Charles | PE | Incentives

How I think about incentives (current ramblings) Summary: - An incentive is one side of a coin, the other side is constraints which produces actions - Definition of direct and indirect factors that incentivize or dis-incentivize - Specific examples of direct or indirect factors that produce actions I use a very broad definition for incentive: a direct factor (positive or negative incentives) or indirect factor (constraint) which is likely to cause a specific action Direct factors are rewards and punishments that cause action or dis-action. This can be: - Commissions incentivize sales people to sell more - Lunch can incentivize employees to come into the office - Higher pay generally attracts better talent - Bonuses, promotions, and raises to incentivize employees to work hard - Write-ups of employees for being late The list goes on… Indirect factors, which I like to call constraints, are structural features that are hard to move that can guide a firm or persons behaviour. This can be: - Cultural norms that guide social interactions - In business, some costs will be easy to change while other costs will be fixed or long term. This arrangement will guide cost cutting behaviour towards fungible costs, with second order effects - Current legislation or government policy can hinder or promote innovation in a certain sector / business (e.g. the US dis-incentivizes the crypto industry, but promotes the EV industry) Specific examples of direct factors: - Consulting firms are notorious for the ‘up or out’ policy with talent. Employees are incentivized to stay with the firm through the carrot of ‘promotion’ or incentivized to leave when promotions are not granted - In my old firm, public shaming was effective in making employees less likely to make a mistake again (but terrible for culture…) - Establishing short term targets for employees will often create short term results (e.g., stock market focus on next quarter earnings lead to managers thinking short-term) - this applies to compensation structures as well (e.g. monthly / quarterly quotas) - The four seasons allows every employee to vacation at their properties at heavily reduced rates, and they are treated just like the guests, creating a circular relationship to fulfill their mantra: treat people how you want to be treated Specific examples of indirect factors (constraints): - Current US legislation hinders crypto development and innovation, causing investors and entrepreneurs to look elsewhere - A restaurant has three major cost bases: 1) people, 2) food, 3) rent. 2 and 3 are either fixed or already as low as possible and not fungible.. this leaves people as the fungible cost base (Not as ‘constrained’) - Private equity is usually constrained by an 8 year fund window and a 5 year investment window, constraining their thinking to the short term for their portfolio companies My thinking is evolving and I’m still landing on the right words to communicate this. But writing is a start.

$HIMS Quarterly release They messed up the years.. woops

@PaulAndreola Great year, congrats on all your and the teams success Paul. Excited to keep seeing the growth!

NameSilo Technologies Corp. Announces 2025 Year End Results prnewswire.com/news-releases/… $URL.C $URLOF

Over years I've seen specific events that impact global supply chains, commodity prices, and the economy: - Ebola in Ivory Coast and cocoa price surge - Cyclone's in Madagascar and impact on Vanilla prices - Oil and the Strait of Hormuz This was fun for me to learn more about what other critical supply chains are at risk

I built something scrappy this morning... A supply chain risk monitor - from Hormuz, to Vanilla, to Cobalt... An easy way to visualize critical global choke points that impact investing Let me know what you think, make sure you turn on "Arc Flows" supply-chain-alert-desk.vercel.app

@BoringBiz_ Your recent takes on 🔥💯

Having watched many people leave finance for jobs at startups and other corporates, there is usually one of 2 ways this typically goes > you realize that most corporate jobs suck anyway. You can’t find enough things to fill your time after the regular 9-5. You get bored out of your mind and decide that you might as well work a job that can pay you the most. These folks usually go back into finance through an MBA, or join an intense startup that has the same hours in hope for a solid equity payout > you find hobbies to fill out your time. Focus shifts to personal relationships with friends and family. Doing banking made you realize that no amount of money is worth your time or health. At the end of the day, a job is simply a job. You set a number in your mind at which you plan on retiring and just traveling the world for fun

Yea. This is awesome. Completely agree. Except that I lean heavily towards "in the room". Best way to learn skills where, years later, you only realize you learned: - How to read emotions - communicate - ask for something - stay silent And more...

Yea... This isn't real

Well done - I like the depth here

@BigJohn043 Completely agree here. Individuals should not be in PE funds unless they can spread over vintages AND managers

This is just the wrong way to think about this. First, IRRs are absolutely real numbers. If you take all of the capital calls and distributions for a fund you run an IRR and you get the returns that fund is giving you when they have your capital. It is just factual. Now there is a very real issue that you don't know the timing of those calls and distributions. So how do you deal with that? If you are an institution and you are invested in 20+ funds it isn't a big issue. They will end up averaging out and you can get a pretty good prediction of the cash flows. You also have a credit line so if you do have a cash need you can borrow for a time. There is also nothing magic about the target portion of the portfolio that is privates. No one gets it dead on. If you are an individual, don't invest in privates if you can't do multiple funds. It should also be a smallish portion of your portfolio. You also should have a credit line and you can always size down the portion of your portfolio that is liquid. If you need liquidity sell of a bit of the S&P500 or whatever. You aren't just going to keep that money in an account earning 7% or something. That is silly. FWIW, I generally don't recommend individuals invest in PE. It has nothing to do with the returns and everything to do with the fact that it is pretty tax inefficient. PE sells every 3-7 years creating a taxable even. Private credit is even worse. And what you will find is that most institutional buyers of PE aren't tax payers - endowments, foundations, pension funds, etc....

A hobby site - built for my problem: - Where is value created in an industry? And how? - What good ideas are out there relevant to my problem? - What can we learn from others? My new favourite addition: Industry Taxonomy Take a look: TacticalVC.ai

@austin_lebahn Great idea. Appreciate you checking it out and appreciate the feedback!

Love this! A few quick points of feedback: - I like the navigation & segmentation of the case studies + the way each case is structured; makes it relatively easy to double-click into a category & immediately learn - As the case library gets built out, consider creating more “specific” sub-levers or labels vs the three you have (ex. Service Mix Shift, Pricing Strategy, New Product Launch, etc.) Might make it easier for individuals to find & locate a specific strategy instead of digging into a few case studies to find said strategy. You could even create a filter function where you can filter the case library for specific “tags”.

Website is live! I'm building the largest sourced value creation case study library. For value creation professionals, operating partners, and executives, and strategists. First Industry: - 10 sub-industries mapped - Every claim backed by filings an earnings calls - Filter by value creation lever, industry, company size Some of you offered to provide feedback... please be critical. What would help? Note: It's not perfect... QA of case studies is very important. Links need to work and sources accurate. It's a process, but wanted to share. tacticalvc.ai

@MatznerJon @TheSalonDon Amen same here

@TheSalonDon Shit I don’t know. I had it easy. I’m at my wife when I was a year or two out of the government making like 60 K a year so if anybody needed a prenup, it’d be her for me.

For those asking about my prenup. This is the structure Her distributions are capped at 30% of combined assets Distributions are: -$175k per year of marriage (lump sum) -Use of a house worth 5.6x the US median housing price until death or cohabitation of 150 days (House can be financed by me on a mortgage. Full house value counts toward 30% cap) -$75k annual alimony (inflation adjusted) -All her jewelry and personal items -Continued Health and Dental insurance -First choice in pets (must be valued under $50k) If marital distributions exceed 30% then reduce the lump-sum, then housing, then alimony to get below 30% This made sense because 1) I never have to pay more than 10% of NW (since house is mortgaged) and the more I make the less the percent 2) She has no penalty for giving up her career (gets full missed salary as a tax free lump-sum) 3) She’s never “out on the street” with paid for housing and $75k annual

People have already mentioned it.. But VC up 30%?? Cmon

@grok @abhidinesan @sur4js Correction, Teachers has $10B AUM allocated to ventures. Their headline AUM has little relevance.

Yes, OTPP's Teachers' Venture Growth arm has a dedicated SF office (633 Battery St) and actively invests in late-stage Silicon Valley tech/AI. Notable deals include Databricks and Anthropic. With $266B+ AUM, they're a major institutional player in the local growth equity scene—hence the joke.

In SF, they start every sponsored event with a silent prayer to the Ontario Teachers Pension Fund.

Stop, they can only take so much

@austin_lebahn Love it, great thought! I know some community-driven datasets do this very effectively. The real I believe is in creating deep tactical examples in niche industries, it eventually needs people to tell stories about private companies that aren't readily accessible

Love the concept. I’m wondering if you could create an incentive structure for people to contribute to the case library. For example: the only way you allow access to the case library is by contributing to it (i.e., each person who has access contributed a case). You could create a limited time access, so members would need to contribute to it again to allow access. It would create a network effect where the more people who have access = the more cases there are available to the members.

Playing around with something that's been in my head for a while on value creation... Every client I talk to wants real, industry specific examples for how value is generated, typically tailored to their specific problem. I'm (very slowly) building a reference library for value creation case studies. Focused on public and private companies. Eventually, would be great to get real stories from real people, relevant to LMM PE. Thoughts and feedback welcome. Useful or dumb?

@AnkitKambojTO Appreciate you! Will keep you updated when it's online

@_PE_Charles I’d be interested to get access and provide any feedback.

Everything sourced from public sources all over. The idea being that you can very or "read more" at the original source. - 10ks, filings, transcripts - case studies / articles published online (attributed of course) - future: youtube video transcripts are great - future: x.com is a goldmine I also have a bunch of anonymous cases I'd like to add from consulting days... The tricky part is QA - avoiding hallucinations and making sure the sourced material actually contains the information

@_PE_Charles Looks like a great idea to me. What is the source(s) for the case studies?

Essentially, a searchable case study library. Nothing fancy, but I've learned that examples and real-world experience often spur the best adjacent new ideas and resonate the most with audience. An aggregation of steps executives have taken to create meaningful value, sortable by industry, value lever, organic / inorganic, and more. Focused on revenue growth, margin improvement, technology and process.