Equity and Asymmetry

My professional and investment philosophy is one of equity and asymmetry.

Asymmetry is the horse and equity is the cart. So let’s not put the cart before the horse:

First, the asymmetry:

In tech startups there are massive asymmetries between a failure and a success. In math terms we’d say that the long tail of outlier success skews the central tendency right and the mean becomes much larger than the median and the mode.

Here’s a symmetrical distribution: ! This is a normal career. There are some crappy jobs and some good jobs, but most jobs make you a middle-class salary.

Here’s a right skewed distribution: ! This is an entrepreneurial career (and a VC’s career as well, we are well aligned). There are a lot of crappy outcomes, but if you get up to bat enough times, there’s a significant chance of an outsized outcome. You can move the “average” far to the right without trying any harder - you just need more loops.

In technology startups, asymmetry is about more than just the financial outcome. Asymmetrical outcomes are a direct result of being able to provide asymmetric value to more people. E.g. the code that a programmer writes once can affect the lives of millions (or billions) of people, and be used billions (or trillions) of times, creating exponentially more value in the world than the time or intelligence that it took to create the code.

Equity is the secret

In a normal job-type-job you get a salary, maybe a bonus! If you have a great job you might get more salary. Most people would be quite happy to make a $500k salary! Not me, and I’ll explain why in a moment.

In a normal entrepreneurial endeavor you usually get a poor salary (if any at all), but you make up for that with a significant amount of equity in the company. In finance, when people are buying and selling companies, they are buying and selling equity.

Equity follows the laws of the asymmetric outcomes that I spoke about above. Salary does not. You can have equity in many companies at the same time, but not many salaries. Equity has significant tax strategies and salary does not. They are both left-bounded at zero - your equity can’t be worth less than zero, but IT CAN be worth hundreds of times more than your salary.

I don’t particularly desire a $500k salary. After taxes, I’ll have $300k. In 10 years, I’ll have made $3M. On the other hand, an expected value calculation for my own startup with 20% equity, results in a likelihood of $33.1M.

So, therefore, the strategy is to acquire as much equity in as many companies as possible and provide as much asymmetric value for those companies as possible. The law of outlier outcomes ensures that if this strategy is executed enough times, you will be rewarded with outcomes far above the average.