How Skin in the Game Applies to Startups

“Entrepreneurs are heroes in our society. They fail for the rest of us.” – Nassim Taleb, Skin in the Game

Pound for pound, entrepreneurs have more flesh on the line

Someone working in a government job or a salaried position has practically zero skin in the game compared to a startup entrepreneur. Founders shoulder all accountability and risk pertaining to their business, whereas civil servants have such cushy job security they have no perception of the struggles that business owners face. Small business owners’ survival depends on their reputation for quality, consumer satisfaction and ability to respond to the market. None of this savvy applies to tenured professors, executives, civil servants or others in jobs that don’t require skin in the game. Entrepreneurs feel every bump on the road, and their livelihood is usually invested in their business. As such, their skin in the game motivates them to innovate, cut costs (not corners), read the market and strategically respond to it. 

Acts as insurance and quality control

Adequate skin in the game ensures founders learn from their mistakes and growing pains. The startup landscape is constantly influx, and entrepreneurs need to respond to outside cues in order to evolve. Systems improve when bugs and failures are eliminated, and the founder is ultimately accountable for this growth. Luckily, this evolution can mean a better product-market fit, and consumers are the beneficiaries. In this situation, the startup founder and consumers’ motivations are aligned, and the market wins. But skin in the game is the price of entry to reach this promised land because it keeps founders accountable, motivates all parties, and functions as an effective BS detector. 

Equity hits differently

As the OfficeMax co-founder astutely acknowledged when starting his business, employees with equity are highly motivated to propel the company to success. Aligning employee and employer motivation is more likely to facilitate exponential growth and allow everyone a stake in the spoils. For founders, offering equity may feel like severing their arm, but when executed properly, it’s a recipe for growth and loyalty. 

Zendaya recently made news for taking care of her team by giving them each 1% equity so that when Netflix acquired her film, the cast each earned a $300K bonus. This model is structured so everyone eats, not just the few perched at the top. That’s quite a nice ‘thank you’ for your hard work, eh? Compared to monster film studios like Disney, Zendaya is a small business, yet she managed to create a self-sustaining financial structure that can be scaled and rolled out across all production houses, regardless of size. Other than greed, there’s nothing really stopping the bigger fish from acting like a startup entrepreneur. They can share the wealth and reap the rewards just the same. 

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