How To Make More Money by Taking More Risk | Ep 775

0:28Hey guys, welcome back to the game. money, you have to provide value. But we all know that it's not just the value that you provide that is propensurate to the compensation that you will get. You have to have other variables to influence how much you make. And the more I've been studying this, the more surprised I have been by the variables that I believe actually create disproportionate compensation for the work that we put in. And this applies to us as entrepreneurs, deals that you have, vendors, and especially teammates and employees. Enjoy. So in the second of this little series that I have going on of me making audio first podcasts, this was started because Layla told me that I should do this.

1:12And I tend to listen. My wife's very good and smart at stuff and she wants me to win. And so I take I take her advice seriously. And so if you agree with her, then let me know. And if you prefer the more annotated style of like denser, what I would consider podcasts, then tell me. I'll do whatever you guys want. But this is a slightly different style because this is kind of throwback to how the game started, which was I would tell you guys what was on top of mind and kind of the things that I'm changing inside of the business based on what I'm learning. So today what I want to talk about is compensation.

1:48And not the way that you think, this is an employee compensation, but I just kind of think about compensation in general. And so I have, before this, had this working model of the amount of money that you get paid that you earn, either as an employee or as a business owner, I see them as the same, comes down to what I believed to be three or four main variables. As I say them, I'll remember it's three or four. So number one is the value that you provide the marketplace. That's number one. Number two is your ability to negotiate. So it's like value is the size of the pie. The negotiation is the slice of that pie that you get.

2:23Third is the dynamics of the marketplace itself, meaning how replaceable or irreplaceable is that value. So for example, if a salesperson provides a tremendous amount of value to a business, and let's say they're really good at sales, and so they can negotiate really well with the owner, if there's somebody else who can do that exact same job and is just willing to do it for a third of the price, then that's still going to be the dynamic of what the compensation for the role is, which you might argue that might just be the only thing that matter. But I will say that there's a fourth variable that's come into play that has been so big and seems so obvious now that I think it might even erase the other three.

3:00And that's weird coming from me because supply and demand is like my thing. It's part of my logo. Like I'm a big believer in it. So I'm not saying this is necessarily not that, but when it comes to like deals with employees or deals with partners or deals with a business, the big thing that erases everything else is risk. How much risk are you taking on? And so I recently had an engagement with, I'm looking for a really, really high level marketer who can come in and help us continue to do bigger and better things at acquisition.com. And so I've almost always had the marketer hat in every business that Laila and I have started together for however long.

3:41And I'm spread thin right now. And so I need help. And I need somebody who's really good. And so one of the problems with a lot of times people who are really good at marketing is that they end up starting their own businesses around marketing. And I had a number of people who had businesses say that they would shut down their business in order to do this role with me. And they each more or less asked for compensation equal to what they made in their business. I struggled to come up with a, like, it didn't feel right. And I didn't have the words to describe why. And so this podcast is me answering why.

4:25Fundamentally, if you go from owning a business and making X amount of money, and then you go within a business and want to make the same X or more money, then it removes the one thing that you're getting disproportionately compensated for in the first thing, which is risk. So you're expecting to be compensated at the same or higher without taking on the risk. And so the compensation that you have, I think in large part, comes down to how much risk you're willing to take on. Sales roles oftentimes get compensated more, or the best salespeople get compensated more than sometimes executives in a business.

5:03And executives who don't understand this get really upset about it. And so if you're an entrepreneur, you can send this to your executives if anyone's ever brought this up to you. But the big variable is risk, is how much risk are you taking on? Because the thing is, is that sales guy can have a career with you. And if they have two bad months in a row, they're gone. They take on risk. And so your compensation, sure, is going to be proportional to the value you create, how well you negotiate, and then the competitive dynamics of other people who could potentially provide that same thing. But the trump card is risk.

5:36So let me tell you a story that will illustrate this. Eduardo Saverin, who you may or may not have heard of, was one of the co-founders of Facebook. Now, people, I don't even know if you can legally say to these co-founders, I think he has some law settlement, whatever. But I think, this is Alex's two cents, Eduardo did very little for Facebook to become Facebook. But he did one thing that mattered more than anything else. Do you want to know what that one thing was? He wrote the first check. So it was his$30 ,000 that went in to fund the servers and the computers or whatever for Facebook. And that ended up being worth, I think today, something like$15 billion.

6:07So it was a pretty good return that he got on that. Now, we can argue that he provided no value. Let's say, hypothetically, he provided no value. The negotiation that he did was he got X amount of shares that he got for that money. And competitive dynamics, probably anybody could have provided that cash, but he was the only one who was willing to take the risk. He was compensated for that risk. And so it didn't matter what Zuckerberg said. And to be fair, I'm a fan overall of Zuckerberg as an entrepreneur in terms of how good he is. You can't get around risk. If someone takes risk on, they put skin in the game, they get compensated for it.

6:43And so it's this big thing that I've been thinking, It's shifted how I'm seeing compensation between roles, between departments, in deals with vendors, in all these types of situations, because it comes down to risk. And so if you have to have one of these kind of harder talks with an employee or a vendor or a deal, I think one of the frameworks that I would add to that, the fourth framework, is how much am I taking on and how much are they taking on risk-wise? Now, if they incur risk because they choose to give something up, right, they are taking on risk, but it's not in relation to the outcome.

7:23And that's the thing. It's like, I mean, this is me being, quote, insensitive and lacking better terms here, but it's a them problem. So we have to think about how much risk they're taking on within the context of our thing. And so if somebody, again, I'll give you an example. So let's say somebody has a salary, right, a really, really expensive salary. and they say, because I get paid this salary here, I should get that salary where you're at. Well, it's completely not connected. I mean, it sounds like it's relevant, but it's not at all. It's a different business and it has nothing to do with the transactions that we're doing right now.

7:58And so we as humans like to make accommodations for other humans in general because we want to work with them, whatever. But in terms of the economics of the deal itself, it just has nothing to do with it. The risk has to be specific to the opportunity that's being pursued mutually. And so the exchange with the salesman, for example, let's say someone's a million dollar a year executive and says, hey, I want to start working in sales for you, but I need to make a million dollars a year. I would say, well, that has nothing to do with this role. Now you will get compensated proportional to the risk of the role, not the risk that you chose to give up independent from this role.

8:38And so I say this because I'm sure that will be something else that someone might bring up in a future conversation. And again, you can choose to stand in this podcast. But it's something that I've been thinking a great deal about when I'm thinking about pursuing opportunities is how much risk am I putting in and how much risk is someone else putting in. And so I will also say that me personally, the reason that I think I've been disproportionately compensated throughout my career is that I'm willing to take on a tremendous amount of risk. I sleep okay with business risk particularly because the business risk for me feels less risky than to other people because the deficiency of skills required to make it less risky, I have, or rather I don't have the deficiency of skills.

9:18So I pay down risk with skills. And I think you can too. So I'm not saying that in a self-aggrandizing way. I just say I think anyone can pay down risk. And that's why Warren Buffett says, do what you know, right? You have a circle of competence. And it's because you get better returns when you have less risk. And so if you can artificially suppress risk because of your competence, then you have arbitrage within a specific segment of a marketplace. Now, that can be you have less risk when you market. You have less risk when you sell. You have less risk when you take on a job. You can draw the circle as small as you want, but the risk is still there.

9:48On one hand, Eduardo Saverin did basically nothing. And on the other hand, he did everything. Because if he had not put the money up, maybe Facebook would not exist. I would maybe encourage you that if there are these opportunities where you do have upside, but you take on more risk, maybe believe in yourself. Maybe take the shot. Now, I'm not saying, you know, take irreversible risk for yourself that, like, you'll never recover from. But I say that also as somebody who has taken those risks more times than once in my career. Andrew Carnegie said this, and I love this quote. He says, there's the old quote, which is, you don't want to put your eggs in one basket.

10:25He says, no, put all your eggs in one basket and then watch the basket. And so basically a different way of saying like go all in. Have your little basket, your little thing of competence and double down. That is my risk thoughts on value creation and value extraction of the day.