THE WISDOM OF SHIFTING TO EQUITY RATHER THAN INCOME

Many years ago I read an article about how rap artists in the US were shifting emphasis towards equity or ownership of their music and away from income, being paid for concerts and a share of their album sales.

This mindset shift now means you have dollar multimillionaires like P-Diddy and 50 Cent and even billionaires like J-Zee and Dr Dre.

And explains why we have active sports billionaires like Tiger Woods and LeBron James. Michael Jordan led the way, but he hit the billionaire mark after he had retired.

First a few clarifications when you are a millionaire or billionaire it does not mean you have a million or a billion in your bank account. It means that difference between what you own and what you owe is more than a million or a billion. So you can be millionaire and cash strapped because your assets, what you own, do not throw off enough cash.

So, the rappers of today have huge asset bases, dwarfing their earnings, unlike their predecessors who had cash flowing out their wallets, hanging from their necks, pinned to their ears and welded to their gums. The rapper of today is much better off than his predecessor as he does not have to keep performing to sustain his bling...

The lesson is obvious, when given a chance take equity rather than cash.

The story is told of in the early days of microblogging site Twitter, Beyonce was contracted to perform at their end of year party and rather than take cash she got paid in Twitter shares. Those shares at last count were worth $300m.

Of course, this is a counter intuitive thing to do as one suggests immediate gratification and the other delayed gratification. Not to mention in owning shares you share in the risk of the enterprise, meaning if it collapses you lose your investment, while even if the company is loss making the company may still pay you.

However, if the company is wildly successful it will show on your bottom line as well.

It makes sense so why do more of us not do it?

The excuse makers complain that the opportunities are not there to do such deals. That’s not true. The truth is that we are psychologically not wired to take a long-term view, we would rather have the bird in the hand than the two in the bush.

And secondly, the people who benefit from these deals tend to keep quiet about them and not shout from the rooftops about their “good fortune”. These are the five percent in society who own more than everybody else.

They have been able to reorient their minds to thinking long term and broken away from what the majority of us do, which is to eat what we have now rather than save or invest for a future date.

It is not easy. But we do it all the time.

When given a cob of maize you have the option to roast and eat now or store it away and plant it. How many cobs can be harvested if you plant the seeds of one cob? When you send your kids to school the return on investment may only be enjoyed 30 years from the day they start learning their ABCs.

 

"A cob does not look like much nor does your toddler son, but if you can just exercise your mind, stretch your vision into the future, you might just be able to see the possibilities and do what it takes and be patient to reap way into the future...

But that is not sexy and does not play well on social media. Instant gratification is more interesting to people watching you.

And for us salary earners it is a no brainer, we negotiate our salary according to our needs or our previous salary. Few employers would pay you in equity—partly because they have no clue about the option themselves. But If you were thinking in terms of benefitting from the future fortunes of your employer, it might make you look better at the financial health of the company you are joining.

How many times have you seen a colleague join a company at higher salary than his previous one, only for the company to sack them or fold altogether because, as it turns out they could not afford him?

Everybody is talking about wealth creation, but what does this actually mean? We think it means earning more, which it may very well be, but wealth creation entails accumulation, beyond just spending more and more money.

What is the point of working if you can not accumulate assets that ensure you work less and less, while still able to maintain or improve your lifestyle?

In 2023 while we should look to improve our earnings, let us also start to think about accumulating equity by building it or buying it.