Skin in the game

Put $300 of skin in the game to learn an emerging market

Shaan's on-ramp for any nascent space: download the apps and risk ~$300 (90 days of coffee money) just to start checking and learning, the same way his smart friends' weekend dabbling was the early signal for crypto.

“And I would take like $300, right? Like go take like, I don't know, 90 days of coffee money, like skip your daily coffee and like be like, okay, that's $300, and go like get a little bit of skin in the game just to learn how these platforms work. And look at— and then you'll, once you've skin in the game, you'll start checking on it.”

Steal thisRisk a trivial amount of money in any new market just to force yourself to start paying attention and learning.

Incentive alignment, not the ISA, is the real moat

Shaan argues people miss the point fixating on the ISA mechanism; the real edge is that Lambda's business only works if students get high-paying jobs, so they train, filter, and place better than a traditional school that gets paid either way.

“it's not that you're nicer people than everybody, it's that the business model actually depends on you successfully getting people high-paying jobs, which is what they want too. And, uh, so like when everybody gets excited about Lambda School, they always talk about ISAs, which is like, you know, this mechanism— it's income share agreement. But that's kind of missing the point. It's more about the fact that you— your success is tied to the success of the student in a way that a normal university is not. And that's why your product is going to be better.”

Steal thisBuild a business model where your only path to profit is the customer's success.

Institutional capital is roach motel money

Hetrick warns that once you take institutional capital, it's very hard to get rid of — he had to recapitalize the business in 2018-2019 just to exit his initial PE partners.

“because that's one of the dirty little secrets about institutional capital is once you take it, it's very difficult to get rid of”

Steal thisTreat institutional money as semi-permanent — only take it when you're prepared for a long, hard-to-undo relationship.

Pay execs in escrowed open-market shares, not options

Shaan describes Constellation's compensation model: execs get no share options; instead 75% of their after-tax bonus must buy shares on the open market, held in escrow for four years, so they can't profit from short-term share-price pumping.

“they take 75% of their after-tax bonus, and they can buy shares on the open market, and then those shares are held in escrow for 4 years. So if the stock is overvalued because they are sort of temporarily pumping enthusiasm, energy, or doing buybacks or whatever, they're buying overvalued stock.”

Steal thisMake leaders buy real shares with after-tax bonus money and lock them up for years instead of granting free options.

The DeFi trade: borrow against your Ethereum to fund startups

Shaan explains his Compound Finance play: post Ethereum as collateral, borrow up to 75% in a stablecoin (USDC) at a very low rate, sell it for dollars, and invest those dollars into startups, keeping his cash free for things like buying a house.

“you go to Compound Finance and what you can do is you can put up Ethereum as collateral. So I put in, let's say $10,000 of Ethereum or $100,000 of Ethereum. And, um, then I can borrow up to 75% of that in another currency. Like for example, DAI or USDC, which is Coinbase's stablecoin. Basically, you put in, let's call it $100, you can borrow $75 of that on there at a very low rate.”

Learn the frontier by putting skin in the game

Shaan relays Naval's advice: the way to learn a new field like DeFi or no-code isn't to ask which book to read, it's to put a little skin in the game, use the tools, lose and make a bit of money, and let real usage teach you the shortcomings and the upside.

“the way to learn is to go put some skin in the game, try to actually use the tools. That'll teach you about their shortcomings, that'll teach you what's cool about it. Watch a whole bunch of videos, lose a little bit of money, make a little bit of money, and you know, the actual learning of being on the forefront of technology will pay itself off multiple.”

Steal thisTo learn an emerging technology, put a small amount of real money at risk and actually use the tools rather than just reading about them.

Being early is the same as being wrong

Shaan's tweetable maxim on timing: doing the right thing at the wrong time produces pain, not pleasure. He ties it to his own failed ventures (Blab, Cloud Kitchen) that he believes would have worked if launched a couple of years later.

“I tweeted this out, which was, being early is the same, is the same thing as being wrong. Or, or another phrase of that is, if you do the right thing at the wrong time, it, you get pain, you don't get pleasure, right?”

Don't pay a CEO a flat % of profit — peg the bonus to beating your existing growth rate

Wilkinson's early comp mistake was paying 5% of profit, which let the CEO stay lazy and still collect. The fix: if the business already grows earnings ~15% annually, set that as the bar so the CEO is only rewarded for growth beyond what you'd already achieve.

“let's say like a business is already growing your earnings, like 15% annually, you want to incentivize them to at least grow that fast because that's what you're already doing and setting that bar. Whereas I think what I did was I said I had something like, you know, you get 5% of profit or something like that, which is not a good comp model because then they don't really need to grow the business. They can just keep kind of being lazy and enjoying the 5% they're going to get at the current level.”

Steal thisPeg a hired CEO's bonus to growth ABOVE your current annual growth rate, not a flat percentage of profit they'd earn just for showing up.

Phantom equity over real equity to keep a conglomerate clean

Wilkinson avoids giving real equity in his ~40 corporate entities because it blocks him from moving assets and merging companies for tax purposes. He uses phantom equity instead, and only gives any equity at all when the plan is to eventually sell the business.

“We're moving towards doing more phantom equity if we do do it, because it's really complicated in a conglomerate like we have where you have, you know, 40 or so corporate entities to not be able to move stuff around and, you know, slam companies into one another for tax purposes and stuff. So we're moving more towards phantom equity if we do it. But if a company is at scale, you know, already doing tens of millions of dollars of revenue and profitable, I wouldn't give equity unless the plan is to sell the business.”

Steal thisUse phantom equity instead of real shares so you keep the freedom to restructure and merge entities for tax purposes.

The capital-call headache that pushed Wilkinson to phantom equity

Wilkinson illustrates why outside shareholders are painful: if a CEO owns 3% and Tiny has to inject $100K into the business, you have to ask the CEO to chip in $3K, they balk, and then you have to dilute them. Phantom equity sidesteps the complexity.

“Let's say we have a CEO and they own 3% of the business and Tiny has to inject money into the business, like loan the business money or something. There's a lot of complexity when you have outside shareholders where you go to the shareholder, like the CEO, and you say, hey, we're loaning $100,000. Can you chip in 3% or, you know, $3K? And they're like, what the fuck? And then you have to dilute them and it just gets kind of complicated. So that's why we're moving towards phantom equity.”

Pay CEOs more if they'll take more risk: trade base salary for variable upside

Wilkinson sizes total comp by how much risk a CEO will accept. A candidate wanting $500K all in salary gets capped, but one willing to take $100K salary with everything else variable can earn far more. He also lets the bonus keep scaling past target (do $15M on a $10M EBITDA goal, get 150% of variable).

“if someone comes to me and they say, Look, you know, I want to make $500K a year. I would say, okay, well, how much do you want to be salary and base salary versus variable comp and bonus? And if they're willing to take more of that in variable comp and bonus, then we can move those numbers up to be bigger than $500K. If they came to me and they said, look, I only want $100K salary and I want everything to be variable bonus. Maybe I would give them way more. And then the other thing we'll often do is we'll say if we set a target, let's say our target is $10 million of EBITDA and you exceed that, let's say you do $15, then we're going to give you 150% of your variable target or your variable bonus.”

Steal thisLet a CEO swap base salary for variable upside, and never cap the bonus — pay 150%+ when they blow past the EBITDA target.

A big bonus check is good news: comp as a magnet to your desired outcome

Wilkinson reframes large CEO pay: a $400K total comp is really ~$180-250K base plus variable you only pay when targets are hit. He thinks of comp as 'a magnet to whatever outcome you want,' and loves writing huge bonus checks because they mean the business beat expectations.

“I love paying huge bonus checks because if I'm paying a big bonus check, that means that the business is doing well and we're hitting our targets and they're growing faster than I expected to. A lot of people get caught up when they hear, you know, oh my God, I'm gonna pay this person, you know, $400 grand, let's say a year. I'm saying in an at-scale business, let's say it's $400K total comp. And they forget that what that really means is $180, $200, $250 in base and the rest in variable. And you're only paying the variable and bonus if they're hitting targets and the business is growing the way you want it to. So I think of it as like, that's a magnet to whatever outcome you want.”

Steal thisReframe comp as a magnet to your target outcome — structure it so the only way the check gets big is if the business wins.