Work In Partnerships, Not Hierarchies
“Don’t follow people. Either walk alongside, or not at all.”
Almost all “jobs” are hierarchal. A boss hires you, and then you are subordinate to that person. Meanwhile, your boss has a boss and your boss’s boss has a boss, and so on. Each person answers to the person with a higher rank. The expectation is that you do what the person above you tells you to do or risk being fired.
This is a terrible way to organize people. First, hierarchies reinforce the principal / agent problem - a critical issue in business. Second, hierarchal relationships don’t compound over time because of the leader / follower dynamic.
As Naval Ravikant says:
“Don’t follow people. Either walk alongside, or not at all.”
The best working relationships are ones where you both have skin in the game and are properly incentivized to add value and compound trust. That way, when you win, you both win.
Seek partners, not bosses.
Partnerships Align Incentives.
With hierarchal relationships, you encounter the principal / agent problem. These are the inherently competing priorities between an owner (the principal) and an employee (the agent). The employee rarely acts in the best interest of the owner or boss because they are acting in their own best interest instead.
Partnerships work to solve this problem by aligning incentives. When two people own equity in a venture, what’s good for the venture is good for both of them.
Here’s Naval talking about how important it is to get incentives right in an article from his site:
“Almost all human behavior can be explained by incentives. The study of signaling is seeing what people do despite what they say. People are much more honest with their actions than they are with their words. You have to get the incentives right to get people to behave correctly. It's a very difficult problem because people aren't coin-operated. The good ones are not just looking for money—they're also looking for status and meaning in what they do.”
With partnerships, our selfish instinct (honed by natural selection) helps because what’s good for the business is good for us. It’s the origin of cooperation and leads to positive sum games like trade and wealth creation.
Partnerships Compound Just Like Money.
Partnerships compound over time. While two people may start out unsure if they can completely trust each other, after a decade of working together there is virtually no friction left to slow down deals. That means partners can do bigger and bigger deals, with higher stakes, over time.
Babak Nivi points out two crucial and counterintuitive points about compounding partnerships. First, just like compound interest, the biggest rewards come at the end of the compounding period. So it may not seem like you’re building trust at the beginning, but you are. Second, it’s better to compound deeply with a few partners than it is to have really shallow relationships with many partners.
You can’t compound hierarchical relationships because trust isn’t necessary. When you’re hired to work for someone, you must do what your boss tells you not because you trust that it’s the best thing to do, but because they’re above you in rank.
Partnerships Tell You What You Need To Know About Another Person.
You never know what an employee thinks about you (and vice versa) until they’re no longer an employee. Hierarchical relationships warp interactions so that you’re never exactly sure what’s true and what isn’t.
I’ve personally experienced this, where a relationship changes drastically after the hierarchical relationship is removed. Without the title, people generally don’t care what you have to say. It’s the title they respected, not you.
Partnerships solve this problem. With equal ownership, partners are incentivized to tell the truth as they see it. You’ll know everything you need to know about a partner when you go to do a deal.
Here’s Naval talking about this on Twitter:
“Smart partners negotiate fair deals because they know that lopsided deals are fragile and that most value accumulates in long term trust relationships. You can tell a lot about a potential partner by their opening offer.”
Partnerships incentivize honesty. You may not like what the other person has to say, but at least you know where they stand.
Equity Partnerships Expose You To The Upside Of Your Work.
In hierarchal relationships, you generally aren’t exposed to the upside of your work because the people above you take credit and the owner makes money. Whoever owns equity in the business gets rewarded with the upside of your work (and takes on the downside risk).
With equity partnerships, you are exposed to the potential upside of the value you create. As the pie gets bigger, your piece of it gets bigger too.
Play Long-Term Games With The Partners You Like For Decades.
It sounds simple: Play long-term, positive-sum games with people you like for decades.
But there are a few non-intuitive elements to this. First, it means you should live in the same place for decades because face-to-face relationships are critical to building trust.
Second, you need to stay in the same industry for decades. Every time you change industries and join new players, you lose all the compounding you did previously. You’re essentially starting at zero with new players and must work your way towards building trust.
So pick an industry, find players you can trust, and build with them for years. Eventually, you’ll get what you deserve.
Thanks for reading.