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Hey guys welcome back to the game. Today's episode is second in our little mini series of audio

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first podcasts. If you like these please please please let me know by tagging me on Instagram

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or sharing this podcast via text so that more people listen to it. It's actually less about

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like please I want to grow it's more you doing that shows me you like this stuff and I will do more

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of this type of content on the podcast. Today I am talking about compensation and risk okay so

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fundamentally to make money you have to provide value but we all know that it's not just the value

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that you provide that is propenser it to the compensation that you will get right you have to

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have other variables that influence how much you make and the more I've been studying this the

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more surprised I have been by the variables that I believe actually create disproportionate

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compensation for the work that we put in and the supplies to us as entrepreneurs deals that you

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have vendors and especially teammates and employees enjoy. So in the second of this little series

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that I have going on of me making audio first podcasts this was started because Layla told me

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that I should do this and I tend to listen my wife's very good and smart at stuff and she wants

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me to win and so I take I take her advice seriously and so if you agree with her then let me know and

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if you prefer the more annotated style of like denser what I would consider podcasts then tell me

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I'll do whatever you guys want but this is a suddenly different style because this is kind of

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throwback to how the game started which was I would tell you guys what was on top of mind and kind

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of the things that I'm changing inside of the business based on what I'm learning. So today what

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I want to talk about is compensation and not the way that you think this is an employee compensation

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but I just kind of think about compensation in general and so I have before this had this working

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model of the amount of money that you get paid that you earn either as an employer's business owner

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I see them as the same comes down to what I believed to be three performing variables as I say

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them all remember it's three or four. So number one is the value that you provide the marketplace

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that's number one. Number two is your ability to negotiate so it's like value is the size of the pie

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the negotiation is the slice of that pie that you get. Third is the dynamics of the marketplace

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itself meaning how replaceable or irreplaceable is that value. So for example if a salesperson provides

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a tremendous amount of value to a business and let's say they're really good at sales and so they

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can negotiate really well with the owner. If there's somebody else who can do that exact same job

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and it's just willing to do it for a third of the price then that's still going to be the dynamic

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of what the compensation for the role is which you might argue that might just be the only

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thing that matter. But I will say that there's a fourth variable that's come into play that has

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been so big and seems so obvious now that I think it might even erase the other three and that's

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weird coming from me because supply and demand is like my thing. It's part of my logo like I

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a big believer in it. So I'm not saying this is necessarily not that but when it comes to like deals

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with employees or deals with partners or deals with the business the big thing that

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erases everything else is risk. How much risk are you taking on? And so I recently had an

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engagement with I'm looking for a really really high level marketer who can come in and help us

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continue to do bigger and better things at acquisition.com. And so I've almost always had the

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marketer hat in every business that Layla and I have started together for however long.

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And I'm spread then right now and so I need help and I need somebody who's really good. And so

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one of the problems with a lot of times people who are really good at marketing is that they end

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up starting their own businesses around marketing. And I had a number of people who had businesses

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say that they would shut down their business in order to do this role with me. And they each

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more or less asked for compensation equal to what they made in their business. I struggled to come

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up with a like it didn't feel right and I didn't have the words to describe why. And so this

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podcast is me answering why? Fundamentally if you go from owning a business and making

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X amount of money and then you go within a business and want to make the same X or more money

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then it removes the one thing that you're getting disproportionately compensated for in the first

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thing which is risk. So you're expected to be compensated at the same or higher without taking

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on the risk. And so the compensation that you have I think in large part comes down to how much

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risk you're willing to take on. Sales roles oftentimes get compensated more or the best sales

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people get compensated more than sometimes executives in a business. And executives who don't understand

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this get really upset about it. And so if you're an entrepreneur you can send this to your executives

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if anyone's ever brought this up to you. But the big variable is risk. Is how much risk are you

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taking on? Because the thing is is that sales guy can have a career with you and if they have two

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bad months in a row they're gone. They take on risk. And so your compensation sure is going to be

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proportional to the value they create. How will you negotiate? And then the competitive dynamics

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of other people who could potentially provide that same thing. But the Trump card is risk. So let

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me tell you a story that I'll illustrate this Eduardo Savor and who you may or may not have heard of

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was one of the co-founders of Facebook. Now people I don't even know if you can legally say

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that he's co-founders. I think he has some lost settlement whatever. But I think this is Alex's

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two cents. Eduardo did very little for Facebook to become Facebook. But he did one thing that mattered

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more than anything else. Do you want to know what that one thing was? He wrote the first check.

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So it was his $30,000 that went in to fund the servers and the computers or whatever for Facebook.

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And that ended up being worth I think today something like $15 billion. So it was a pretty good

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return that he got on that. Now we can argue that he provided no value. Let's say hypothetically

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that he provided no value. The negotiation that he did was he got X amount of shares that he

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got for that money. And competitive dynamics probably anybody could have provided that cash.

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But he was the only one who was willing to take the risk. He was compensated for that risk. And so

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it didn't matter what Zuckerberg said and to be fair I'm a fan overall of Zuckerberg as an

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entrepreneur in terms of how good he is. You can't get around risk. If someone takes risk on,

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they put skin in the game. They get compensated for it. And so it's this big it's this big thing

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that's just I've been thinking it's it's shifted how I'm seeing compensation between roles,

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between apartments, in deals with vendors in all these types of situations because it comes down

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to risk. And so if you have to have one of these kind of harder talks with an employee or a vendor

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or a deal, I think one of the frameworks that I would add to that, the fourth framework,

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is how much am I taking on and how much are they taking on risk wise. Now if they incur risk

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because they choose to give something up, right? They are taking on risk but it's not in relation

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to the outcome. And that's the thing is it's like it's I mean this is me being quote insensitive

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and lacking better terms here. But that's a it's a them problem. So we have to think about the

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how much risk they're taking on within the context of our thing. And so if somebody again,

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I'll give you an example. So let's say somebody has a salary, right? A really, really expensive salary.

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And they say because I get paid this salary here, I should get that salary where you're at.

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Well it's completely not connected. I mean it sounds like it's relevant but it's not at all.

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It's a different business and it has nothing to do with the transactions that we're doing right now.

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And so we as humans like to you know make accommodations for other humans in general because we

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want to you know work with them whatever. But in terms of the economics of the deal itself it

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just has nothing to do with it. The risk has to be specific to the opportunity that's being

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pursued mutually. And so the exchange with the salesman for example, let's say someone's a high

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a million dollar year executive and says hey I want to start working in sales for you but I need

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to make a million dollars a year. I would say well that has nothing to do with this role.

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Now you will get compensated proportional to the risk of the role, not the risk that you chose

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to give up independent from this role. And so I say this because I'm sure that will be something

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else that someone might bring up in a future conversation and again you can choose to stand

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in this podcast. But it's something that I've been thinking a great deal about. What I'm thinking

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about pursuing opportunities is how much risk him I putting in and how much risk is someone else

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putting in. And so I will also say that me personally the reason that I think I've been disproportionately

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compensated throughout my career is that I'm willing to take on a tremendous amount of risk. I sleep

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okay with business risk particularly because the business risk for me feels less risky than to other

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people because the deficiency of skills required to make it less risky I have or rather I don't have

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the deficiency of skills so I pay down risk with skills and I think you can too so I'm not saying

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that you know in a self-aggrandizing way I just say I think anyone can pay down risk and that's why

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Warren Buffett says do what you know right you have a circle of competence and it's because you

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get better returns when you have less risk and so if you can artificially suppress risk because

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of your competence then you have arbitrage within a specific segment of a marketplace. Now that

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can be you have less risk when you market you have less risk when you sell you have less risk when

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you take on a job it can be you can draw the circle as small as you want but the risk is still

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there on one hand Eduardo Savrin did basically nothing and on the other hand he did everything

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because if he had not put the money up maybe Facebook will not exist I would maybe encourage you

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that if there are these opportunities where you do have upside but you take on more risk maybe

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believe in yourself maybe maybe take the shot now I'm not saying you know take irreversible risk

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for yourself that like you'll never recover from but I say that also as somebody who has taken

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those risks more times than once in my career Adrian Carnegie said this and I love this quote he says

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there's the old quote which is you don't want to put your eggs in in one basket he says no put all

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your eggs in basket and then watch the basket and so basically a different way of saying like go all

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in have your little basket your little thing of competence and double down that is my risk

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thoughts on value creation and value extraction of the day