Behaviour and Money: Volume One
Three observations on how people behave around capital, status, and the quiet psychology of ownership.
1. Twelve Months after
2. Status Tax
3. The First Time Equity
A NOTE BEFORE YOU BEGIN
Behaviour and Money is the working title of an ongoing collection of observations about the curious ways people conduct themselves around capital. The collection began as a private notebook, accumulated over years of watching founders, operators, and senior people behave in patterns sufficiently consistent to suggest that the underlying psychology of money produces more reliable behavioural signatures than almost any other variable in business life. Watching people manage money, particularly the moments at which they receive significantly more of it than they previously had, is one of the most reliable diagnostic activities available to anyone interested in human nature, and it produces observations that are by turns illuminating, predictable, and quietly comic in ways the people involved would generally prefer were not being noticed.
This volume contains 3 essays. The first concerns the 12 months that follow a significant capital event, and the entirely predictable behavioural drift that occurs in founders who have just received considerably more money than they had been operating with for the previous decade. The second concerns status spending and what the visible commercial choices of a business reveal about the underlying confidence the people running it actually have in its prospects. The third concerns the predictable patterns that emerge in people who have been given equity for the first time, particularly in the period between the granting of the equity and their first genuine understanding of what equity actually is.
Each essay is short and intended to stand on its own without requiring the others. The collection will continue across future volumes as the underlying notebook produces fresh observations worth surfacing into print, which it shows no signs of ceasing to do. The pleasure of writing this particular collection lies in the fact that the material renews itself constantly, and the moment one thinks one has documented the full taxonomy of strange behaviour around money, somebody you have known for 15 years does something completely unexpected and the taxonomy expands again.
Watching people manage money is one of the most reliable diagnostic activities available to anyone interested in human nature.
The Twelve Months After
On what happens to founders in the year after a significant capital event.
A specific kind of conversation happens with founders in the months following a successful capital raise, a meaningful sale, or any other transaction that produces a substantial increase in personal wealth. The conversations are remarkable for their consistency across founders who have never met each other, work in different sectors, and have ostensibly little in common beyond the recent receipt of an unusually large amount of money. The patterns are so predictable that one begins to suspect the actual experience of suddenly having more money than one has previously had is producing the conversation rather than the founder, who is essentially a passenger to the psychology the windfall has activated.
The first 3 months are typically characterised by an almost evangelical restraint. The founder has engaged a financial advisor, set up the appropriate vehicles, and made the small ritual purchases that one is permitted to make in this period without becoming embarrassing. A watch, perhaps, although a tasteful one. An upgrade to economy plus rather than business class, because business class would feel premature. The founder mentions occasionally that money does not really change anything, that they remain fundamentally the same person, that they have been deliberate about not allowing the windfall to alter their values or priorities, and this is generally true at the moment they are saying it.
The next 3 months produce the first small inconsistencies. The watch leads to a slightly better watch, because the original turned out to be insufficiently special once one became accustomed to it. The economy plus becomes business class, because the cost of the upgrade is now genuinely trivial relative to one's available capital, and one would be foolish to suffer needlessly. The founder begins, almost without noticing, to assess situations through a slightly recalibrated cost framework, in which expenses that previously felt extravagant now feel reasonable, and expenses that previously felt reasonable now feel slightly austere. The recalibration is not conscious. It is the natural human response of an organism adjusting to its new financial environment, and it happens to every founder regardless of how disciplined they believed they were going to be at the start of the period.
The recalibration is not conscious. It is the natural human response of an organism adjusting to its new financial environment.
Months 7 through 9 produce the genuine behavioural drift. The founder begins to make decisions that the founder of 12 months earlier would have found inexplicable. A renovation of the family home that was not previously necessary or a second property that nobody is quite sure why one needs. An investment in a friend's venture that one would never have considered when the capital was scarce, which one now justifies through a reasonably elaborate thesis about supporting talented people in one's network. The investment will, in most cases, fail, which is a result the founder will quietly absorb without revisiting the thesis that justified the original decision, because revisiting it would require acknowledging that the thesis was less robust than the founder's recently expanded capital base.
Months 10 through 12 produce the recalibration of the recalibration. The founder begins to register that they are spending in ways the previous version of themselves would have found alarming, and that the financial advisor's projections for what the capital was meant to fund have begun to look slightly optimistic. The conversations with the advisor take on a more careful tone. The founder makes a small list of upcoming expenditures that should be deferred. The renovation extension that was being contemplated is quietly shelved. The recalibration is not a return to the original posture, because the original posture has now become genuinely inaccessible, but it is a deceleration that the founder presents to themselves as wisdom rather than as the panicked course correction it usually is.
The fascinating thing about this 12-month pattern is the consistency with which founders, having lived through it once, do not recognise themselves in descriptions of it. The pattern is sufficiently universal that one could almost predict the specific timing of each phase, and yet each individual founder experiences the pattern as their own unique journey through the psychology of new wealth. The universality of the pattern is hidden from the founder by the specificity of their own decisions, each of which feels personal and considered rather than predictable and patterned. The pleasure of watching the pattern repeat across founders is the pleasure of watching the same play performed by different casts who genuinely believe they are improvising.
IN CLOSING
The most useful observation about the 12 months after a significant capital event, drawn from watching it happen many times, is that the founders who navigate the period best are the ones who treat the windfall as a temporary alteration to their psychology rather than as a permanent improvement to their judgement. The capital makes a founder less constrained, and the absence of constraint is what produces the predictable drift across the 12 months. Founders who maintain their previous constraints deliberately, even when the financial necessity for those constraints has disappeared, tend to look back on this period with substantially less regret than founders who allow the constraints to soften in response to the new circumstances. Discipline is rarely commercially necessary. It is almost always personally useful.
The StatusTax
On what visible commercial choices reveal about underlying confidence.
Walk into the office of any reasonably successful business and the visible commercial choices the founder has made will tell you considerably a lot about their actual confidence in the business. The furniture, the address, the artwork, the conspicuous presence of a barista, the design quality of the reception area, the choice of laptop on the desk, the brand of pen the founder happens to be using during the meeting. Each of these signals carries information that the founder is, in most cases, partially unaware of broadcasting, and each of them reveals where the founder's underlying confidence actually sits relative to where their public communication suggests it sits.
The phenomenon is worth taking seriously because the visible signals are remarkably resistant to falsification. Founders can rehearse their language, and deliver carefully calibrated answers to investor questions, but the visible spending choices have usually been made over years rather than weeks, and they reflect the founder's actual disposition rather than the disposition they are performing in any given conversation. The status tax is the cumulative cost of these visible choices, and the size of the tax tells you what the founder has been buying with their commercial decisions, which is rarely the thing they would say they were buying if you asked them directly.
There are 3 types of status spending that show up reliably in growing businesses, each of which carries different information about the underlying psychology. The first is pre-emptive status spending, in which the founder makes visible commercial choices that signal a level of success the business has not yet achieved, in the hope that signalling the success will help produce it. The expensive office before the revenue justifies it. The senior hire whose salary is genuinely uncomfortable for the current capital position. The conference booth at a scale appropriate to a business twice the size of the current one. Pre-emptive status spending is usually justified through the language of investment, momentum, or attracting the right kind of attention, and it is occasionally correct as a strategy. It is more often the product of insecurity wearing the costume of ambition, and the financial consequences usually arrive about 18 months after the original decision.
The status tax is the cumulative cost of visible choices founders have made over years rather than weeks. It is harder to fake than language.
The second type is compensatory status spending, in which the founder makes visible commercial choices that signal a level of personal lifestyle the business cannot really support, often because the founder has been working extraordinarily hard for an extended period and feels that some small acknowledgment of the effort would be reasonable. The personal car that arrives slightly too early in the business's growth curve. The renovation of the family home funded through a personal loan against the business. The holiday that was important for the founder's wellbeing and was also significantly more expensive than the founder would have approved of as a budget item for an employee. Compensatory status spending is usually justified through the language of sustainability, mental health, or appropriate reward for sacrifice, and the founder almost never describes it as status spending because they do not experience it as performing for anyone. The market, however, reads it as status spending regardless of the founder's interior experience.
The third type is defensive status spending, which is the most interesting to read carefully. Defensive status spending occurs when the founder makes visible commercial choices that signal stability and success at precisely the moment the underlying business is becoming less stable than it appears. The expensive new office that opens just as the company is quietly underperforming the previous quarter. The senior hire announced with considerable fanfare a fortnight before 2 unannounced departures. The brand refresh launched at the moment customers are starting to lose confidence in the underlying offer. Defensive status spending is almost always invisible to the founder making the decisions, because the founder is responding to the underlying anxiety by performing the version of the business they wish were true, and the performance is genuinely effective at convincing the founder themselves before it convinces anyone external. The difficulty with defensive status spending is that the market eventually reads the signals correctly, and the founder is left having spent capital on a performance that did not solve the underlying problem.
The cumulative status tax across these 3 categories is significant in most growing businesses and substantial in many. Founders rarely calculate it, because doing so would require classifying their previous spending decisions in categories they would prefer not to acknowledge, and the calculation is generally produced retrospectively by external observers after the business has come under financial pressure. The most commercially valuable hour a founder can spend in any given year is the hour required to honestly assess what they have spent on optics over the previous 12 months, and what proportion of that spending genuinely earned its return rather than simply performing a version of the business that everyone in the room already believed in.
IN CLOSING
The founders who pay the lowest status tax are, almost without exception, the ones who have stopped trying to signal what they have already achieved and have moved on to building what they have not yet achieved. The signalling, once one is sufficiently successful, becomes commercially counterproductive because it consumes the resources required for the actual building, and the most successful founders one observes tend to look slightly underdressed for their current commercial position, work in offices that are smaller than the business could justify, and conduct themselves in ways that would not particularly impress somebody who did not know the underlying numbers. The discipline of refusing to pay the status tax is one of the quietest competitive advantages available to any operator, and it is almost never the discipline founders find themselves naturally drawn to.
The First Time Equity
On the predictable behaviours of people newly granted ownership.
Granting equity to someone for the first time is one of the more revealing experiences available to a founder, because the recipient's response to the grant tells you almost everything you need to know about how they have previously thought about ownership, money, and their own commercial worth. The recipient is usually unprepared for the conversation, has rarely held equity before, and processes the experience through a set of intuitions that are almost entirely shaped by the financial circumstances of their previous decade. The behavioural responses are predictable, occasionally amusing, and consistently informative about who the recipient actually is, which is information the recipient is largely unaware of broadcasting.
The first response, which occurs in roughly half of all initial equity grants, is the response of polite uncertainty. The recipient receives the documentation, expresses genuine gratitude, asks 1 or 2 questions about vesting schedules or dilution, and then quietly puts the paperwork in a drawer where it remains essentially unconsidered for the following 2 years. The recipient continues to think of themselves as an employee with an additional benefit, rather than as a partial owner with a different relationship to the business, and their behaviour at work does not noticeably change. This response is neither encouraging nor alarming. It indicates that the recipient has not yet absorbed what equity actually is but does not yet predict whether they will eventually do so. About a third of these recipients will eventually internalise the grant and shift their behaviour accordingly. The remaining two thirds will continue to operate as employees with paperwork, and the equity will produce essentially no behavioural change throughout their tenure.
The second response, which is significantly more interesting to observe, is the response of immediate self-revaluation. The recipient receives the grant, performs a rapid mental calculation of what the equity might be worth under various exit scenarios, and immediately begins to behave as though the upper end of the range were the most likely outcome. The recipient becomes notably more confident in meetings, more willing to express opinions about the broader strategy, more inclined to consider themselves a peer of the founder rather than a senior member of the team. This response is almost always premature relative to the actual value of the equity in question, and it produces a behavioural shift that is occasionally appropriate and frequently uncomfortable for everyone in the building. The founder is left wondering whether they have just promoted somebody who was already overpromoted in their own internal hierarchy, which is usually exactly what they have just done.
The response to a first equity grant reveals how the recipient has previously thought about ownership, money, and their own commercial worth.
The third response, which is rare but worth identifying when you encounter it, is the response of measured ownership. The recipient receives the grant, asks careful questions about the implications, takes the documentation home to read in detail, and returns with 1 or 2 specific operational changes they would like to propose now that they hold equity in the business. The proposed changes are usually small but revealing. A reporting line they would like to clarify, or a decision-making boundary they would like to formalise, or a specific commercial responsibility they would like to take ownership of. The recipient has understood that equity changes their relationship to the business and is responding by attempting to make the relationship operationally consistent with the new structure. This response is the rarest of the 3 and the one most predictive of the recipient eventually becoming a genuine principal of the business rather than an employee with paperwork.
The fourth response, which is unfortunately more common than the third, is the response of accumulated entitlement. The recipient receives the grant, expresses appropriate gratitude during the conversation, and then begins, over the subsequent 6 to 12 months, to develop a sense of having been undervalued in their previous compensation, having earned the equity through historic contributions that should now be acknowledged through additional grants, and having developed a more strategic view of the business than their current role permits them to express. This recipient becomes a permanent low-grade compensation negotiation for the founder, who has inadvertently activated a sense of entitlement that the previous compensation arrangement had been keeping politely contained. The equity has not produced ownership behaviour. It has produced ownership grievance, which is a different and considerably more expensive psychological position.
The most useful observation about first equity grants, after watching many of them, is that the conversation itself is far more diagnostic than the document. The founder should treat the equity conversation as the single most important assessment of the recipient's underlying disposition that the founder will ever conduct, because the recipient has no preparation, no script, and no professional posture to adopt during a conversation about something they have never previously experienced. What the founder sees during that hour is what the founder is actually going to be working with as a co-owner for the next several years, and the founder should adjust their subsequent decisions accordingly.
IN CLOSING
Equity is structurally a financial instrument and behaviourally a psychological one, and the financial design of an equity grant tends to receive considerably more attention from advisors than the behavioural design receives from anyone. The financial structure can be perfected and the behavioural outcome can still be entirely disappointing, because the behaviour was determined by who the recipient was before the grant was made rather than by what the grant said on paper. Founders who learn to read the behavioural signals during the first conversation, and to adjust their subsequent equity decisions in response to what they observed, accumulate co-owners who genuinely behave as co-owners. Founders who focus on the financial structure alone tend to accumulate paperwork holders, which is a considerably less useful asset to have around the business.
A CLOSING OBSERVATION
The 3 essays in this volume are, in their different ways, all examinations of the same underlying observation, which is that money produces remarkably predictable behavioural patterns in the people who interact with it, and that the patterns are usually invisible to the people exhibiting them precisely because they are so universal. The founder 12 months after a windfall, the operator paying their accumulated status tax, the employee absorbing their first equity grant. Each is performing a version of a script that has been performed by many others before them, and each is experiencing the performance as uniquely their own. The discipline of observing these patterns in others is useful. The discipline of recognising oneself inside them is considerably more useful, and considerably rarer, because the patterns are designed by human psychology to be invisible to the person who is currently inside them.
Future volumes of Behaviour and Money will continue to document patterns of this kind as they surface in the underlying notebook. The collection is open-ended by design, because human behaviour around capital shows no signs of becoming any less interesting, and the supply of material renews itself without effort on any author's part. If anything, the supply expands as the audience for these observations expands, because readers begin to recognise themselves and others in the patterns, which produces fresh conversations, which produce fresh observations, which eventually produce fresh essays. The notebook is, in this sense, a self-sustaining piece of equipment.
