Welcome to Jester's Trek.
I'm your host, Jester. I've been an EVE Online player for about six years. One of my four mains is Ripard Teg, pictured at left. Sadly, I've succumbed to "bittervet" disease, but I'm wandering the New Eden landscape (and from time to time, the MMO landscape) in search of a cure.
You can follow along, if you want...

Tuesday, May 20, 2014

Can you make change?

Warning: this post has very little to do with EVE Online. But it's something I've been thinking about lately and hell, the tag-line on this blog says from time to time the topic will be "life." So let's do one of those posts.

What follows is a little test. Read the whole story, then decide if the protagonist is being smart or dumb. Ready?

You are a 45-year-old man working for a car company, in distribution and finance. Your day-to-day job involves writing business agreements with the company's suppliers, as well as ensuring those business agreements are met. For instance, your most recent task involved working with a manufacturer of car radios, antennas, telephone, and back seat video systems. Your task was to write the contracts and business agreements that would ensure a sufficient supply of these things for the company's product line for the coming year. Then you monitored the terms of the agreement to ensure the supplier was meeting the terms and delivering the electronics to the factories on time.

The company has an inexpensive cafeteria in the building where you eat lunch most days. Your own department is small and the actual manufacturing of the cars is done in another country. So you usually eat lunch with some of the car designers. One designer in particular that you enjoy talking with -- his name is Gary -- is in his very early 20s, but is smart and very serious-minded. Gary is very quiet but very technical; you don't understand what he's saying half the time but the half you do understand is fascinating stuff.

Unfortunately, Gary's best friend on the design staff is Paul, who is very new to the company and is kind of a flake. He's even younger than Gary and dresses oddly. Rumor around the company is that Paul is a drug addict and he doesn't really understand design. Because Paul and Gary are friends, more often than not you find yourself sitting with both of them in the cafeteria. Unfortunately, you do understand everything that Paul says, and most of it sounds like BS. But Paul is charismatic and seems to be selling this BS to his bosses. Sometimes Gary and Paul get into loud arguments that you have to mediate. You later learn that Paul and Gary are neighbors; they're both renting houses in the same low-end neighborhood. This is probably why Paul hangs out with this guy even though they appear to have nothing in common.

One day, Paul comes to you and says that he and Gary have designed a radical new car engine that gets eight times the fuel economy of the engines currently designed by the company. They claim to have done this work on their own time and even claim to have offered the engine to the company, but the company turned them down. Paul invites you to his house where they've mounted the engine onto an old go-kart from the 1970s. The fuel tank of this go-kart is less than a gallon but the thing does appear to be drivable, or at least they can drive it up the street in the neighborhood and back. You don't know much about car engines but to your eyes the thing looks amazingly primitive. You can't tell how it works.

You've been invited to look at the engine because Paul and Gary want to start a business to sell this engine to car manufacturers. They'd like you to write up the partnership agreement since they know you understand the business side of things and they don't. They've offered you some money or a small stake in the company if you will do this. You're pretty sure that Gary has done all the work on the engine but all of his notes are hand-written and he seems to have most of the design for this thing in his head. You definitely don't understand his explanations of how the engine works when he will stop to tell you about them at all (which isn't often). Both Gary and Paul have started showing up late for work and exhausted every morning. It's clear they're putting far more time into this go-kart engine than their actual jobs.

Still, this strikes you as easy money. So you write up the partnership agreement and a few other business documents. Paul and Gary agree to give you 10% of the company for your work. Paul jokes that your main job will be "adult supervision" and settling arguments between Paul and Gary, just like you have done in the cafeteria. You finish the documents and you try to keep up with what Paul and Gary are doing but there's no possible way you can keep up. You have responsibilities and they seem to have all but abandoned theirs.

A week or so later, you hear that Paul has been shopping the engine around to venture capitalists. One has agreed to give the company a half million dollars to develop the engine. Paul shows you the VC's business agreement and wants you to review it and see if it's fair. You look at it and discover in dismay that the VC has indeed agreed to give them a half million dollars, but expects to see a return on his investment in less than a year and that all members of the business partnership are equally liable in case of default. You've seen Paul and Gary's rental houses. They have no assets worth anything if this engine fails. You, on the other hand, have a house that you own, a car, a small retirement account, and a few small investments that total a little less than a half million dollars.

It's clear that if Paul and Gary take this money and fail, you'll lose everything and they'll just start over. Even if the engine succeeds, it strikes you as likely that the car company you all work for is going to intervene legally.

You think about it for a few days, then go to Paul and tell him that the VC's money is good and the contract seems fair. But that you'd like to sell your stake in the company as part of the agreement. The three of you sit down and talk about it for a while, then decide that $3500 is fair for the 20 or so hours of work you put into writing the partnership paperwork and other documents. You agree to this, Paul and Gary get the half million, they write you a check for $3500 and you cash it.

Over the next six months or so, you hear about Paul and Gary taking their go-kart to various small-time go-kart enthusiast clubs. In the company cafeteria, Paul sometimes encourages you -- in quite wild-eyed terms! -- to "rejoin the business." But you hear from other people in the design department that both Paul and Gary are likely going to be fired soon for not paying attention to their jobs and you decline.

So. That's the story. Are you being smart, getting your money for basically doing no work? Or are you being dumb? Have you thought about it?

What's above is basically a retelling of the story of Ronald Wayne. If you've never heard of him, I don't blame you. In 1976, he sold his 10% stake in Apple Computer for $800 ($3500 in 2014 dollars).

Sometimes, betting your entire livelihood and future on radical change proposed by crazy, wild-eyed dreamers is difficult.

Hey, you in the back! I said this post had nothing to do with EVE Online.

41 comments:

  1. "Sometimes, betting your entire livelihood and future on radical change proposed by crazy, wild-eyed dreamers is difficult."

    No, that isn't so difficult.

    The really difficult part is telling the actual world-changers from the 10,000 nutjobs who look and sound exactly like them...

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  2. Since when does a VC investment agreement have the founders personally liable to pay back venture capital if the business fails? That was a really bad deal to begin with.

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    1. This was 15 years before VC capital was more risk-based.

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  3. It's more than 99% likely the company will fail. If the downside risk can be contained, it's pretty stupid to walk away. Knowing people who have started businesses that don't work and the potential consequences, it's pretty smart to walk away.

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  4. I'd have bailed too.
    I'd also likely have missed out on supporting my own engineers as Kodak did with when they invented primitive digital photography. Hindsight is a bitch.

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  5. Or how many times did a story similar to this play out, but the end company wasn't Apple? Thousands?

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    1. If not tens of thousands. According to every study I've seen done on it, 19 out of every 20 start-ups fail.

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  6. I for one happily read your post because it wasn't about EVE Online. Thank you. As for the issue, I think the "you" in this story is being smart. It's easy for the young and financially challenged to go after their dreams. They have noting to lose. At 45, I assume there is a wife and family to consider, or at least a dog, and decades of effort at stake. The point is, that deep into life there are others who depend on you, and you've spend a lot of time building a secure retirement. When one is 22 and single, no one depends on you. It is then you make your future, not when you're 45, not unless you've already lost everything and once again have nothing to lose. The only thing that could change my view is if "you" were tremendously passionate about this new engine. It is obvious "you" were not, so what's the point of taking the risk? "You" would take on a disproportionate percentage of the lien, and I'm sure the VC knew that before making the offer. Research is everything. And taking the Ronald Wayne story a little farther, let's assume Paul is Steve and Gary is the Woz. You know of whom I speak. In the end, the gifted, technical genius was totally shafted by the slick dude with a nice haircut. We all know who got rich and who got left out in the cold. The story is more complicated than that, but the jist of it is true enough. So even if "you" had taken the risk and the company revolutionized the engine industry, chances are you'd still be poor at the end of it. That's how these things unfortunately seem to work.

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    1. Yes to all. And yet for the last four decades, we've been told this guy was dumb because he could have been a multi-billionaire.

      And yes, Paul was Steve and Gary was Woz. Those are their middle names. Steve Jobs wasn't nearly so slick in 1976.

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    2. Paul became famous, mega-rich and dead, Gary is ....well known, not so rich and alive. Who is the winner now?

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    3. Jester, you are even more crafty than I already thought. I had no idea what their middle name's were/are. Well played sir, well played.

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  7. It's very easy to become results focused when assessing decisions, but it's a very flawed way of doing it. For every time this works there was probably 100 times when it went horribly wrong and a person had half his life destroyed.

    You look at someone who made millions and billions and think 'they must have made the right decision.' But there's a lottery winner every week who pulls in $4 million or whatever and they didn't make a sensible decision.

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  8. This phrase should be familiar to all of us: Never fly what you can't afford to lose.

    In more general terms: If you're going to attempt something risky, be sure that you can afford it failing.

    The 'you' in the story looked at the risks and decided that he couldn't afford it to fail. Ronald Wayne sounds like he did the same.

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    Replies
    1. Yeah. Today's VCs rarely risk their own money--or not enough of it to endanger themselves--and wrap themselves in so many layers of legal protection that venture capitalism is properly seen as a disease rather than as a career. Worse, it's become a circus (see Shark Tank)...yet we have so bought into the myth of Money As Virtue that Wayne is now a cautionary tale at best, and a figure of fun to many.

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  9. The really smart move would be to discuss the terms with the VC. That's the protagonist's specialty anyway. Missed opportunity, could have benefited more himself and the other two.

    Only if that's not negotiable, then, for an established employee on a different specialization, it was indeed the correct way to proceed.

    Should the protagonist be 20 years younger, the answer could be different.

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  10. I just wanted to add, since nobody else did, that it seems like only Ronald Wayne made the ethical choice.

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  11. There was a documentary I saw in school about 10 years ago called "Triumph of the Nerds" that went through the early phases of the home pc being built and whatnot. The narrator at one point goes to a house in San Jose and says "This was the garage where Apple started. I know, because I was employee #11" and then goes on to say at one point the company offered to pay stock instead of cash since they were so cash strapped, but his mom made him insist on cash. . . and now he's narrating documentaries instead of a multi-millionaire. Was kinda funny, really.

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  12. Billionaire venture capitalists rarely pick winners to invest in and they have incredible resources to perform their selection, so I don't see why anyone would expect Ronald Wayne to have done better at the time. It's almost like calling someone an idiot for not buying a winning lottery ticket.

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  13. There were ways of limiting his ownership liabilities. He was a bit short sighted in that area.

    Additionally, let me throw a curve ball at everyone. What if his involvement would have caused the company to fail? Maybe through a decision about financing or expansion or his involvement in the later business plan. It is really easy to judge these things through the rear view mirror instead of through the windshield.

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  14. This story is exactly why you can't let reporting bias be the basis for assessing risks and making decisions. Ronald Wayne assessed the risks based on his knowledge of the business which in this case was 100% correct. His risk was everything, the boy geniuses risked nothing and he had no real way to direct things in a direction to reduce that risk or assure success. He was at the mercy of either random chance or luck.

    How many people make a decision based on listening to all the success stories but never really assess the risk. It's easy to make fun of Ronald Wayne and the many people that didn't see the future and get rich, but how many of us know guys pumping gas or working fast food that based their futures on a strong pitching arm that never made it to the big leagues or had a plan B. How many of us know that guy and also know that his parents (the ones who should have understood the risks) were pushing that go for broke plan the hardest?

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  15. Good post. The decision to get out was the only possible solution. The first screwup was going into the partnership without forming an LLC that protects personal from investment assets. The second was not to insist (on personal cash if required) to do a technical due-diligence. Acting as "adult supervision" the requirement is doubly important since it can be used to raise the value toward the VC. Thirdly, the terms of the VC are nuts. Nobody gets $500 k out back within one year unless he flips the company to another VC. No value would be created, just BS.

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    1. ^^this^^ A LLC would protect his assets. The LLC then buys into the partnership. Best of both worlds, so to speak.

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  16. Great post, Jester. I really enjoyed it. Fortune favors the bold, but then again, you might never hear of the ones who were less fortunate

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  17. Uh why wouldn't they just form a LLC or incorporate, or some other form of liability restricted business?

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    Replies
    1. LLCs didn't really exist back then.

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  18. Screw regret! A problem with examples like this is that they use information to evaluate a decision that’s *not* available at the time the decision was being made (namely the long term results of the decision). If RW rationally worked out his decision based on reasonable due diligence there’s really little more to be said. If the results of a reasonable decision end up far from optimal neither RW nor anyone else should proceed to kicking themselves. The universe is a fickle place. Mere humans can’t foresee every bump and wiggle. Measuring individual decisions against the Lord God’s omniscient power to see the future in hindsight right here and now is unrealistic, unhelpful and unpleasant.

    DireNecessity

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  19. Hmmm...why is this post tagged "Eve Online"?

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    Replies
    1. Maybe it's subtly an Eve post by analogy. Gary is Greyscale and Paul is Seagull.

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    2. Or maybe Jester doesn't tag posts by hand. I'm not familiar with blogspot but I know there's a way to have Wordpress automatically tag new posts based on content. Simply using the phrase "EVE Online" twice might be enough to trip the plugin.

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  20. There is a million failed start-ups, and there is one Apple. I'd keep the $800.

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  21. That touched close to home... When I was in my mid 30s, (married but no house and no kids) I had a distant relative, a venture capitalist, who had a startup tech firm that was making and branding their own PCs that came with not only bundled software but a bundled Internet provider too... This was at that time a Very New Thing and deemed risky businesswise to say the least...

    But he had a plant, and was showing growth. I was working as a Tier 2 support tech for a dept of the state when he contacted me... He had the wife and I down to Norfolk where he wined and dined us and made me an offer to manage his IT Helpdesk...

    But... I had just moved from Va beach to Richmond, so I was facing a 1 1/2 hour commute, each way to/from Hampton and my wife had just landed a really good FT job as a Chemist at a Richmond firm so relocation was not a good option. Now here was the rub... his offer was for the exact same pay rate I was making as a Tier 2 Tech... plus generous stock options WHEN they went public.

    What do I know from stock options? nothing... except that they weren't money... yet, and maybe, never. I was really rattled for a week over the decision... then I turned him down.

    Later I heard he went public, made a ton and dumped the company... it was closed in less than 2 years. Did I choose right? I stood to make a lot of money but ONLY if I had sold out early... like he did. Who knows what I would have actually done huh?

    Plus, you wanna sob story... my dad told me he turned down an option on Microsoft's IPO... because there was NO WAY computers were ever going to be useful to individuals... and he knew what he was talking about, he worked for the power company here and they had one of the, at the time, most powerful mainframes in Va. ... it took up 2 whole floors of the HQ building... he just could not believe in a Personal Computer.

    Told me he wore out a set of knee caps in the 90s kicking his own ass over that one...

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  22. Knowing when to take risks is a hard decision. If it were a binary choice, I think Ronald made the right decision to not bet everything on something so uncertain and given.

    However, I think he could have fought for a less risky piece of the pie given he recognized value in what they were doing and was contributing real value himself, rather than cashing out entirely (options spring to mind, or putting up real cash and being an investor rather than a partner).

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  23. An engine with 8x the fuel efficiency? Sadly I do understand engines and thermodynamics, so I rightly discarded this loopy idea without proper understanding of the miracle technology.

    Besides, you never mentioned if "You", Gary or Paul had non-compete clauses in your job contracts either.

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    Replies
    1. At the time the Apple 1 was invented, it was a ridiculously more efficient computing platform than had existed or could be mass-produced to that point. The analogy is actually quite valid.

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  24. The question isn't really is the person smart or dumb. Of course hindsight is 20/20, but then, none of us have this benefit. The question is does this person regret their choice, and the answer should be no, assuming they stayed true to themselves and their character, which it appears the person in the story did. If I was Ronald Wayne I would have no regrets, because I made the best decision I could with the information I had at the time.

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  25. I know a guy who left his pretty secure job as a unionized railroad conducter when he was in his early 30s to start a hazardous waste disposal company. He convinced one of his buddies (a Medal of Honor recipient from the Vietnam war) to join him. Another friend of his was interested but ultimately declined because he thought it was too risky.

    25 years later they sold the company to a larger enterprise and the two owners split the $20 million they got in the sale. The third guy has his railroad retirement pension. They told the third guy he was nuts for not joining them at the start, but at the time it was safer to stay away from a risky proposition.

    Risk and reward, what are you gonna do?

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  26. I've both started start ups and worked with them as clients, and have worked with VC. I probably would have wanted to be bought out but for ten times the amount given in the story. Yes, I'd have missed out. But in real life I have dodged many bullets while wild-eyed would-be-tycoons went down in flames right in front of me. Of course, if I understood the investment and the people better, maybe I'd make a different decision. And of course, if I knew ahead of time what the outcome would be, I'd make the right call. ;)

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  27. Meh, under typical modern day employment contracts for engineers, the engine would belong to their employer anyway, so any profits would be forfeit.

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  28. Thank you for sharing this information this is very nice blog thank you for giving this info
    Groobers

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  29. It all boils down to the fact that if you own 10% of a company you shouldn't be liable to pay 90% of its debts. Unbalanced "gameplay" creates odd situations :p

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