November 26 2007: 8:52 AM EST
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The PayPal mafia

By Jeffrey M. O'Brien, Fortune senior editor

In other words, they were looking for people like themselves. A bilingual immigrant from Kiev, Ukraine, Levchin is the hypercompetitive son of a playwright father and a physicist mother. He's numerate in the extreme and is an accomplished clarinetist whose athletic pursuits don't typically take him beyond table tennis. He lives to work.

Born in Germany, Thiel has a J.D. from Stanford and did some time as a corporate lawyer. But finance has always been more his thing - Institutional Investor named his hedge fund, Clarium Capital, "global macro fund of the year" in 2005. (He was once ranked among the top under-21 chess players in the country, but he gave up playing competitively.

"Taken too far, chess can become an alternate reality in which one loses sight of the real world," he says. "My chess ability was roughly at the limit. Had I become any stronger, there would have been some massive tradeoffs with success in other domains in life.")

"All of this is about self-selecting for people just like you," says Levchin. "He thinks like me, he's just as geeky, and he doesn't get laid very often. Great hire! We'll get along perfectly."

Recruiting underclassmen from the middle of the country assured Levchin that his charges would have few preconceived notions and fewer social distractions. "Most of them were very introverted anyway," Levchin recalls. "They'd come in, eat crappy food all day, and sleep under their desks."

Early on, disagreements sometimes broke out into wrestling matches, and on at least one occasion Levchin worried that he had a serious fight on his hands. As with the real Mob, PayPal wasn't exactly welcoming toward women.

When it came time to hire a high-ranking female engineer, she turned out to be bad at Ping-Pong. Levchin took that as a lack of competitive fire but grudgingly hired her anyway. She quit within six months. "Peter never fails to rub that in," he grumbles.

Of course Google (Charts, Fortune 500) is also famous for a relentless pursuit of brainiacs. But PayPal was no Google. "The difference between Google and PayPal was that Google wanted to hire Ph.D.s, and PayPal wanted to hire the people who got into Ph.D. programs and dropped out," says Roelof Botha, PayPal's onetime CFO who went on to become a general partner at one of the nation's most powerful VC firms, Sequoia Capital, and put the first venture money into YouTube. "It's a different temperament."

The PayPal-ers who didn't possess Thiel's anti-establishment streak as new hires had it by the time they left. The PayPal culture wasn't just antigovernment. It was anti--mainstream thought.

Thiel, ever the freethinker, has donated $3.5 million to the Methuselah Foundation, a life-extension-research organization run by the controversial academic Aubrey de Grey, who believes humans will one day live to 1,000.

Thiel sits on the board of the Singularity Institute for Artificial Intelligence, which concerns itself with the coming merger of man and machine. In the early days at PayPal, he even discussed establishing cryogenic storage as an employee benefit.

Thiel's leadership style is as unconventional as his worldview. His hallmark management MO at PayPal (at least, pre-IPO) was the all-hands open-book session. Customer logs, revenue flow, fraud losses, burn rate: He'd display it all for every employee to see. This access to information, coupled with the lack of offices, created a flat structure where any idea could win the day.

"Good decision-making flows out of details," says former COO David Sacks, who now runs both the online genealogy startup Geni and the Hollywood production studio Room 9 Entertainment, which made Thank You for Smoking. "We did not subscribe to the idea that managers are this special class of employee."

Sacks himself almost didn't get hired by PayPal - perhaps because of a short stint at McKinsey. But Thiel recognized him as an important dissenting voice, someone who could sharpen the company's focus.

Once he came on, McKinsey taint notwithstanding, Sacks further opened the culture by establishing a no-unnecessary-meetings policy. He became a meeting cop. Anytime he'd see a closed-door discussion happening, he'd sit in for three minutes. If he considered the meeting to be valueless, he'd call it adjourned.

Sacks, in his office on Sunset Boulevard in West Hollywood, recalls how the lack of meetings helped create a culture of many workers and few managers. "You didn't measure where you were in the organization by how many people you're managing," he says. Prestige was measured "by how few people there were above you who could prevent you from doing what you wanted to do."

Back in Silicon Valley, Reid Hoffman, a former executive VP, sits in his own office at the social networking site he started, LinkedIn. Hoffman is one of the Valley's most prolific angel investors, with stakes in more than 60 startups, including Facebook and Digg.

Like Sacks, he loved PayPal's meritocracy. "The group was very analytical," says Hoffman. "It was all about, 'Here are my arguments; here's my perspective.' You could never say, 'In my experience,' because experience wasn't there as a variable."

Not everyone liked the PayPal vibe. Chief among the dissenters is Elon Musk.

It's free-lunch Friday at the space-exploration company SpaceX, down the road from Los Angeles International Airport. The massive fuselage of a rocket ship dominates the ground floor. In its shadow, dozens of employees sit cramped at a handful of foldout tables.

There are no seats to be had, not even for the man who invested $100 million of his own money to start the company. So Musk and I retreat to his desk. I've just asked him what it was like to be the victim of a coup led by Sacks, Levchin, and Thiel. "It was like unicorns and rainbows, flower-filled meadows," he says with a smirk.

Musk came to PayPal not through Levchin/Thiel's regime but during the company's merger with his Internet bank, Born and raised in South Africa, Musk sold his first company, Zip2, to AltaVista at age 28 for more than $300 million. Now 36, he's running SpaceX, which plans to send people into space and eventually colonize Mars, and serves as chairman of Tesla Motors (electric cars) and Solar City (solar-panel installation).

Despite having perhaps the greatest entrepreneurial streak of all the PayPal mafia, Musk was purged from PayPal like some kind of toxin. Soon after the merger, Thiel resigned.

Musk became CEO of the combined company and decided it was time for a technological overhaul. Specifically, he wanted to toss out Unix and put everything on a Microsoft platform.

That may sound innocent enough to laypeople but not to Unix zealots like Levchin and his team. A holy war ensued. Musk lost. The board fired him and brought back Thiel while Musk was on a flight to Australia for his first vacation in years. "That's the problem with vacations," Musk deadpans.

Musk still contends he didn't deserve his fate, that his biggest flaw was being cut from different cloth. "Peter, Max, and I are not directly aligned philosophically," he says. "Peter's philosophy is pretty odd. It's not normal. He's a contrarian from an investing standpoint and thinks a lot about the singularity. I'm much less excited about that. I'm pro-human."

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