@27XVII Agree. Challenge for many smaller stocks globally is they don't have the cashflow because they are still running at high losses for growth
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Scott Middleton
2.1K posts
Scott Middleton
@scottmiddleton
I build, invest in and acquire tech businesses through Terem Capital. On 𝕏 I do deep dive analysis into spinouts, small cap tech and acquisitions.
Katılım Ocak 2008
514 Takip Edilen588 Takipçiler
@BigJohn043 I always come back to skin in the game for my own thinking on this.
You lay out the different scenarios well which I don't think gets thought or talked about enough. Especially the middle.
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I think the thing that you are missing is that equity compensation is never "fair".
When a deal goes really well (>4x) everyone makes tons of money: the investors, the management team and the private equity firm. And frankly all three make more than they "deserve". Generally something good happened and some level of luck was involved. A deal is a deal and so the payouts are what everyone bargained for but it is difficult to really say that the returns are justified based on the value added.
FWIW, this is true in private equity, public companies, VC, whatever.
When money is lost then no one makes anything. Everyone gets that. Although management inevitably feels like they worked really hard and it was "unfair" for all of their efforts.
The issue is what happens when the returns are middling. First, most management teams don't understand that a 2x is middling. The "average" private equity deal will do better than that. Those teams work hard, but they aren't even replacement level performance. And for some reason those teams believe they deserve a big payout.
My experience is the most PE executives are getting paid a pretty market base and bonus. They aren't taking a big discount for the upside.
And lets not pretend they are somehow "deceived" about how the management incentive plan works. There are detailed legal documents that spell it all out. They are generally represented by counsel.
FWIW, our plan is 10% of all profits go to the MIP. No performance vesting. No preferred return. So management makes something on a 2x.
But nothing about all of this is "fair". It is probably not fair on the upside, downside and middling cases. Then we can talk about how the MIP is distributed. That is never in line with the value actually created....
PEoperator⚡️@PEoperator
My post on management incentive equity struck a nerve. Well not the original post so much as @moneyfetishist’s reply. @BigJohn043 and @paulswaney3 have taken the other side (to put it politely). My take is that this disagreement is the exact issue. As @BowTied_Sales guy said… this feels like artists vs record labels. Artists say “it’s my music.” The label says “we have the capital and distribution.” Both think they deserve more. I think that’s one of the reasons you see the ETA/search space taking off. More independence, capture more of the return. Back to the issue at hand… Private equity does not do a good job of communicating to operators exactly how these awards work. So operators end up with unrealistic expectations or frankly, no understanding of how the award is calculated. Doesn’t make sense. If the whole point is to incentivize managers but they don’t understand it, how could they be possibly be incentivized? The reality is it feels like PE is taking advantage. Overpromising, over complicating and under delivering. But PE operator, caveat emptor, it’s a free market, they have options, if they could get a better deal they would have blah blah. The problem is they don’t have all the information. PE firms share what they want and frankly it’s so damn complicated that even if they did share everything no one would know what’s going on anyway. The complication is a feature, not a bug. The questions I posted are valid, but they’re mostly harmless. @moneyfetishist got to the heart of the issue: asymmetric information and misleading marketing. The real issue is trust. Do you trust the PE firm? As DeNiro says, “can you ever really trust another human being, Greg? No, the answer is you cannot.” I actually don’t think most private equity firms are trying to screw you. They just don’t fully explain how the management incentive works. Tbh, most of them probably don’t understand it. You can split technical hairs all you want. Most PEs recruiting managers overpromise and under-communicate the details and downside scenarios. They don’t share the model. They don’t share the waterfall. Many resent even getting detailed questions. That’s because they view you as replaceable. And that’s because you are. They can find another CFO. No big deal. PE has become arrogant. It’s a problem. It may not be the way John or Paul (or Ringo or George) treat their operators or think about it at all, but it’s become the norm. Ultimately as an operator, it IS caveat emptor. No need to be cynical, just be realistic. Ask the questions I posted. If the PE firm is withholding, THAT is a data point. Gather the facts as best you can. Listen to what they’re NOT saying. And, keep your eyes wide open. Good luck out there.
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@DinoSawaya Too many unnecessary, overreaching non competes in NDAs. Definitely negotiating them or moving onto the next opportunity
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@carrynointerest That's good news because I just used it to classify company data for some research.
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@Eli_Albrecht I guess it's an interesting alternative to "market terms are..." or "typically investors would..."
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I am working on a deal where the Seller's lawyer responds to every issue with a formal legal memo response (no less than 4 pages), citing rationale and case law. In large part because of this, this (relatively simple) deal has been ongoing for 6 months.
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@STLChrisH Cant just blame PE. Everyone with a half decent advisor loves a good normalisation.
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@27XVII Yes, it's tricky when you have a choice. You are negotiating with yourself and often your life partner
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Scott Middleton retweetledi
Most people focus on executing because it's far easier to measure, but thinking is far more important.
It's hard because thinking is not observable to the outside world. To others, it looks like you're doing nothing or wasting time.
Thinking looks like sleeping well, carving out large blocks of time without interruption, going on long walks, staring into space, reading a lot, writing a lot, and not talking to anyone.
And it’s the most important thing you can do.
Execution only matters if you’re thinking correctly.
The things that look like you’re working hard: late nights, lots of meetings, responding to DMs and emails immediately, etc. are actually the opposite of thinking.
The social pressure to look like you’re hustling is the biggest blocker to thinking clearly.
If you want to be successful, it’s not 996. It’s 24/7. Every hour should be an input into maximizing the quality of your thinking. The point of sleeping, eating healthy, etc. is to think clearly.
It’s just the most important thing you can do.
And most people won’t do it bc it doesn’t “look like hard work”.
But the person who does it will win.
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How did $SRG get TAMS so cheap ?!?!
3.2x Ebit for what seems to be a quality biz
Pretty incredible cheap price for a scale biz in a good sector
👏👏🤯🤯
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@girdley Also agree with your feelings on "holding company".
IndustrialistCo movement.
Only thing is people that build real physical machinery would make fun of software guys like you and me 🤣
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@scottmiddleton The options are:
Tycoon (sounds like I'm going to build a railroad)
Capitalist (no romance)
Magnate (nobody knows what this means)
Industrialist
So, yeah, I'm with you. Do real shit.
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We should bring back the term "Industrialist."
It's the combination of entrepreneur and investor.
From Wikipedia:
".. entrepreneurs that amass on their own or wield substantial family fortunes in the process of building or running their own businesses."
(Though Wikipedia also wants to call it a "Business Magnate," but that name has like zero romance.)
The large-scale guys doing this stuff are obvious: Musk, Dolan, Carlos Slim, Bezos, Ellison, Jobs, Shaq, etc. Even Michael Jordan, Reese Witherspoon, and Oprah.
They get called entrepreneurs, but that's misleading.
--
You're also seeing it on a smaller scale. A person with a leading business, then adding other ventures around it via incubation or acquisition.
I think there was a drive to call this "Holding Company," but the pushback on that name is justified. It evokes the image of Warren Buffett simply stock-picking, when 99.9% of us are hands-on in these ventures.
It's just not the "I own and run one company until I die" classic strategy of decades past. These people have multiple irons in the fire.
Am I crazy or just need coffee?
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@RonShamgar Now that you are famous please remember us little people.
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Pleased to be mentioned on this week “The Contrarians” podcast (15th minute)
Nothing drives me crazy more than tucked bed sheets in hotels
“One Untuck for me!!” (George Constanza)
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@girdley Industrialist has a better vibe around building though.
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@girdley I've been trying to find a word for entrepreneur and investor - industrialist is best so far. Capitalist works as well now that I think of it.
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@RonShamgar Real life proof tech companies can grow profitably.
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With arguably the highest software pedigree of any board or management on the ASX - I see no reason why Bravura $BVS can’t make $300m sales and $90m cash Ebit in 1-2 years
That’s $5.00 valuation any day !!
(Held ) 💪🏻💪🏻💪🏻
Ron Shamgar@RonShamgar
💰💰 Profit Upgrade alert 💰💰 Our core holding Bravura $BVS upgrades guidance to $275m revenue from $250m and cash profit from $50m to $65m !! Stock is going to $4.00 We bought in at around 30 cents 👀 💪🏻💪🏻💪🏻👇👇👇
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Whoever seed investing is a bad business clearly never saw Slow in action.
Where should we reinvest it?
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Scott Middleton retweetledi
“When your opportunity cost is too high for lottery tickets. Your time is too precious for momentum without conviction.
The question isn't whether you can start something. It's whether this particular idea is worth the next decade of your life.” @wquist
Will Quist@wquist
Why Experienced Founders Need Slow Conviction Over Fast Momentum... Too many great founders ask ‘can I start this?’ when the important question is ‘should i?’. Incorporating and raising capital is at least a 3 year commitment, even if you realize you are wrong fast. When you think about the salary and options you’re walking from, you are making a SERIOUS investment. The difference between ‘can i’ and ‘should i’ is the whole ballgame.
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Scott Middleton retweetledi
A favorite Howard Marks quote, “Did you ever hear about the 8 foot tall guy who drowned while crossing the river that was 6 feet deep, on average?”
The lesson?
Don’t build you business to survive during average conditions. Built to survive during the toughest conditions.
This is particularly relevant when thinking about a company’s debt load.
Chris Hoffmann@STLChrisH
Owning any business over a long enough time horizon:
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Scott Middleton retweetledi
Scott Middleton retweetledi
There’s no such thing as founder-led growth without founder-led discomfort.
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Scott Middleton retweetledi
big opportunity for aggressive tech M&A. the AI step change in what you can build catching many companies flat footed (see: "death of SaaS" meme) as they lack the talent/organizational will to adjust quickly...but customer value creation is large enough to justify acquisitions
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