Discover more from Rafael Alvarez
The Insult of Equity
Nothing but paper
Being an entrepreneur is all the rage right now. Becoming the next Steve Jobs is the latest fantasy of recent graduates, non-graduates, or anyone tired of their job or boss. Talking about business models, cash flows, canvas, return on investments, stocks, dilution, and series A financing is no longer reserved only for investment banks, it’s become jargon of the startup rockstars who want to knock the ball out of the park. These are the entrepreneurs of today.
In 2001 the word “entrepreneur” didn’t even exist. In ninth grade I met someone through IRC and together we fell head over heels for a revolution that fused technology with my rebellious teenage communism: Free Software, Linux, Slackware and lastly Debian. When we got to university we thought: "Finally we’ll get to learn about Linux!". However, by the third semester we realized that colleagues, professors, and enterprises would turn to us when they needed help with this technology. That’s when we said: 'Let’s start a company'.
We named it Fluidsignal, and we weren’t thinking about getting rich, selling the company, buying other companies, scalability, product, or innovation… we weren’t even thinking about next year's salary. We just thought that we loved Linux and that apparently Linux helped people. We also felt that after studying together for more than 4 years we were already a team. However, we had no idea what we were getting into.
After 14 years of working as an entrepreneur, I can tell you from my limited perspective what entrepreneurship means. I know that many entrepreneurs will agree with what I’m going to tell you; however, being an entrepreneur and talking about failure is a weird crossbreed that you won’t see that often. They’ll approve my version silently, because sadly, failure in Colombia is considered something to hide, not something to learn from.
Simply and crudely, being an entrepreneur means sharing risk with a group of people. It means investing time and money into a cause that could work out or could go badly, so that when we win, we all win, and when we lose, we all lose.
Generally the cause does not go well, as Marcelo Bielsa would say: “We should make it clear to the majority that success is an exception. Humans from time to time triumph. But they usually strive, fight, struggle, and win only from time to time. Only from time to time.”
Entrepreneurship is like pooling your money with several friends and betting that money playing dice, hoping to defeat statistics by spending some time analyzing the geometry of the dice and the style of the dice roller. After several rolls, you’ve either won and want to keep playing, or you’ve lost and want to get your money back. In the long run it's not winning that makes you stay, it's the team spirit you’ve created, or the love of the game.
Entrepreneurship means working longer hours than an employee with a salary.
Entrepreneurship means hiring people for a fixed salary at an indefinite term while all you have for a company is contracts for the next two months.
Entrepreneurship means being the last to get paid.
Entrepreneurship means paying yourself far below the market salary.
Entrepreneurship means backing the company's credits with personal or family properties.
Entrepreneurship means hiring your best friends and having to suspend or fire them and very possibly lose their friendship.
Entrepreneurship means realizing that the market doesn’t want, doesn’t need, or can’t use your dream, and that you’ll have to change your dream in order to understand that the needs of others are more important.
Entrepreneurship means realizing that there’s a tougher boss than the boss: the client!
Entrepreneurship means getting personally into debt in order to keep a team going and hopefully recover what’s been lost.
Entrepreneurship means winning and realizing that for some, no victory will ever be enough.
Entrepreneurship has little to do with wealth, and a lot to do with sweat and relationships to people.
Today, entrepreneurs are like the rockstars of business. The press talks about them, Ruta N rewards them, and investors inject tons of money into them (or so it seems). However, the realities are harsher than those perceived from outside. As my mother used to say, “You can’t believe half of what you hear.”
In most cases, entrepreneurs have negative equity. The number of users we hear about is registered users, not active or frequent users. Sales go up and profits go down. The luxuries you see from the outside are paid for on the credit card or by company money. Nothing is as it seems.
After playing the game, you realize that the only thing invariant in entrepreneurship is the relationships you build with people, because as an entrepreneur you generally have greater control over these. You decide who to partner with, who to hire, who to lay off and who to sell to. These relationships evolve to create bonds of trust, bonds that allow more complex projects to be developed.
To conclude, I want to focus on relationships with your partners, the closest and most infinite relationships you can have. Getting into a partnership is worse than marriage. When you’re married and you get bored, the worst that can happen is you pack your things and leave. From then on you no longer see your spouse, you no longer have to talk to them, you go and live in your space and determine how to distribute two pieces of furniture and the expenses of the kids. Having a partnership is worse:
Companies are a type of asset that is difficult to appraise.
Companies don’t only spend money, they also have income potential.
Dissolving a partnership impacts your customers and therefore your revenue.
In most cases the value of the companies is due to the people or partners in them.
The vision and values of the company are the intersection of your and your partners' values.
For all these reasons, added to the madness of entrepreneurship, I think that when someone invites you to be a partner in their company—that is, to pay you with equity instead of cash, that is, to pay you with risk!—you should feel insulted. It’s marriage times ten! It’s like asking your hand in marriage without having met you, without having ever had a conversation or a fight, without knowing what you like, how you think, how you feel and how you behave in the good times or the bad times.
Today when someone tells me they’ll pay me with shares, equity, or risk, I feel insulted. However, I forgive them. They don’t know it means getting married times ten.
Have you ever wondered why someone would invite you to a business and pay you with equity? Are they unsure of what they can achieve on their own? Do they want to share wealth and poverty with you? Or do they just have no currency to pay you with other than risk?