Embrace Accountability to Get Leverage

Take risks under your own name and society will reward you with leverage

You need accountability to get leverage

Nivi: Why don’t we jump into accountability, which I thought was pretty interesting and I think you have your own unique take on it. So the first tweet on accountability was, “Embrace accountability and take business risks under your own name. Society will reward you with responsibility, equity, and leverage.”

Naval: Yeah. So to get rich, you’re going to need leverage. Leverage comes in labor, comes in capital, or it can come through code or media. But most of these, like labor and capital, people have to give to you. For labor, somebody has to follow you. For capital, somebody has to give you money or assets to manage or machines.

So to get these things, you have to build up credibility and you have to do those under your own name as much as possible, which is risky. So accountability is a double-edged thing. It allows you to take credit when things go well and to bear the brunt of the failure when things go badly.

Take business risks under your own name

So in that sense, people who are stamping their names on things aren’t foolish. They’re just confident. Maybe it turns out to be foolish in the end, but if you look at a Kanye or an Oprah or a Trump or an Elon or anyone like that, these people can get rich just off their name because their name is such powerful branding.

Regardless of what you think of Trump, you have to realize that the guy was among the best in the world at just branding his name. Why would you go to Trump Casino? Used to be because Trump. Why would you go to a Trump tower? Because of Trump.

When it came time to vote, I think that a lot of voters just went in and said, “Trump.” They recognize the name, so the name recognition paid off.

Same thing with Oprah. She puts her brand on something, her name on something and it flies off the shelves, and it’s like an instant validator.

These people also take risks for putting their name out there. Obviously Trump is now probably hated by half or more than half of the country and by a big chunk of the world as he sticks his name out there.

By putting your name out there, you become a celebrity, and fame has many, many downsides. It’s better to be anonymous and rich than to be poor and famous, but even famous and rich has a lot of downsides associated with it. You’re always in the public eye.

A well-functioning team has clear accountability for each position

Accountability is quite important, and when you’re working to build a product or you’re working in a team or you’re working in a business, we constantly have drummed into our heads how important it is to be part of a team. Absolutely agree with that.

A lot of our training socially is telling us to not stick our necks out of the crowd. There’s a saying that I hear from our Australian friends that the tall poppy gets cut. Don’t stick your neck out, but I would say that actually a really, really well-functioning team is small and has clear accountability for each of the different portions.

You can say, “Okay, this person’s responsible for building the product. This person’s responsible for the messaging. This person’s responsible for raising money. This person’s responsible for the pricing strategy and maybe the online advertising.” So if somebody screws up, you know exactly who’s responsible. While at the same time if something goes really well, you also know exactly who’s responsible.

If you have a small team and you have clearly delineated responsibilities, then you can still keep a very high level of accountability. Accountability is really important because when something succeeds or fails, if it fails, everybody points fingers at each other, and if it succeeds, everybody steps forward to take credit.

We’ve all had that experience when we were in school and we got a group assignment to do. There were probably a few people in there who did a lot of the work. Then there are a few people who just did a lot of grandstanding or positioning to do the work. We’re all familiar with this from a childhood sense, but it’s sort of uncomfortable to talk about.

People who can fail in public have a lot of power

Clear accountability is important. Without accountability, you don’t have incentives. Without accountability, you can’t build credibility. But you take risk. You take risk of failure. You take risk of humiliation. You take risk of failure under your own name.

Luckily in modern society, there’s no more debtors’ prison and people don’t go to jail or get executed for losing other people’s money, but we’re still socially hard wired to not fail in public under our own names. The people who have the ability to fail in public under their own names actually gain a lot of power .

For example, I’ll give a personal anecdote. Up until about 2013, 2014, my public persona was an entirely around startups and investing. Only around 2014, 2015 did I start talking about philosophy and psychological things and broader things.

It made me a little nervous because I was doing it under my own name. There were definitely people in the industry who sent me messages through the back channel like, “What are you doing? You’re ending your career. This is stupid.”

I kind of just went with it. I took a risk. Same with crypto. Early on, I took a risk.

But when you put your name out there, you take a risk with certain things. You also get to reap the rewards. You get the benefits.

Take Accountability to Earn Equity

If you have high accountability, you’re less replaceable

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.