[PMC] Skin in the game

This piece, from Matt Levine, contains a really interesting idea.

This excerpt captures the main idea:


Here is a New York Times story about the “McKinsey Investment Office, or MIO Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which invests employee money, including in companies that McKinsey advises. “That web of relationships underscores the unusual nature of McKinsey’s hedge fund, and the potential for undisclosed conflicts of interest between the fund’s investments and the advice the firm sells to clients,” says the Times, and I suppose there are some shady elements: When McKinsey advises on a bankruptcy, for instance, and its hedge fund owns one or another slice of the capital structure, then there’s a clear potential for conflicts of interest.

Mostly, though, it’s hard to get too worked up about this. For one thing, most of the fund’s money seems to be run by outside advisers, and even the stuff run by McKinsey employees seems to be mostly walled off from the consulting business. For another thing, the incentives are mostly good: McKinsey’s consultants are trying to make the company better, and its hedge fund is invested in the company and wants the company to get better, so there is no problem here. “The firm’s partners stood to profit from their own advice,” says the Times about McKinsey’s indirect investments in Valeant Pharmaceuticals, but why would that be bad? If they do stuff to make the stock go up, then they make money, but that is also what the company wants. (In the event, Valeant’s stock went down, which was bad for both Valeant and McKinsey.) Really companies ought to demand that their consultants buy some of their stock, so they have some skin in the game with their advice.


Except for this one dude I interviewed once and some of Blair Enns inspiring stories about value creation, the blanket advice on taking equity or a revenue share in lieu of cash for consulting work is… don’t do it, man.

The arguments for this position are good, it seems. It complicates things if you take and subsequently need to administer a revenue share, though I suppose taking stock or some other equity would simplify that.

It exposes you to risk you can’t 100% control. This usually gets expressed in language something like this: “thanks for the offer of a revenue share, but I there are many aspects of this project’s ultimate success that I’m not able to control, so I’m not comfortable with a revenue share instead of cash payment for this work.”

Which is fine, but this is where I really start wondering… is it our client we’re not confident in, or is it ourselves?

What would it take for you to be so confident your work will move the needle for a client that you would consider a revenue share or (partial) payment in equity?

What do you think? Have you ever taken revenue share/equity as partial or complete payment?

If so, how did it work out for you?

-P