The Real Value Of Risk

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Lunch today was a myriad of conversation topics — mostly fanatical. Take the fictional billionaire who can’t spend all his money, or can he? It was reasoned that — after taxes, a private jet, yacht, homes at each touring destination, and to boot, your own private railway — it is very possible to spend all your billions. We very well could have been sitting around reading cards from a “Chat Pack”; in one ear, out the other. There was one thing said, however, that struck a chord, and that was, “…that’s why owners/investors make so much money…they take so much risk.”

Everyone nodded in agreement, except for myself. I couldn’t keep my mind from drifting back to our slipshod billionaire — let’s call him Harry the Billionaire, or Harry B for short. Take a startup company, let’s say it takes two million to get it up, running, and implemented. For most, two million is nothing to snarl at. It’s a significant amount of money and one could reason a hefty amount of risk for any one person to carry. What about for Harry B, though? This guy drops “bens” like he has a hole in his pocket. Two million dollars is not a ton of risk for Harry B.

Let’s make a couple of assumptions. In the proposed statement, since we don’t know anything about this company in which owners are making so much money, and because great risk is the reason they have so much money, it’s feasible for us to assume that this company is a startup. Since most startups generally are not making buckets of money to pay their owners/investors really well, it’s also feasible to assume that this “money” is really “company ownership” that is in hopes of one day becoming “money”.

So back to Harry B. Since he does not have great risk in this company, whereas others with less personal wealth would be at great risk, does that mean that Harry B should have a lesser share of company ownership that is more proportional to his risk investment?

While no one has the right to make money, they do have the right to the pursuit of happiness and the means thereof. If Harry B is starting the company and assuming all the risk, he’s certainly free to own how much ever he wants. Who are we to tell him otherwise? I suspect on the risk taking side of this, one can always spin the scenario to be a tautology in their favor.

In all this, there is a greater cause for meandering. That is, “by what should we measure risk?”. What I mean to say is, “should risk only be measured in financial terms?”. Think back to the gold rush. These pioneers left everything — friends, homes, livelihoods, in some cases family — in the pursuit of a dream or a big payoff much like our modern day business owners/investors. They risked it all; some giving of their very lives. They made the ultimate sacrifice, and many of them never saw a payoff. I would argue that this type of risk — personal sacrifice for a company — should not go without merit. This is worth far more than any amount of money one may put into their company.

If you are a business owner — especially of a startup — don’t overlook or belittle the personal sacrifice that is being made by the people who are helping you achieve your dreams. If you are paying someone, in most cases it’s fair to assume that you have greater financial means than them. This also means that whatever you value their sacrifice or risk investment at, it is probably multiplied by a factor of ten in their reality. Here’s an example: If I have a $50,000 net worth and you a $500,000 net worth, you may see me taking a pay cut of $5,000/year to come work for you worth 0.5% of your company. To you, what I’ve done for you is not that significant. But to the bearer of that risk investment, that $5,000 is greatly significant. It may mean he has to downsize, move to another neighborhood, put his children in a less-desirable school, forego health benefits, commute further and spend less time with his family, etc, etc.

Bottom line is, take the time to know the risk investment of those building your dreams. Don’t get so narrow-sighted on your own personal risk that you forget that others have made significant risks in other means than just financial.

I really like this pie chart that did here. Take some time to read their article. I hope it inspires you as it did me.

Company Ownership - Influence

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