” Luke Nosek remembered.

“Microsoft Database Server was meant to be an enterprise product,” noted Brownfield—a Linux partisan. “[Microsoft] was set up to run your enterprise and have ten thousand records of people. It was not meant to be this high-performance online processing, run-for-years sort of system.”

Microsoft kept processes running, even after the requests were complete. “The problem is that if you have a process serving requests that’s always alive, then it just gets slower and slower and slower and slower,” Jawed Karim observed. “[T]he Linux server didn’t have that problem. The reason is, the way the Linux web server works, every time there’s a request, it starts a new process.” Case in point: early V2 iterations struggled with “memory leaks.”

Eventually, another engineer recalled, the servers needed rebooting “every thirteen seconds.”

Sugu Sougoumarane had interviewed with X.com before the merger—and was rejected. “I come back home and I get an email from the recruiter saying, ‘Elon has passed on you.’ So then I send an email back to the recruiter, saying ‘Give me Elon’s email. I’m going to send him an email.’ ” Sougoumarane wrote an effusive note to the X.com CEO that led Musk to give him a call. Once on the phone, Sougoumarane “told him that [X.com] is going to change the internet, basically. And I said, ‘I don’t care what you give me. I’ll work there if I have to sweep the floor.’ ” Musk hired Sougoumarane—and forwarded his email to the entire X.com team.

“When I was coding the PayPal debit card,” Wu recalled, “I actually wrote two versions of the code. One was the Windows version, in case, you know, Elon got his way. But I also had to write a whole separate version in Unix, on the PayPal platform, just in case PayPal eventually got the upper hand. So I had to spend so many hours just coding: writing two separate versions of the code, and also testing on two separate platforms.”

V2 damaged morale in the engineering ranks. “It was a really weird time. There should have been a lot of urgency, because it’s a very risky time and we have no idea if we’re going to succeed. And yet, from a developer’s perspective—I shouldn’t be admitting this—there were days I went to the movies at three p.m.,” engineer David Kang said.

CEO Transitions

Levchin debated quitting the company entirely. He had enjoyed the start-up’s gestational period, when the future was unknown and his imprint unmistakable. Now, as just one of dozens of employees, and with his underlying work being unwound by his boss, he spoke about leaving it all behind and launching something new. I’m just going to leave, Levchin remembered thinking. This V2 thing is just destroying my will to live.

The participation of David Sacks and Roelof Botha carried particular weight: Sacks had been promoted by Musk; Botha had been hired by him. Both felt an affinity for him, but neither could see a way out of the company’s current dilemmas with him staying on as CEO. Particularly for Botha, threatening to resign meant potentially giving up his job—and his immigration status—if Musk prevailed. He didn’t make the choice lightly.

…the message was surprisingly gracious, as even his critics would admit. His public praise of Thiel—just hours after Thiel had pushed Musk aside—showed self-restraint. Indeed, Musk didn’t seek retribution. Jeremy Stoppelman—an early Musk X.com recruit—reached out to Musk in the immediate aftermath to ask if he and others should show their support by threatening to resign en masse. Musk instructed him to stand down. Even Musk’s longest-serving allies within the company were thrown off by his moderation. “It was very odd to me how graciously he was taking it,” Branden Spikes said. “If it were me, I’d be pissed.”

“Peter and Max and David and the other guys are smart people, with generally good motivations, and they did what they thought was right for the right reasons. Except that the reasons weren’t valid, in my opinion. “It’s easy to be bitter and hate them forever,” he went on. “But the best course of action is to turn the other cheek and make the relationship good. And I put a lot of effort into making things good.”

Karim recalled a moment in the cafeteria late one evening during the period in which Musk’s fate was being decided. Musk walked in and silently made his way over to a full-sized Street Fighter arcade game. “He looked really, really distraught,” Karim said, ”… and he was playing Street Fighter on the arcade by himself. And then I said, ‘Hey, hey, Elon, how’s it going?’ And he says, ‘Eh, alright.’… And then two days later they announced that he got fired by the board.”

Nobody’s happy when you’re done with a civil war, engineer Erik Klein remembered thinking.

“I remember to this day that I saw people crying. Like sobbing. Some of the engineers had invested so much effort into V2,” Jawed Karim recalled.

Thiel admitted that Solo’s outside endorsement “played a big role in convincing the board to just go with me.” For Thiel, the mandated search process left a bitter aftertaste. One observer said Thiel felt “pretty unhappy” that some on the board had been trying to push him out. It created a rift between him and Sequoia’s Mike Moritz, which never fully healed, and it reinforced PayPal’s allergy toward “executive experience.”

Fraud & Security

PayPal’s close observation of the many fraudsters on its platform helped lead it to a series of cutting-edge fixes, including several that set an industry standard for deterrence. “[Fraud] saved us—on accident,” Luke Nosek explained. “And it was cheaper than buying Super Bowl ads.”

The team predicted the “Gausebeck-Levchin test”—as they called it—would work well at first, then degrade over time.

The feature deployed, and the team waited for it to break. To their considerable surprise, it didn’t. “It turns out the original version held up fine for years,” Gausebeck remembered. “I guess the people who were motivated to try to defeat it weren’t the same people who had the skills to do that. It’s a very different set of skills than interacting with a web page.” The Gausebeck-Levchin test became the first commercial application of a Completely Automated Public Turing Test to Tell Computers and Humans Apart—or CAPTCHA.

Sacks remembered. “It’s easy to stop fraud if you’re willing to kill usability. What’s hard is maintaining a sufficient level of usability without letting fraud get out of control. So Max controlled the fraud dial. I controlled the usability dial. And we’d come together to agree on a compromise.”

“The people who ended up working on this were not domain experts,” engineer Santosh Janardhan observed. “And that, frankly, is good. They had no preconceived notions; they approached it with very fresh eyes. And converted [fraud] to a tractable, mathematical thing.”

In 2000 and 2001, the industries that would spring from machine learning and big data were still far-off—but PayPal pioneered many of the techniques that defined those sectors. PayPal’s use of random forests, for instance, was among the world’s first applications of that learning method for a commercial purpose.

PayPal effectively reinvented itself as one of the first big data security companies.

PayPal turned fraud from an existential threat to one of the company’s defining triumphs. It also had the unexpected benefit of thinning out the competition. “As the Russian mobsters got better and better,” Thiel said, “they got better and better at destroying all our competitors.” Thieves forced to work ever harder to fleece PayPal customers moved on to easier prey. “We’d also find that fraudsters were kind of lazy, right? They want to do just the least amount of work… So we just kind of hoped to push them off onto [our competitors],” Miller observed.

For Levchin and Frezza’s efforts on IGOR, they earned US Patent US7249094B2: a “system and method for depicting on-line transactions.” Frezza was awarded the patent posthumously. On December 18, 2001, three days after his final exams and just three weeks shy of his twenty-second birthday, Robert Frezza passed away following heart failure.

PayPal invited grief counselors to the office, and Levchin flew to Lawrenceville, Pennsylvania, for Frezza’s December 22 memorial service.

Levchin sent a company-wide request for anything “interesting, personal, funny, silly, whatever, that pertains to your work with Bobster.” Levchin delivered the book to them at the funeral, and the family was deeply touched. “I can say without exaggeration that no single thought, no single word, deed, or gesture has meant as much to us as the memory book put together by you all at PayPal,” Bill Frezza wrote to the team. He noted that his late son had relished his PayPal tenure and “the challenge of proving himself to his talented, skeptical, and demanding colleagues.”

“There were standards already about how you’re supposed to secure them, but they covered maybe one-tenth of the way that an adversary could attack your system,” engineer Bob McGrew recalled. “The work at PayPal was unstructured, but it was actually really high quality. It was done by people who actually cared about achieving a truly secure system, rather than a team of people who cared about adhering to the protocol standard for securing credit cards safely.”

“Wells Fargo had a competing bill payment system thing. But they weren’t going to go away if they got hacked,” McGrew explained. “At PayPal, any computer security issue was just absolutely an existential threat.”

“What did you just type in that worked?” After a second of embarrassed mumbling, he admitted to choosing “a$$word” as his passphrase. The gall! I asked everyone entrusted with the grave task of relaunching crytposerv to pick really hard to guess passphrases, and this guy…?! Still, this was something—it worked. But why?! Levchin demanded the others’ passphrases. All failed, but “a$$word” succeeded.

Solaris automatically truncated passphrases over eight characters, and thus, all the long, clever passphrases Levchin made everyone pick had become useless stubs on the Solaris encryption box. All except for “a$$word.”

“Fraud catching is a combination of people, machine learning, and automated rules,” Cervantes noted. “People will always be a component of that. Always. Because there’s an element of human behavior that bots just cannot quite emulate.”

By creating these elements from scratch, Levchin risked vulnerabilities. “You don’t ever want to build your own primitives… you want it to be done by someone who’s got nothing else in the world to do other than just building the crypto primitives,” Levchin shared.

Boneh was the person that Levchin turned to when he wanted a speedy code check that fall. “So I was like, Well, what’s the closest thing to a security audit that I can do in twelve hours? So then I thought, Hey Dan, how would you like to come by and read my code? And he’s like, ‘Of course, anything for you, man. Happy to,’ ” Levchin recalled.

The IPO

“[Thiel] just kept saying, ‘I don’t want to run a public company. I [have] no desire to be a public CEO. I’d rather do other things. I don’t want to go public,’ ” Kight recalled.

Despite Thiel’s reservations over being a public company CEO, he wanted to move quickly with the IPO. To him and his executive team, PayPal’s business remained fraught with risk. In addition to other benefits, going public would put the company in the same league as eBay—showing that PayPal wasn’t just an annoying appendage that could be dispensed with via a rule change.

PayPal had gotten caught in an internal crossfire between Morgan Stanley’s investment bankers and its equity analysts. The bankers, responsible for the deal-making that helps companies raise capital, had excitedly brought PayPal in, but the equity analysts, responsible for tracking stocks and providing research-based investment guidance, were more suspicious.

He had been assured that Morgan Stanley’s equity analysts were supportive of PayPal’s IPO, and he took the blame for “trusting them on that score.” “As long as I remain CEO of this company,” he concluded, “we will never use [Morgan Stanley] for any work again.” The team would instead seek out a new lead underwriter, a process that would delay the IPO.

“I think he got frustrated with these investment bankers,” observed Rebecca Eisenberg, one of the company’s senior counselors and IPO stewards, “because they are low freaking integrity… [T]hey thought they knew how to translate PayPal to the SEC, but how do you translate what you don’t even understand yourself? And Peter was right in trying to sideline them. The investment bankers just got in the way of PayPal’s success.”

After leaving Morgan Stanley, PayPal’s executives chose Salomon Smith Barney to see the IPO through. The SSB bankers advised postponing the IPO until 2002, even as Thiel demanded it go forward sooner.

“The competitive thing in me was just, you know, if the bankers thought we weren’t ready, then it was more important than ever. It was sort of like a Wall Street versus Silicon Valley thing,” he said of his will to prevail, “and there was a part of my thinking where, emotionally, I felt like the Wall Street banks were especially negative because we were encroaching on their turf.”

“What would you do with a three-year-old company that has never turned an annual profit, is on track to lose a quarter billion dollars and whose recent SEC filings warn that its services might be used for money laundering and financial fraud?” the author asked. “If you were the managers and venture capitalists behind Palo Alto’s PayPal, you’d take it public.”

Thiel raged about the media’s coverage at the office. “It really pissed Peter off,” engineer Russ Simmons remembered. “And he gave this speech in front of the whole company talking about how they were idiots and we were going to prove them wrong. That’s one of the times when I’ve seen him most fired up.”

PayPal filed its S-1 with the SEC just seventeen days after September 11, as the stock market plunged to three-year lows. But by the time PayPal’s IPO was in the offing, the stock market had rebounded almost 30 percent from its September lows. Because Thiel had insisted that PayPal push through and file just following a national catastrophe, PayPal was one of the only firms prepared to go public in early 2002, and the company earned a disproportionate share of media and investor interest.

“I thought [the IPO] would be a cool thing to do because no one else was doing it,” Thiel said. “The unfortunate downside was that we got way more scrutiny than we otherwise would have.”

“These guys really hadn’t seen our type of business before.… Do we go into the fintech bucket? Do we go in the tech bucket? Do we go into the services bucket? As a hybrid it was difficult to understand which bucket to go into, and these guys were very rigid,” he recalled.

“[The underwriters] were like, ‘You guys have to have more seasoned execs on here. We can’t take this to our clients,’ ” Woolway remembered. “And we said, ‘Nope. This is the team we have.’ ”

“The IPO is a good time [to sue],” explained Thiel, “because it’s very time-sensitive, so you’re normally just willing to write them a check and make them go away.”

“Peter goes, ‘Absolutely not! We’re not paying these people a penny!’ ” Hurd recalled. That was, in part, because CertCo had filed a suit—as opposed to floating the possibility of a lawsuit with the option to settle. Once the suit was filed, PayPal had no incentive to settle. Chris Ferro, a PayPal lawyer, remembered Thiel’s acid remark: “It’s like they shot the hostage—then sent the ransom note.”

Peter was out of his mind with anger, and he could barely keep it together. I was pissed off as well, but I realized, whoa, whatever this means to me, it means a lot more to the guy who’s been working his ass off for the last four years on it.”

Without a lawsuit filed in court, PayPal was under no obligation to amend its SEC filing—so it decided to stall Tumbleweed until the IPO.

If Tumbleweed failed to file suit by the end of the day, PayPal’s IPO would be locked. Keeping the firm occupied until 5:00 p.m. would be Hurd’s responsibility. “That was my only job,” Hurd remembered. “Just go there and act like I was negotiating with him. Whatever I could come up with to keep the guy in the room for four hours.” Hurd left the offices at 5:15—he had done it.

With the quiet period hovering over much of early 2002, PayPal could say little to defend itself publicly, so Hoffman and the executive team came up with another way of muzzling eBay. If they’re in negotiations to buy us, Hoffman remembered thinking, if they say anything to the public market, it’s breaking fiduciary responsibility. PayPal, the executive team and its board decided, would enter another round of acquisition negotiations with eBay—to silence it.

“I was pretty resolutely convinced they were going to buy us at some point,” recalled Hoffman. “So we needed it to be a very clean process by which they don’t feel like they’re mistreated if it doesn’t happen and allows us to go back for a third negotiation.”

“I have a mandate to sell the company for a billion dollars,” he remembered saying. “I’m not trying to negotiate.” And of course, every day of “not trying to negotiate” bought PayPal an additional day of eBay silence as its IPO marched to a close.

Whitman reportedly grew frustrated at PayPal’s unwillingness to yield, complaining to Hoffman that eBay had shown good faith in increasing its offer, yet PayPal hadn’t responded in kind. “I think she thought we were going to take the $850 million,” Hoffman said. “She didn’t realize that my principal goal was to keep them quiet, not sell the company.”

During eBay’s and Amazon’s IPOs, employees were admonished against obsessing over the stock price; in PayPal’s case, the executives dispensed with that fiction and broadcasted the figure onto the screens that usually featured user data. “Everybody was checking the ticker every three minutes—or three seconds,” Scott Braunstein remembered.

“You have literally thousands of hours of work culminating in the rest of the world saying you’re successful…,” Erik Klein observed. “You see your salary—but you don’t see any tangible outcome from any of the work you’ve done for those years. Until that one point—in which case it’s all dropped on you at once. It’s toilet paper until that day.”

Max Levchin would later call it “the happiest day of my life,” and colleagues recalled that their otherwise stoic CTO was caught up in emotions.

The eBay Acquisition

These and previous negotiations had left a bitter taste. eBay leadership was justified in its frustrations: PayPal and eBay had now gone through four negotiations for acquisition, and the price eBay had offered had gone from $300 million to $500 million to $800 million to now over $1 billion. Each time, either the total value or the terms of the deal had torpedoed an accord.

“[The IPO] was incredibly helpful to the deal, because there was a mark,” Jordan said, referring to the clarity offered by PayPal’s stock price. “We had tried five times to buy it, but the first four times, we couldn’t agree on the price. Once it was marked and it traded a little bit, it’s worth $1.4 billion.”

Ultimately, the deciding factor for Malloy, Hurd, and Musk was the executive team’s insistence that they and their direct reports were at the end of their tether. “They did ask us whether or not we wanted to be acquired by eBay,” Skye Lee recalled. “And I was tired. I’m like, ‘I’m ready. I can’t do this anymore.’ ” Malloy knew Max Levchin could endure inhuman levels of work. “When he told me, ‘It’s time.’ I knew we had to sell,” Malloy recalled. “You can’t force people to keep working if they’ve gotten to that point.” For many on the PayPal team, working at the company had become an exercise in perseverance—not production. “This repeated experience of almost dying is not something people can stand,” Luke Nosek said. “You want out because of the exhaustion. It’s better to have a financial exit than to have everyone so drained that maybe the next thing you need to do just won’t come out.” Malloy also noted that once the idea of an eBay exit—and its associated financial rewards—hung in the air, it was hard to claw back. “It’s very hard for normal people to put that genie back in the bottle,” he said, although he saw Thiel as being less moved by post-exit riches than others.

…one eBay board member, Starbucks CEO Howard Schultz, encouraged the team to reconsider. He pointed out that PayPal had only recently achieved profitability, and then just barely. eBay’s $1.4 billion, he argued, could be better spent elsewhere.

”It was the first nonunanimous vote in eBay’s history,” Jordan said.

No one’s job would be at risk, he promised, and no positions would be eliminated—“Except for Billpoint.” The room clapped and cheered.

“We all had to play the game of going and talking to the eBay folks about wanting to stay,” Woolway remembered. “But it was very obvious that no one at eBay wanted anyone at PayPal to stay… and no one [from PayPal] had any ambitions to stick around at the combined company.”

Lessons & Legacy

“What we learned from the PayPal experience was… that you could actually go and revolutionize an industry with people who were very smart, working hard, and deploying a technology that people hadn’t seen before,” Hoffman said. “And so, suddenly, which industries you might possibly go at becomes a much broader scope as a function of our experience at PayPal.”

“If not us, then who? The idea that our motley crew of misfits could come together to build something out of nothing was really incredible.”

“The very best employee at any job at any level of responsibility is the person who generally believes that this is their last job working for someone. The next thing they’ll start will be their own,” Levchin said. “Having as many people like that as possible is what made the difference in the company, and it’s what made it such a fertile ground for entrepreneurs later on.”

“If you get to a certain level of comfort, it’s hard to put it all on the line again and to appreciate the person who is putting it all on the line again,” Malloy said. “Do you really understand that person that’s sleeping on the floor?”

Designer Ryan Donahue remembered a team “obsessed with the distribution of their product. They had this very savvy and sort of really mature perspective on how important it was to be able to get your product into people’s hands—and that that actually trumps the quality of your product and many, many other things.”

“The best teams deal with meteors,” Malloy observed. “Meteors that don’t hit you create opportunity.”

“If you’re at a fantastically successful company like Microsoft or Google,” he explained, “you will infer that starting a new business is easier than it is. You’ll learn a lot of wrong things. If you’re at the company that failed, you tend to learn the lesson that it’s impossible. At PayPal we were sort of intermediate. We weren’t as successful as some of the great successes of Silicon Valley, but I think people sort of calibrated it and learned the best lesson—that it’s hard, but doable.”

“There was an opening to start a company like PayPal, but even three years later, I’m not sure it would have been possible,” Thiel said.

“Those that bring the big ideas into hard, unpredictable reality are the practitioners, the high-leverage ones, and I admire them almost without reservation,” Max Levchin wrote on a personal blog, years after PayPal. “One key ingredient of being this kind of a person is an almost irrational lack of fear of failure and irrational optimism, but there is a more tactical side there too: they manage to not get caught up in all the little details… while being remarkably aware of the really important ones.”