The 6 Levels of Making Money | Ep 955

0:00 You've heard me say this before, we need to be reminded more than we need to be taught. That's why today's episode is when you may have heard before. I brought it back because it's important. If you've already heard it, take this as a sign that maybe you just take more action. And if you haven't, then welcome to the game. Enjoy.

0:15 There are only four ways to get money. Steel, inherit, marry into it, trade for it. If you have morals, you probably don't want to steal it. And if you're watching this, you probably aren't going to inherit it. And even if you are, you probably don't want to wait until your parents die to get it. And if you're a guy, you're probably not going to marry into it.

0:30 And even if you do, do you really want to be owned by your wife's family? Which means in all likelihood, if you're watching this video, you're likely only have one option left, which is to trade stuff for it. And trading stuff for money, I made a million dollars, 106 times in a row, in a weekend. I also want to portfolio of companies that trade stuff for money, that did over $250 million in revenue last year at Acquisition.com.

0:50 Now, within the element of trading stuff for it, there are six ways to structure those trades. And in this video, I'm going to break them all down and show you which ones to avoid, and which ones to go for, and I'll do them in reverse order of bestness. Now, I said there are six. The last two are God tier setups that only can work in very specific circumstances.

1:07 But that being said, let's start with number one. So scheme number one is I work, then you pay. This is a very classic arrangement. This is a very standard W2 employment agreement. So the trade is, no matter what happens, I get paid outside of getting fired. So as long as I don't get fired, I get paid.

1:27 And so I trade risk for reliability in this construct. And as much as the entrepreneur talking heads want to say, being an employee nowadays is riskier than owning a business, that's not really true. Because if it were, then everyone would own them and be rich. And that is not the case. And as a fun fact, the average business owner, like almost half a business owner doesn't make any money at all.

1:46 That means they work the whole year, and poor, then they start it. Crazy. And that's because them's the stats. But the median is about the same as minimum wage in California. So as much as people want to believe that all business owners are rich, that is not reality. And so this is the lowest risk, but most reliable way of making money.

2:06 The second way of trading stuff for money, a little bit better on our risk reward, number two, is you pay as we go. So if you think about the first one is you front, like you work, and then you get paid no matter what. This one, it happens in parallel. So as I work, I keep getting paid. This is very typical for contractors.

2:28 It's just sometimes it's like half now, half later. Or I get paid along these milestones as long as these things kind of occur throughout our time period. So this is super typical for independent contractors and vendors. So the work is ongoing. You pay me ongoing. You pay me some now, some during, some at the end, half now, half later, etc.

2:47 Now the pros of this is that you front load some of the money. The cons is that people fire vendors way faster than employees. And so let me give you an example. So employees have a 3.9 year average tenure, and that's according to the US Bureau of Labor Statistics, versus a three to 12 month engagement for an independent contractor, and only one to three months for a temp gig.

3:07 So that means that you have five times the annual toner for vendors compared to an employee. And so as much as people are like, man, it's so much less risky to own your business. It's like, well, you're toning over five times faster than if you were an employee. So not actually true. So we covered our lowest tier in terms of risk and reward.

3:25 I work then you pay. Now we get paid as we go, which leads us to our third tier, which is you pay, then I work. So for example, I get paid in full up front, and then I begin. And you can only do this when you own a business. So I'll give you a simple example. Surgeons, right? They say, hey, you're like, hey, I want to get surgery.

3:44 And they say, great, pay for the surgery, and then I'll do the surgery. Like, have you ever seen a surgeon say, I'll do the surgery, and then you can pay me later. It doesn't really happen. And so typically the more leverage you have, the further up this pyramid you can go, because you can ultimately command your own terms.

3:59 And so these are increasingly better terms with the caveat if you know what you're doing, right? And so another structure for this that you can use is one that I call as a business owner, lay away. So that means that you say, hey, I'll start doing this work on your patio. I'll start painting your house.

4:16 I'll start helping you with your marriage, whatever the hell it is. You just start paying now. And once you've paid up, we'll begin. And I'll tell you right now, having done this before, having an unlimited payment structure, which is what lay away affords you, you say, oh, I can make any payment plan work.

4:30 And people like light up, they're like, oh, really? And you're like, yeah, like, well, how much can you afford? They're like, okay, I could do $50 a month. You're like, great. So it's a $600 thing. It's going to take you a year. You can pay it off in a year. And then after that, we'll start. And then they're like, oh, I have to pay it before we start.

4:43 And you're like, yeah, would you just be like, I was going to just go work for you. And then you're going to pay me. And they're like, oh, okay. Well, I can split it 300 now, 300 next month. I'm like, great. So just having lay away nine times out of 10, letting them make their own payment plan. And then telling them that that's when they start, people will pay for speed.

4:59 And lay away is a lever to force that on them. Also, if they ever pay it and then they'd fall off, you didn't lose anything, you got paid. All right, so you take no risk by doing this. The only risk you have is that they might not finish the payment obviously. The other one is that you have a third party financing company, they can do this.

5:14 But fundamentally, all of these things mean the same thing in different ways. And I like using the mod. Think about them as tools for the job, right? And so if you are the type person who gives your time like a surgeon would or an attorney would, some attorneys, for example, they say, okay, pay me first a retainer.

5:28 And then I will draw down from this retainer and then I will tell you when to re up. They still get paid before they work. So you can tell where you're at in terms of leverage and earning by where you sit on this pyramid. Real quick, I'm going to show you the exact 10 stage roadmap from zero to a hundred million plus that less than 1% of companies finish I've now done multiple times.

5:46 And so I can say with a lot of confidence that these are the stages as headcount increases that you need to get through. And I broke each of these down by eight different functions of the business. What the constraint feels like? Like what are the symptoms of it when you're going through it? And then what steps we actually took to graduate?

6:00 And we've done this across software, physical products, service businesses, brick and mortar, all of this and it works. And it's my gift to you, it's aptly free. And so the links in the description, but you just go acquisition.com for its last roadmap just enter your info and it'll spit it right back to you offering.

6:15 Drumroll, please number four. So this one is one of my favorites, which is when X happens, you pay me. Now, you'll notice that with this one, things occur and you get paid, which is divorced from your time commitment. Not to say you won't put time in, but the way that you get paid no longer is reliant on how much you work.

6:38 And so for example, a revshare, a profit share, an outcome-based bonus, accelerators, an equity deal fundamentally works the same way. Like why does ownership pay better? Because if the business does well, then I get paid. That's how it works. And these are almost always percentage-based or milestones.

6:56 Now, there isn't as much risk with this model when you know what you're doing. So if I say you don't pay me until your top three in Google Maps rankings, that means I can get paid the moment that occurs. And if that takes five seconds for me, awesome. It just completely divorces my compensation for how much time I work.

7:13 And instead puts it on my ability to create an outcome, which is predicated on the skills. So in a consumer example, you could say, hey, if you lose 20 pounds, I get paid more. You could say, hey, if you get ready a bikini show by this time, it could be, hey, if we finish the project on this date, or if you get your ads run up, running and profitable by this time, for every amount over X, agencies are classic with this, like X% of spend.

7:39 You have consulting agreements that are percentage of profit or revenue. There's tons of different ways to structure these things. But all of them are, when this happens, I get paid. Now, I said I have two God tier or S tier versions of this because you might be thinking, shoot, I worked and you get paid.

7:52 I understand why that's the lowest one here. It's super reliable, but I'm not gonna get a lot of upside. You pay as we go. Okay, we're kind of in lockstep here. You pay, then I work. Okay, I'm a little bit more leveraged. When X happens, you pay me. Now, if there's a through line for this whole video, it's that you will be compensated in proportion to the risk you're willing to take.

8:13 And the key is the perceived risk that you're willing to take on. Because the people who do this well, have it be very risky for other people and not risky it off for them. And so the market overcompensates them because the market perceived this as very risky. This is fundamentally what investors call misprice bets.

8:30 And so if you buy distressed debt, it looks risky. But there are guys like Howard Marx, who made billions of dollars by buying what other people perceive as risky when it's not as risky as they perceive it. And so many of these things are distortions of reality for you when you're going through this because you perceive, like I said earlier, that this is lowest risk and it is true.

8:50 But there are also risks that are not mentioned, which is the risk of not achieving what you want in life. And so I think that Peter Thiel said this best. He said, you know, if Elon had even one of the companies he had be successful, we would have said that he was unbelievably lucky. He said, having two of them be successful, it doesn't even make sense.

9:07 He said, and it makes you really wonder what does he know about risk that we don't? And I really thought about that because fundamentally, I was thinking it's like they're a really smart people, they're really hardworking people. It almost never correlates with how much you get paid. But how much risk you take on certainly does.

9:22 And in a deal, which all of these things are transactions, right? The thing that is always the overarching umbrella that you always have to come in with is who's got the risk? And the more you shift that risk in your favor, the more you get paid. And this also happens at the employee W2 level. If you go in and say, hey, this job was advertised for $100,000, I'd be willing to do the work for 60 if you give me an upside of 180.

9:46 They're like, huh, if these things occur, I would like to get paid more. So you can start shifting your terms and taking on some of the risk, which you can only do when you're good. So let's go to number five. Number five is drum roll, please. What happens when all you do is buy and sell risk itself.

10:10 So how does that actually happen in practice, right? Well, there's an entire industry, one of the oldest industries in all time called insurance. And what's beautiful about this particular model is that when nothing happens, you still get paid. And once the nothing has happened, that is now profit. Every month that nothing happens, you still get paid.

10:28 And there is no delivery besides the agreement that you take on the risk. And so what's interesting about this is that this insurance predates the tax code. Some of the oldest companies in the world are insurance companies. And I'll give you a little razor that I use when I think about building businesses is I look at the companies that have been here the longest.

10:45 And when you see a company that's been here 100 plus years, that means that they've gone through World War One, World War Two, you know, after the microwave, after the television, after the social media, computers, internet, they've made it all the way through. That means that they have a way of taking on risk well and being compensated for it.

11:04 And so no one is better at being compensated for risk than the people who buy and sell it. And so what's interesting about this particular thing is that insurance is a reverse lottery. Is that everyone is paying for a reverse ticket that if they get the bad thing to happen, everyone else chips in. Now, what could be above that?

11:22 Were you literally just get paid to take on risk? Well, all of these risks that we've talked about are almost entirely financial risk. But is there a risk that society values more than financial risk? The answer is yes and no. But the answer in terms of money is an absolutely yes, which is what body takes on physical risk the government because they have a monopoly over violence.

11:51 We wouldn't be able to do any of these things if we did not have borders and we did not have troops to protect them, right? And so in exchange for them carrying the biggest risk of all, we as contributors to society pay our taxes. And so the taxes, what's beautiful about this, is that no matter what you pay me.

12:15 When you're the tax collector, you get paid no matter what. Now, obviously you have to make money in order to get taxed, but for everyone who does make any money, they gotta pay them, right? And so the reason they're able to enforce this is because they have a monopoly on violence. So the same force they use to repel our enemies, they also use to enforce their laws.

12:35 So my team just asked me how do you move up this and take advantage of some of the four, five and six levels if you're a business owner or even a sole printer? So number one is royalties. The reason they were called royalties is because they were paid to the royals, which means it comes off the top. And so whenever you're trying to get paid, you wanna go higher up, you wanna get paid no matter what, you wanna get paid first, you wanna get paid without economics.

12:58 So if you're doing a profit share, it's way better to have a rev share. Why? Because somebody can play around the property, can overspend, but a rev share is the revenue, right? Top line, top line. So that's where royalties, licensing, things like that can be very, very valuable. Now, what are we doing there?

13:11 It's basically, we, if we set up a deal like that, it means what X happens when you make this money, you pay me, period. So we're further up the count. What about this risk one? So a couple of things. One is that you can sell insurance without being an insurer. Now, I wanna be clear, follow the law, blah, blah, blah wherever your area is.

13:27 But you can absolutely sell a guarantee. You can absolutely sell a warranty. These are all things that are elements of risk. If you look at Apple, Apple care, I think is a gazillion dollar insurance play where they just say, yeah, yeah, like just in case you're screen cracked, which of course, they say we don't cover all of these other things and then they just get paid the whole time basically for air.

13:49 And so you can always inject these things into a business no matter what type of business you have. Obviously the physical things like home services, things like that, the warranty's become more obvious. But in a services business, not as in building stuff, but doing stuff for people. The risk that you're going to take on is if something goes wrong, if something is delayed, if it's more difficult than expected, these are all things that you can choose to take on for a premium.

14:12 Now finally, no matter what you pay me, very tough to have as a business. I would say the way to think about this is control of the money flow. And so if you move up the pyramid, like a franchise or typically, we'll have an agreement where they control the money. Now some franchise structure differently, the better franchises, they get paid and then remit payment, the remainder to their franchisees.

14:40 A different company, a business like that is like payment processing. Payment processors always get paid. Why, they control the money flow, right? You know, you process your card, they take their slice and then they remit payment. And so you can still move your way up here. Now you could make an argument when X happens as in like, when I process the payment, this occurs.

14:58 But I think that as we're moving up this thing, it's like, is there a road or they don't get paid? Not really. And so this is how I think about increasing leverage from the business. It's just simply shifting around where the risk sits. And if there's risk that's on the table that is an accounted for, that I'm comfortable taking, I'll always want to take it on because it's typically mispriced.

15:18 People will be willing to give you way more money than you think the risk is really worth because people are always afraid. Jeff Bezos said this in our love it. He said, humans overestimate the downside and underestimate the upside. And if you think about this from a tax perspective, Peter Lynch was one of the best traders all time and 30% compound returns for like 15 plus years.

15:35 He said, when you think about investing, he said, a stock can only go to zero. He said, but it can go infinitely behind the other direction. And so if you buy it $10, or you can lose this 10 bucks, he said, but it could become $1,000. And so in thinking about, this is the part that people mispriced risk is that they count in number of failures rather than the absolute return.

15:54 And so if you have, and this is also Jeff Bezos quote, and notice that there's a common theme among really good entrepreneurs is that they understand risk better than most people, which typically means that most people don't take enough of it. The story that I start my first book with, I'll read it to you because I think it's fucking awesome.

16:09 Who doesn't want to read it, right? Outsized returns come from betting against conventional wisdom. And conventional wisdom is usually right. Given a 10% chance of 100 times payoff, you should take that bet every time, but you're still going to be wrong nine times out of 10. Now we all know if you swing for the fences, you're gonna strike out a lot, but you're also gonna hit some home runs.

16:32 The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score a thousand runs.

16:49 This long tail distribution of returns is why it's important to be bold. Big winners pay for so many experiments. We take risk to get reward. Like we have to take risk in order to get reward. And where you get best rewarded is where the world perceives you to be taking on far more risk than you really are, which you only really have happened when you're either lucky or you're good.