The Secret: Strike Deals Where Everyone Has Limited Downside and Harness the Super Power of Incentive
Some of you have been writing to me privately and asking about the early days when we started out and were trying to build our companies. I thought it would be useful to share some of the things we did during that time that worked out well … and maybe I’ll even talk about those things that didn’t work out so favorably. I hope you find it useful in your own endeavors.
When Aaron and I started our first business years and years ago, we needed to get thousands of products coded and online. That would have taken tens of thousands of dollars in cash upfront with no promise of payout later. That was a risk we weren’t willing to take, so instead, we came up with an idea that mirrored Charlie Munger’s super power of incentive mental model.
We went to a jewelry store and department store to purchase a range of high-end gifts, which we knew would hold their value. This included a diamond and ruby tennis bracelet, bottles of Chanel perfume, a diamond watch, etc.
We then approached several close friends and family members and made them a deal: If they were able to code [x] products successfully within 90 days, and those products were done well enough that they reached [y] in sales, we would give them the items. We made it a competition. That way, they were working as entrepreneurs and knew that if it didn’t work out, they got nothing (no paycheck) but if it did, they won big.
The Moral of the Story
In other words, they had nothing to risk but time and had a shot at getting some fantastic gifts. We had virtually no financial risk because, if things went poorly, we could either return the items or sell them for what we paid. (Always have a financial backup plan.) If things went well (they did), we got to pay them out of profits and not use any of our own cash. Everyone wins.
In the end, everyone was happy. Giving those things away was one of the best experiences I’ve ever had because it felt good to reward those who worked hard and delivered results. I visited one of the workers a few hours ago and was reminded of this program when I saw the gifts. She let me take a photo with my iPhone. I had forgotten what some of the things looked like, but I have to say: Aaron and I have taste.
What I want you to learn from this is how you structure your business deals is almost as important as the investment itself. This is why Benjamin Graham said not to ask if “XYZ” was a good investment, but rather, “on what terms and at what price“. Had I added these people to payroll and created a fixed expense, it could have taken that company down before it got off the ground. We forced the firm to pay for its own expansion out of earnings.
A Secondary Financial Lesson: Know Your Target Audience
(This experience also taught me something that I truly didn’t understand because I was, to be honest, a clueless guy: Many (not all) women love jewelry. I mean love it. They were more excited to receive items like this than cash. I’d want the money. Or stock certificates. I grossly underestimated the power of stereotypes and was promptly rebuked by almost every female in my life with a giant, “duh”. Had I known this, I would have gotten far more pieces like the bracelet shown here, which caused two hardworking, very intelligent women to almost fight. The moral: Know what motivates your target audience. For me, getting paid in stock is a huge incentive. For other people, not so much.)
Years and years ago, Aaron and I came up with an incentive system that caused a group of hard working women to help us launch one of our first businesses. This is the diamond and ruby bracelet that served as one of the prizes to those who delivered the highest performance.
