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    Mailbag: Skin in the game

    (Readin’ time: 8m 57s, but worth every second 🙂 )

    I got some very interesting replies from y’all to the Skin in the Game email.

    I wanted to make sure I had permission from everyone to share these replies, thus the delay in turning them around for you.

    Overall, it seems like the sentiment among my email list leans pretty pessimistic–or at least cautious and lawyerly–on the notion of putting part or all of your compensation at risk in the form of an equity or revenue share agreement with a client.

    Personally, I think the caution is well-advised if you’re earlier in your career or your business is somewhat fragile with respect to cashflow. And the data that some of y’all share with me when you opt in to my list suggests that many of you are relatively early in your career, at least in terms of marketing sophistication:

    positioning services - Experiential marketing learning for independent consultants

    There are two ways to look at this. 1) Revenue sharing or equity stakes are always risky compared to cash compensation. 2) Earlier in your career, the opportunities you get are from riskier or poorly performing businesses, and therefore your revenue sharing or equity stake opportunities are similarly risky and unappealing compared to cash compensation.

    That said, in the replies below you’ll see some thoughtful takes on this question, and some from folks who have put skin in the game via equity or a revenue sharing arrangement. Perhaps some of those will turn into interesting success stories in a few years?

    Quick micro-tangent. I love this recent tweet from Blair Enns:

    positioning services - Experiential marketing learning for independent consultants

    OK, onto your replies!

    From Gustavo:


    Furniture design works like that. You design a chair, your client build the chair, you are paid based on how many chairs are sold. Some designers receive a fee plus the royalties, some just royalties.

    If I think the business has some growth opportunity, I join in. But the best deal is when you get some money plus participation on the profit. That can be real passive income.

    Something I might correct is that that is one of the business models. Not everybody on furniture design works like that. But it is pretty common one.

    Also, some type design deals are almost like that. An example is The Guardian. They hired Commercial Type to design all of their fonts. But they are also available for retail. The thing is that The Guardian doesn’t own the font and Commercial Type has the rights to sell it.

    Kind of the opposite of that can also happen. Klim Type Foundry designed a font for retail. I can go to Klim and ask them do design a custom font for my business based on one of their fonts. That deal is cheaper than asking for a font from scratch.


    Fred:


    That same as it would to take a full time job with the company. For an early stage, VC funded startup with no cash flow, they can throw some stock in if they like, but I value it at $0 and charge accordingly. For a company that’s two or three years from IPO or acquisition, that has solid cash flow, and where there is a normalcy it’s operating in, sure, I’ll take part of my compensation in stock because it’s probably discounted pretty heavily. For a publicly traded company where its stock has become blue chip, I probably wouldn’t take stock because there’s no discount, and it’s basically just exposing me to volatility for no good reason.

    In a couple of cases I have given technical advice to early stage startups at a friend’s behest (my sister’s now ex-boyfriend’s startup for example). He offered me stock, and I declined, since when I was doing it out of the goodness of my heart, I could walk away and let him screw up the business side without any lost sleep. As soon as I owned a hunk of it, I would have to provide adult supervision. Holding that would have cost me money.


    Kai:


    Do I trust the client to execute on their responsibilities such that the expected value of the revenue share is positive?

    If the client has to do B and C and I have to do A – if I do A flawlessly and the client doesn’t do B and C, the system breaks.

    100% confidence in the client. Otherwise, if I could make that level of impact, why am I not in that line of business myself?


    From the other Philip with a correct name spelling:


    This would have to be a small business/startup client with big upside potential, and I’ve yet to meet one that has fully vetted their idea. I’ve done this long enough to have a very simple test – how many preorders do you have? However, they will often give a fake answer to that, like “we have 5 companies who are very interested!” So I made it super clear:

    X potential customers out of Y asked have told them, “If you have these specific features I will pay you this specific amount per time frame.”

    I would seriously consider equity if anyone did that, but nobody has. If they did and the other factors looked good (competition, barriers to entry, first mover advantage, implementation costs, scaling, etc) they could pretty easily get funding, or possibly convince technical cofounders to work entirely for sweat equity.

    It also occurs to me that value-based pricing is a form of profit sharing. Not equity, but closer in spirit.


    From Brian:


    As a consultant, my track record doing 3 deals involving equity:

    1 – fail (still in biz, but they had to refinance and dilute my shares)

    1 – startup is doing very well and still going 4 years later

    1 – exit (a small merger/acquisition not for a goldmine of money) but there was a payoff that was a nice bonus for me 6 years later

    These days, I am very hesitant for the reasons you stated. If the consultant feels strongly there is potential, my advice is to strongly consider BUYING shares, not options and get a mix of cash + shares. Get your shares 100% up front or at the end of the engagement, pay the tax on them at low price, and then pray. That’s another thing : if you buy 10k in shares up front, you gotta pay tax on that right there (plus tax on the earnings). In the future, I would probably renegotiate my cash + shares deals so that the cash number is high enough to offset the initial income tax on the shares I bought.

    And get a good attorney from the start.


    Ewald:


    Ugh.

    I get asked to work “for equity” just about every single day. Especially when it’s startups who are at the idea phase and nothing more. In the past, I tried it, and lost 100% of my “equity” because the businesses either went bust, or never reached IPO phase and are still chugging along, though my “equity” amounts to less than 1% of the value of the time I put in.

    These days, if I truly believe your idea will change the world, I work for up to 15% of my fee in equity. The rest, cold, hard cash, thank you very much. I also don’t work on projections of what your company might be worth 5 years from now to determine how much equity I should get, but do a more realistic estimate of what it’s worth right now. If nothing, well, then I don’t want equity, thank you very much.

    It seems that, as a freelancer, I often (always?) get confused with an angel investor. Terms like “sweat capital” and “future value” are bounced around, yet, it’s almost never that the client has actual risk involved. They had the idea, right? So that’s their big contribution. All I need to do is put in the three months to build the MVP and be thrilled they are letting me in on the ground floor, for a whopping 1 or 2 percent of BILLIONS that the company will be worth in 5 years.

    I wish I could show you the emails and chats that I’ve received from people when I say I’d much rather prefer to be paid for my work. I’ve been called a f@!cking moron, white racist pig and, once, an elitist little snot that doesn’t know my place. All because I didn’t just about faint at the chance to work for free, I mean, equity. It usually ends with folk telling me how sorry they are for me that I don’t have the vision to see where this is going and that I’m obviously not of the right calibre to help them realize their dream. That’s cool – I love being able to pay my bills at the end of the month, thank you very much.

    As a rule of thumb, if it’s an existing business, with provable potential, I’m open to discussing partial equity. Revenue share is not something I feel comfortable with, to be honest, and I’d avoid it most likely. For brand new startups, no, equity can be a bonus, but not in lieu of payment, the risk is just too massive.


    From Frank:


    In my first five years as a freelancer in the early days of the Internets, I did a bunch of websites and design work for startups. Within three years, most of my client’s businesses had failed or folded. Even with established brick and mortar clients, the recession hit in 2008 and the majority of them went out of business within a couple of years. I used to joke with my wife that if you want your business to fail, hire me to build your website!

    I think when you take a revenue share or some investment instrument in lieu of cash payment you are taking on more responsibility in the company and losing a small piece of your independence and consulting objectivity. It goes back to your question (or Liston?) asked a emails ago: If a new CEO were to come into your company what would they change and what is keeping you from making those changes? It’s that outsider, objective perspective girded by expertise that is valuable to a company. When you accept a revenue share, you start to become an insider of sorts and your objectivity and judgement becomes clouded, not to mention you run a high risk of the company failing when you have little to no control over other operational aspects.

    I think I would consider a revenue share in lieu of cash in terms of licensing/royalty of a design/product where a company had a proven track record of success in that specific area. Partial equity for payment? No way. Unsecured debts get paid last in bankruptcy.


    Tom shared this: www.tomkerwin.com/blog/2014/5/19/why-ill-never-accept-a-revenue-sharing-deal-for-conversion-rate-optimisation-work

    Josh shared this:


    I have now taken equity in two projects, but that was in last 12 months, and I had been consulting for 9 years before I took any equity as compensation. If someone asks me whether to take equity as a programmer, I tell them no.

    On the second equity project I took, I pitched them on offering me equity (not them pitch me). And my pitch was, “you have reached a growth inflection point, a rare opportunity. This next 2 years you are going to grow no matter how bad the team performs. But an all star performance can change growing 2x to 20x. You should offer me an incentive equity plan on top of my retainer to play my All Star best, thinking and acting like an owner.”

    That pitch doesn’t work generally, because most businesses aren’t sitting at a growth inflection point.


    Tobie:


    The main problem is the legal complexity and risk of dealing with anything that is pre-IPO, regardless of whether or not it’s going to have value in the future.

    A bunch of equity compensations also have tax implications and might require that you make a large cash investment to purchase them, with no guarantee of recouping your investment.


    Matt said:


    This is an interesting topic, to me at least. I’ve got a wing of my business (just started, so I have no experience with it yet) that takes an equity stake in the companies we work with. A couple years ago, I completely dismissed the idea of taking an equity stake, but a few months ago, I started thinking, “Huh, maybe I should rethink that.” Because I need to pay rent and put food on the table, most of my work is still “cash for consulting.” But ask me again in a couple years, maybe I’ll say taking equity stakes for payment was the best thing I ever did.


    Thanks for the thoughtful replies, y’all!

    -P

    Let’s learn about market research

    (Readin’ time: 1m 16s)

    I mentioned this a while back, and now the time is nigh.

    Ari Zelmanow is going to teach y’all how to do market research, and he’s going to do this on a webinar I’m hosting on Wednesday, March 27 at 11am Pacific time for as many as 90 informative minutes.

    If this topic is interesting to you, you can register here: zoom.us/meeting/register/2dcce03c725504864ac87b605f06faf5

    Ari is legit. You know this is true because I only do webinars with guests who are legit.

    And secondarily, you can check out Ari’s LinkedIn profile and see that:

    • He currently heads up research for Twitter’s data and enterprise solutions division.
    • He’s earned a doctorate in human cognition.
    • His colleagues–like Dan Ariely–are similarly legit.

    The webinar with Ari is 90 minutes long because I like to have plenty of time for Q&A.

    It’s done using Zoom’s meetings product because I like to feel like we’re around a big roundtable, rather than putting the audience behind a Rawlsian veil of ignorance or a Harry Potter invisibility cloak the way most webinar software does.

    It’ll be recorded and made available online. I’ll email my entire list to link you to it, so no pressure to register for the event if you can’t attend. If you can attend, great, and if not, also great, you can catch the recording later.

    But if you want to ask questions of Ari–who has considerable expertise on interviewing developers specifically in order to gain insight into their thinking–then you’ll need to attend the live event.

    Again, it’s on Wednesday, March 27 at 11am Pacific time for as many as 90 expertise-packed minutes.

    If this topic is interesting to you, register here: zoom.us/meeting/register/2dcce03c725504864ac87b605f06faf5

    I’ll send out a few more reminders for this event before it happens.

    -P

    [PMC Weekend Edition] No Data Science Job Titles

    (Readin’ time: 21 seconds)This, despite the somewhat sensationalist title, is interesting: www.forbes.com/sites/forbestechcouncil/2019/02/04/why-there-will-be-no-data-science-job-titles-by-2029/So is this: forrestbrazeal.com/2019/01/16/cloud-irregular-the-creeping-it-apocalypse/We’ve all read Marc Andreesen’s Why Software is Eating the World article, and it articulates something real and true, but the articles above point out that the tech industry tends to eat itself first.positioning services - Experiential marketing learning for independent consultantsHappy Saturday,-P

    Milk of the Moon

    (Readin’ time: 2m21s)After my ex-wife left me for a cult leader in 2008, there were two albums that really got me through the following months: Wilco’s Sky Blue Sky and Greg Brown’s Milk of the Moon.I got to see Greg Brown perform last night here in Sebastopol. I’ve never seen him live before, but it was pretty much like I’d expect it to be — great. You don’t sustain a 40-year career in folk music without knowing a thing or two about putting on a good live show.I’d been on the fence about going to the show, but when a previous client emailed me and said he’d be going, that moved me off the fence and got me to leave the warm embrace of the semi-rural world headquarters of Philip Morgan Consulting for the evening. It was great to see the show with a witty, intelligent companion (all of my clients are also very witty, intelligent, and good-looking and you’re all my favorites).The venue was one of the larger church buildings in town. It was supposed to be at the Community Cultural Center’s building, but that building was damaged in the recent flooding, along with The Barlow–the town’s most modern shopping development–which is still closed for repairs because of the flood.I’ve started playing the guitar again. My stated goal was to learn every song on Neil Young’s Silver and Gold by heart last year. That, um, didn’t happen. Like a lot of goals… Part of it was starting with the wrong guitar, and part of it was not pushing myself to practice enough.So what I’m focused on now is singing confidently. How the heck do you do that? How do you find the right note and really nail it with your voice?I’m guessing it’s a lot of practice, or some natural ability, or both. But maybe for most people it’s lots of practice?One of the things that surprised me about working for myself was that I wasn’t immediately good at it.That might sound arrogant (or ignorant), but my experience of life up to the point I started working for myself in 2009 was that things came easily to me (except for singing with confidence, ha!). Or perhaps that I only really tried to do and cared about things that came relatively easily to me.Playing small feels the same as being good at most things you try, doesn’t it? I guess let’s call that the cocoon of competence.I wonder how many of y’all have experienced this cocoon. Maybe coding came easily to you relative to the business of selling custom software development? Or building stuff for clients is much easier than advising them on what to build or how to go about building it?For me, at least, it’s been worth it to grow beyond the cocoon of competence.It’s been painful and not-easy at plenty of points. But it’s been worth it.I can’t say enough good things about the role of discipline and habit in bustin’ out of the cocoon.So I guess that’s today’s question for you: where could you recruit the power of discipline or habit to build up something you want but aren’t immediately good at?As I’ve heard it said: only the disciplined are truly free.Happy Friday,-P

    What happens when you learn to fly a helicopter?

    So what happens when you learn to fly a helicopter?Not a drone, but a real human-sized helicopter?Well, apparently, you might–like Expertise Incubator participant Elliot Murphy–start thinking very deeply and insightfully about risk: www.kindlyops.com/newsletter/Here’s an example of what you get when you sign up for Elliot’s email list:


    Why we want to have some risk

    A favorite adage says profit comes from risk in business.But what about personal risk? A less popular idea is that of risk bestowing dignity.The dignity of riskI first heard about this idea from the very best boss I ever had, someone incredibly inspiring: Dr. Pat Deegan. Pat would say that people underestimate how profoundly stressful boredom is, and that to sit back and not try was far worse than trying and failing.I’m not talking about thrill-seeking. Not talking about risky behaviors with violence and drugs.The dignity of risk refers to the idea that excess caution is counterproductive. That without taking reasonable risk, we lose all dignity, self-esteem, ability to learn, and will to live. When I think back to times when those close to me encouraged me to take on risk, those are the times that I felt most respected and appreciated.positioning services - Experiential marketing learning for independent consultantsToday was a terrifying day. I flew a helicopter for the first time. The flight instructor had me try to hover. I nearly crashed three times in a row. This is dangerous, and expected, and the best way to learn. The instructor told me what to expect, was ready to intervene after I lost control and before the crash each time, and knew that it was not possible for me to learn without trying and failing.This is a delightful example of Snowden’s safe-to-fail experiments or probes.When have you personally benefited from taking on risk?


    Elliot writes about risk in the context of regulated industries, so if this topic is interesting to you, get thee over to this page and sign up for his email list.It’s great stuff.Or, if you need to look him in the eye before you’ll entrust him with your email address, you can do that too: www.youtube.com/c/KindlyOps/featured-P

    Mailbag: On the future value of writing

    Regarding yesterday’s email, Marcus Blankenship gave me permission to share his response:


    I used to believe that my thinking proceeds writing. This made writing hard. Now I understand that writing creates thinking. This makes writing easier. When I want to think about something, I write about it. This makes writing easier. I am often surprised at what I wrote – new thoughts I did not have before I began.


    Thanks for sharing this, Marcus!The inspiration shows up after you sit down to do the work, not before. We’ve all heard this over and over again. This is a well worn rut in the road of conventional wisdom.But learning it by doing is completely different. It doesn’t make you sound clever at cocktail parties.It deeply transforms you. It helps you cultivate a point of view. It destroys what’s shallow and insubstantial in your thinking. And it reinforces what’s substantial and compelling.If this kind of transformation interests you, join us: theexpertiseincubator.simplecast.fm/-P

    On the future value of writing

    If you want to get paid highly for your thinking, then–despite the fact that your mind is thinking every waking moment–you need to practice thinking a lot.But you need to do so in a structured way. Not the semi-random, reactionary way the mind tends to run on autopilot.For a while I’ve said “writing has massive future value for consultants”.I believe this, but I’d probably struggle to explain it if asked. Fortunately, nobody has asked. Folks just kind of nod in agreement when I say this.But now I have at least one component of an explanation: writing is how you practice thinking.I suggest you do it in public: theexpertiseincubator.com-P

    10x more valuable

    I like to say around here, “Unfortunately, you’re in a relationship business.”My friend Jonathan Stark recently sent out an email about 10x-ing your value.I want to run with that theme and ask: what relationship(s) would 10x the value you create for your clients?Not what skills or expertise, but what relationships?I was thinking about this, quite honestly, for myself. What relationship(s) would 10x–or dramatically increase–my value to my clients?I’ve taken this consulting gig doing market research for a services company that has a SaaS. As I’m doing this research, I’m realizing the kind of relationships that would increase my value in the context of this kind of consulting, which I don’t do a lot of because I’m mostly focused on coaching and creating group experiential learning experiences for my clients. That’s more scalable revenue and impact for me but, when it makes sense for me and the client, I take on consulting work.In the context of this particular consulting engagement, it would be great for me to have insight into how certain people within big companies think about a specific piece of technology. Big enterprise companies.I find that in many situations, there’s two things you can observe: the thing itself, and–often–a proxy for the thing itself. I also find that the proxy can be easier to observe, perhaps because it’s easier to access than the thing itself. Or perhaps because it’s literally more observable.We could think of Plato’s cave. We can’t observe the thing itself, but we can observe the shadow it casts on the wall of the cave.There are times when:* Action is a proxy for thinking. The action is more easily observed than the thinking.* The activity of easily observed individuals (sales people are one example) is a proxy for the thinking of less easily observed company leaders and their strategy. You might “observe” the actions of a salesperson by buying them lunch and asking them about it. Many of them love to talk!* Ad spending is a proxy for a company’s desired market position. I’m not 100% sure how you observe ad spend, but I think there used to be and maybe still are SaaS tools that collect and report on ad spend of various companies.And… in the context of my project… recruiters are a proxy for the needs of hiring managers.Of course, no proxy is a perfect representation of the thing itself, but on the other hand, some data is dramatically better than no data!So if you’re doing any kind of market research, make sure you consider what proxies might be easier to observe than the thing itself.And consider: what relationship(s) would 10x–or dramatically increase–your value to your clients?-POh, and finally… any folks on this here list able to connect me with a good recruiter who works (not necessarily exclusively) with big non-tech companies? I’d appreciate an intro.

    [PMC Weekend Edition] Mailbag: Giant flywheel of death

    I got the best response to last weekend editions’s Giant flywheel of death email. THE. BEST!This came from Luca, who was on my podcast a while back. He said:


    There’s a fusion reactor at Munich technical university. Its ridiculous power draw is satisfied by a giant flywheel.During planning, someone calculated what would happen if the thing broke free. They calculated it would go straight through Munich, and then about 50km further; pretty much right to the foot of the alps. IIRC they actually decided to orient it such that it would roll uphill if it were to break free, lest it go even further 😀


    I was thinking about this for DAYS. I looked it up and found this picture for you of the flywheel:positioning services - Experiential marketing learning for independent consultantsHere’s the description:


    The electric energy needed by the ASDEX Upgrade fusion experiment to power its magnetic field coils and plasma heating facilities is supplied by large flywheel generators. An experimentation pulse in ASDEX Upgrade requires an electric power of 400 megawatts lasting 10 seconds, i.e. half as much as the whole district of Munich. Such an abrupt grid load is not permissible; so the electric energy for ASDEX Upgrade cannot be taken directly from the grid. Instead the flywheel generators gradually take the energy needed from the grid, store it and then pass it on to ASDEX Upgrade in a single pulse.The biggest flywheel generator at IPP can store 1,514 megajoules or 421 kilowatt-hours of useful energy. It is used primarily for the main field coils of ASDEX Upgrade. The 220-ton flywheel is accelerated in 30 minutes by a grid-supplied drive motor from stationary to 1,650 r.p.m.. Its circulation velocity can attain 900 kilometres per minute, i.e. almost the speed of sound.During an experimentation pulse the flywheel then drives a three-phase generator, whereupon it decelerates to 1,270 r.p.m.. The three-phase generator can supply up to 155 megawatts of power for about 10 seconds. Once it has unloaded, the flywheel generator is restored to full power every six minutes.Source: www.ipp.mpg.de/4244138/generatoren


    So the Munich flywheel is different than the one my friends and I like to imagine, but it’s still some serious poetry-in-motion kinetic energy!Thanks for that share, Luca!Happy Sunday,-P

    [PMC Weekend Edition] “Worship power, you will end up feeling weak and afraid”

    I haven’t explored David Foster Wallace’s work, but this is just excellent: fs.blog/2012/04/david-foster-wallace-this-is-water/It’s about a 16 minute read, and worth every minute.If you need some motivation to read it, knowing that you will probably be nodding your head vigorously when you arrive at this section might be enough motivation:


    Worship power, you will end up feeling weak and afraid, and you will need ever more power over others to numb you to your own fear. Worship your intellect, being seen as smart, you will end up feeling stupid, a fraud, always on the verge of being found out. But the insidious thing about these forms of worship is not that they’re evil or sinful, it’s that they’re unconscious. They are default settings.They’re the kind of worship you just gradually slip into, day after day, getting more and more selective about what you see and how you measure value without ever being fully aware that that’s what you’re doing.


    Happy Saturday,-P