Episode #54: Preference Stacks, Power Games, and the Future of War

Stewart Squared

In this episode of Stewart Squared, Stewart Alsop III and Stewart Alsop II explore the mechanics of the preference stack in venture investing, the difference between economic and voting rights, why Delaware dominates incorporation, and how governance plays out through independent directors and board structures. The conversation ranges from startup financing and information asymmetry to the U.S. government’s new equity stake in Intel under the CHIPS Act, the precedent of the GM bailout, and the Defense Department’s secure enclave program. They trace the lineage from ARPA to DARPA, contrast research versus development, and examine how primes lost ground to companies like Anduril and Palantir, whose virtual border security and autonomous systems reflect lessons from Ukraine’s battlefield innovation. The discussion closes on how AI and autonomy may reshape great power competition with China and Russia.

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Timestamps

00:00 Stewart Alsop and Stewart Alsop II open by contrasting hype with durable principles in venture capital, setting up the idea of the preference stack.
05:00 They define preferences, economic rights versus voting rights, and why most startups incorporate in Delaware with bylaws shaping governance.
10:00 The discussion shifts to information asymmetry, insider trading, and Trump’s move for the government to buy 10% of Intel, raising questions of nationalization.
15:00 They trace precedents from the GM bailout, explain the CHIPS Act grants, Intel’s secure enclave program, and rumors of chip vulnerabilities.
20:00 Apple’s security updates, government use of secure devices, and Ukraine’s use of fiber-tethered drones illustrate the link between defense innovation and autonomy.
25:00 They revisit ARPA to DARPA, the role of Xerox PARC and IBM in research versus development, and how primes consolidated into a few big contractors.
30:00 Startups like Anduril and Palantir, backed by Peter Thiel, rise as Ukraine’s war shows drones and autonomy challenging exquisite systems.
35:00 The talk broadens to Trump’s personal investments, bonds, and using office for gain, before returning to global conflict and proxy wars.
40:00 Great power competition with China frames the future of war; AI, autonomous vehicles, and virtual border security become central to command and control.
45:00 They close with Anduril’s early contracts in virtual border security, international sales, and how AI shifts defense and governance models.

Key Insights

1. The preference stack is central to understanding venture finance. Each new funding round can create senior preferences that give later investors priority in recovering their money. Founders often underestimate how these layers accumulate, and by the time a company reaches Series C or beyond, preferences can make exit outcomes far more favorable to investors than to the team.
2. Economic rights and voting rights are distinct, and this split shapes governance. Economic rights determine who gets paid and in what order, while voting rights determine who directs the company. Most governance authority sits with the board, where independent directors and a lead independent director (LID) are intended to balance management and shareholder interests.
3. Incorporation choices matter. Delaware dominates because of its business courts and clear governance rules, protecting both investors and shareholders. Alternative states like Nevada and Texas are discussed, with Musk, Andreessen Horowitz, and Dropbox using them for different reasons. Still, Delaware remains the norm.
4. The U.S. government’s equity stake in Intel marks a rare and significant move. Historically, the government avoided ownership, except during crises like the GM bailout. By converting CHIPS Act grants into a 9.9% equity position, the government now acts as an investor, though without direct governance rights, setting a new precedent for public-private industrial policy.
5. Secure enclaves and vulnerabilities highlight the tension between privacy, national security, and trust in hardware. While conspiracy theories about universal back doors in CPUs are dismissed, the reality of constant patching, Apple’s security posture, and defense demand for trusted systems show how critical secure chips are for both consumers and the military.
6. The Ukraine war demonstrates that small, cheap, and rapidly iterated systems like drones can rival or even surpass expensive “exquisite systems” built by primes. Fiber-tethered drones and battlefield improvisation show how autonomy and adaptability redefine effectiveness in conflict.
7. The future of defense innovation is shifting to startups like Anduril and Palantir, funded by venture capital, that apply AI and autonomy to military needs. From virtual border security to autonomous vehicles, these firms challenge primes and reshape how nations prepare for great power competition with China and Russia, where AI-driven command and control may prove decisive.