Once people see you pulling off one role, they think you’re a safe bet to do a similar role. – Margot Robbie
You know when you look at the same thing from a different point of view, you see different things?
For example, you are probably very comfortable with the idea of a payback period.
You put your money into a project and you get it back in three years.
That makes sense – and, depending on the project, more money turns up later.
I was listening to Ryan Holiday, the author of Ego is the enemy among other works being interviewed on the economics of the book business.
And he talked about earnouts.
In essence, if a book publisher wants to buy your book they give you an advance.
That’s a payout that you get up front – it lets you live and buy noodles while you write.
Then, you write the book and it goes on the shelves and the sales start trickling in.
The first thing that needs to happen is the book needs to earn out – it needs to pay back for the publisher who took that bet on you.
Same thing, different point of view.
Now, imagine what happens when you go for a job interview – how does the boss of the company look at you?
Well, most bosses I suppose, have a role that needs filling – a job that needs to be done.
That calculation is one where they think, “Well, I could be making £50 an hour so I’ll hire someone else to do that job at £10 an hour.”
But really, what you want to have them think is, “Wow, I could sell the skills this person has and make back the money I pay them in six months, and the rest is all profit.”
So, in the book business, the money that comes in first goes to pay off the investment the publisher has made.
And that first part is the same with jobs – where the sales pay for you to be in work in the first place.
And many places actually need a multiple of salary to come in – they might work on two or three times the salary to get to the profit levels they want.
But here’s the thing.
Once you’ve reached a point where your earnout is complete, why should the company get everything else?
In the book trade you start to get a percentage – a bit of those future sales.
And that’s the money that matters – the trickle over time that gives you an income.
I think this whole area is one where people could really do with looking at themselves from an investor’s point of view.
Some people work in jobs where they are cheap – anyone could do that and no one will worry about replacing you and getting someone else in.
Some get paid a lot but deliver just enough to pay their way or not enough to justify keeping them – and eventually that tends to catch up with them.
They might be lovely people – but they’ll still be let go with reluctance.
Some go for the big payout, asking for as much as possible – and they get it while they’re winning, but get thrown out just as fast if they make a wrong move.
But none of this really matters if you’re looking at the long term.
If you look at earnout, the payout you get actually has to last you all the way until the payback has happened – from now to when.
Then you start to get anything else.
But at that point you have to do nothing more as well, the revenues roll in from the product you’ve created, the asset you’ve built.
That asset could be a book, a product or the service you’ve developed.
So, if you’re in a position when you have to ask for money to develop that asset – well, you should be very conscious of the earnout equation.
Because if someone takes a bet on you, and pays you up front, you need that earnout to work out.
Otherwise you might not get a second bet – almost certainly not with the same person.
But all this talk of payout and payback and earnout is simply a way of looking at what’s going on.
It just describes how the bet will pan out as the future does.
The most important thing that needs to happen for any of this to be relevant is that you have to work on producing that asset.
Production is what matters.
If you want someone to bet on you – make sure you’re the kind of person who produces something of value.