20. Take Accountability to Earn Equity

If you have high accountability, you’re less replaceable and you can get a piece of the business.

Accountability is how you’re going to get equity

Naval: Accountability is important because that’s how you’re going to get leverage. That’s how you’re going to get credibility. It’s also how you’re going to get equity. You’re going to get a piece of the business.

When you’re negotiating with other people, ultimately if someone else is making a decision about how to compensate you, that decision will be based on how replaceable you are. If you have high accountability, that makes you less replaceable. Then they have to give you equity, which is a piece of the upside.

Taking accountability is like taking equity in all your work

Equity itself is a good example because equity is also a risk-based instrument. Equity means you get paid everything after all the people who need guaranteed money are paid back.

If you look at the hierarchy of capital in a company, the employees get paid first. They get paid the salary first. In legal [bankruptcy] proceedings, the salaries are sacrosanct. If you’re a board member and the company spends too much money and has back salaries to pay, the government can go after you personally to pay back the salaries. The employees get the most security, but in exchange for that security, they don’t have as much upside.

Next in line would be the debt holders who are maybe the bankers who lend money to the company for operations and they need to make their fixed coupon every month or every year, but they don’t get much more upside beyond that. They might be making 5, 10, 15, 20, 25% a year, but that’s what their upside is limited to.

Finally there are the equity holders. These people are actually going to get most of the upside. Once the debt holders are paid off and the salaries are paid off, whatever remains goes to them.

But if there isn’t enough money to pay off the salaries and the debt holders, or if there’s just barely enough to pay off the salary and the debt holders, which is what happens with most businesses, most of the times, the equity holders get nothing.

The equity holders take on greater risk, but in exchange, they get nearly unlimited upside. You can do the same with all of your work. Essentially, taking accountability for your actions is the same as taking an equity position in all of your work. You’re taking greater downside risk for greater upside.

Realize that in modern society, the downside risk is not that large. Even personal bankruptcy can wipe the debts clean in good ecosystems. I’m most familiar with Silicon Valley, but generally people will forgive failures as long as you were honest and made a high integrity effort.

There’s not really that much to fear in terms of failure, and so people should be taking on a lot more accountability than they actually are.

Nivi: Is accountability actually fragile or do you really just mean that we’re hardwired not to fail in public, so it just feels like it’s a fragile thing?

Naval: I think it could actually be fragile. An example of accountability is you’re an airplane pilot. As a captain, you’re taking on accountability for the entire plane.

Let’s say that something goes wrong with the aircraft. You can’t later blame it on anyone else. You can’t blame it on the steward or the stewardess. You can’t blame it on the copilot. You’re the captain. You’re responsible for the ship. If you screw up, you crash the ship, and there are immediate consequences.

In the old days, the captain was expected to go down with the ship. If the ship was sinking, then literally the last person who got to get off was the captain. I think accountability does come with real risks, but we’re talking about a business context.

The risk here would be that you would probably be the last one to get your capital back out. You’d be the last one to get paid for your time. The time that you’ve put in, the capital that you’ve put into the company, these are what are at risk.

Even if a business fails and your name’s on it, that’s not as bad as if it turns out to be an integrity issue. Bernie Madoff, for example, Madoff investments, that name is never going to be good again in the investment community. You could be Bernie Madoff’s great-great-great-grandson. You are not going to go into the investment business because he ruined the family name.

I think these days the accountability risk with a name happens more around integrity, rather than it does around purely economic failure.

Accountability is reputational skin in the game

Nivi: The big takeaway for me on accountability is that you will be rewarded directly in proportion with your accountability. I also think this is why people like Taleb rail against CEOs who get rewards without accountability.

Naval: Yeah. Taleb’s Skin In The Game is required reading. If you want to get anywhere in modern life and understand how modern systems work, then Skin In The Game would be near the top of my list to read.

Accountability, skin in the game, these concepts go very closely hand in hand. I think of accountability as reputational skin in the game. It’s putting your personal reputation on the line as skin in the game.

Accountability is a simple concept. The only part of accountability that may be a little counterintuitive is that we’re currently socially brainwashed to not take on accountability, not in a visible way.

I think there are ways to take on accountability where every member of a team can take on accountability for their portion. That is how you get a well-functioning team while still putting credits and losses in the correct columns.

Chapter 21 >>