Be rich, or pretend to be

Loss aversion is dangerous, especially if you are in management. But I don’t mean loss aversion in terms of unwisely fearing downsides for your company: I mean fearing downsides for yourself.

Imagine if you didn’t need the salary you get paid for the position. If the job went away — if you were fired — you’d be fine. You’re not filthy rich, necessarily. You’ve just got more than enough money to go for, say, a year or two without thinking about earning another cent.

Now picture facing a decision that you damn well know means a conflict with your boss — maybe it’s the CEO of the company. Maybe it’s the board of directors, because you’re the CEO.

Wouldn’t that safety net of cash stiffen your spine? Wouldn’t it make you more honest?

Now, there are a lot of reasons why people avoid conflict or otherwise make bad compromises in life. But a big one is just that most of us need to get paid to live, and we therefore won’t jeopardize our income stream.

Just about everyone in the universe lives under this condition. There is some benefit to it: needing to get paid provides a low pass filter on bad days. You can’t just quit on the spot because someone yelled at you: you’ve got to think harder about whether you really ought to leave a company, since you need the job to live.

But if you are a founder, or if you are in management, you have got to act as if you have it made in the shade. You can’t let your personal needs get in the way of speaking your mind.

Why? Because your ability to be brutally honest is directly tied to your ability to do the job. If anything is compromising that, you are inherently, intrinsically, not going to do the job as well as you need to.

So either be rich, or pretend to be.

This isn’t license to be a jerk. Or a bad listener. Or to value fact-less opinions. It is simply a way to avoid the temptation to stay quiet in a meeting, to go all mealy-mouthed in front of your boss or peers.

This requirement of steely-spined honesty isn’t true of a lot of work, by the way. Or, at least, it’s less true, since the consequences of “going along to get along” become less severe. But if you are in a leadership position, you, sad to say, don’t have that luxury.

Two observations based on this thesis / recommendation.

First, I believe this thesis directly ties to the “rich getting richer” phenomenon. One reason that success breeds success is purely economic. The successful (rich) person can take risks without fear of personal loss, and is therefore less likely to make bad compromises. Well-managed companies that have epically long runways enjoy the same exact privilege.

Second, some thoughts on taking money off the table as it relates to this thesis. As a quick definition, this means converting some of one’s stake in a company into cash during a financing (and therefore giving up more ownership), which is sometimes possible in later investment rounds.

I read with interest a conversation on one of the founders’ lists I am on about this topic — the first blush reaction to taking money off the table is negative: “hey, you don’t believe in your company enough to keep all the equity as stock and watch it grow into a monster payout when you IPO? You can’t run the show since you lack belief!”

But once I read the stories of some founders that did cash out a portion of their equity, I understood the power and wisdom of doing so. These folks noted they were able to look at their companies far more objectively and honestly — and they were far better at taking risks and making tough decisions than they would have been earlier.

So what if you are not rich? Man. I think you have to fake it. You have to be willing to endure loss of income. Indeed, what we admire in many entrepreneurs that are just starting out is that they are willing to endure something like poverty to pursue their vision. Being willing to endure that has the exact same functional effect of being rich — you do things because you think they are right, not to secure the next paycheck.

And that attitude, I have got to believe, leads to better outcomes in the long run.