Convex Payment, The “S” Curve, And Pay Per Epoch

Today I’m going to share 3 things: 2 concepts that I recently learned (or fixed them better in my cognitive field) and one that I created myself, but in close relationship to the first two. I’m sure you already astutely sensed that I’m going to talk about:

  • convex payment
  • the “S” curve
  • pay per epoch

Context And Background

The first 2 concepts are better (and shorter) described in this tweet, by Cristian Strat. So if you want to go to the source, feel free, it will take just a couple of minutes.

I met Cristian a little over a decade ago, in Romania. For a few weeks we pondered if we should work together on a new idea or product, but eventually we chose not to. He and his team started a local project in Romania, which seemed interesting, so I recommended them to an investor, who ended up putting some money into their idea. Meanwhile, though, another project of theirs was accepted in a startup incubator in Canada, so they left Romania. A couple of years later, their project was acquired by Twitter, where they stayed until Twitter’s IPO. After that, they started another project, which didn’t take off, but it seems they raised a nice flag with it, because they were invited to become Coinbase’s tech team. Where they stayed until recently, when Cristian decided to be an entrepreneur again. I hope I didn’t forget something and that the events really unfolded that way (if not, I apologize).

All this information was provided to give you a bit of a context and background. The first two concepts aren’t coming from some shallow “finance guru”, but from a person who actually practiced all that he preaches.

Convex Payments

We tend to equal the amount of reward we get for performing specific tasks (or for doing our job) with the amount of skill. To a certain extent, this is true, but it’s also incomplete. There is no linear correlation only between the amount of skills you have and the reward you get. As the tweet says:

Once you think of payoff as a stochastic process, in which intrinsic skill is just one factor, then you start to understand what nudges the process in the right direction, and what doesn’t make a difference.

Convex payments are logarithmic, not linear. Once you take into account more factors, and once you know how to put them together, they collude in such a way that the rewards follow the famous “hockey stick” entrepreneurs are after, only this time is not about the sales of a startup, but about the individual rewards one can get.

And here are some factors that are influencing this:

  • Reputation that puts you on the radar of smart people
  • Strong network
  • Valuable information flow
  • Starting companies
  • Joining fast-growing companies early
  • Expertise in high-growth industries
  • Trying new things and cutting losses
  • Integrity

I will also add to this: unusual and in high demand combinations of skills, mainly combinations of hard and soft skills. Knowing React Native, for instance, but also having strong emotional intelligence skills.

The S Curve

The “S” curve postulates that no matter how much you bet on strict compliance, you will plateau rather sooner than later. Not because there would be something intrinsically wrong with strict compliance in itself, but the context is usually richer than we know and strict compliance may act as a hard limit. In other words, you may be missing out.

Here are a few ways in which the S curve is enforced:

  • “Meeting” vs “exceeding” 2021 Q1 perf expectations
  • Getting a bonus
  • Jockeying for favorable peer reviews
  • Pleasing your peers, manager, execs
  • Mastering idiosyncratic bureaucracy and processes
  • Learning a new language, framework, stack, etc.

In and by themselves, none of the above is wrong (well, maybe some of them are, like mastering idiosyncratic bureaucracy and jockeying for favorable peer reviews), but the focus only on them will eventually get you stuck.

Now, the opposition of these two concepts is clear, but I think we need another dimension. Introducing Pay Per Epoch.

Pay Per Epoch

In an ideal world, we will all be able to choose one or the other, and, hopefully, we will all aim for convex payments. In a real world, we’re not. We have other constraints, like geographical limitations, family pressure, increased cost of living, etc.

So what helps here is to put a strong time limit to each approach, to do it only for an “epoch”. Sometimes in life we may be in a position to take on more risk, sometimes we may not.

For instance, we may want to play the “convex payments” card and start a business, or join a fast growing company early on. But we should be mindful about our current constraints and only do this for as long as we can afford. I’m talking of course about basic risk mitigation, but also about a clear projection of our own future. If the business fails and we need income predictability, we may trade the potential hockey stick (which wasn’t realized, after all) for a smaller increase in revenue, but greater predictability. And we may do this easier if we know we have to do it only for one “epoch”, like 3 or 5 years.

Similarly, when we choose to stay in an “S” curve, we should first be aware that it is an “S” curve and don’t expect it to yield the same profits as a convex payment situation, and second, we should put a hard limit on it too. Like being in that bureaucratic job for a maximum of 3 to 5 years, until we have enough runway to try another jump.

This “epoch” part is very important because, we, humans, have this tendency towards attachment. And attachment is agnostic: in and by itself is neither positive or negative, it’s just attachment. We may get attached to the thrill of being an entrepreneur, and ignore basic risk mitigation when the attachment goes too strong, or we may be attached to the comfort of a well paying job, but with little, if any, growth perspective.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.