The 6 Levels of Making Money | Ep 955
In this episode of The Game, Alex Hormozi explores different models for structuring business transactions and managing risk in entrepreneurship. He examines various payment structures, from basic W-2 employment to more complex arrangements involving royalties and licensing agreements, while explaining the relationship between risk-taking and compensation.
The episode delves into practical strategies entrepreneurs can use to increase their earning potential, including methods for generating income independent of time invested. Hormozi discusses how to leverage warranties and guarantees as premium services, control fund flow effectively, and structure deals that benefit both business owners and employees through outcome-based compensation and equity arrangements.
This is a preview of the Shortform summary of the Mar 24, 2026 episode of the The Game w/ Alex Hormozi
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1-Page Summary
Models For Structuring Business Transactions and Getting Paid
Hormozi presents several models for structuring business transactions, each with different risk-reward balances. The most basic model is the W-2 employment agreement, where payment comes after work completion. A step up is the pay-as-you-go system, offering regular cash flow during projects. The third model requires full payment upfront, similar to how surgeons operate. Hormozi also discusses outcome-based compensation and risk management through insurance or taxation. He introduces the layaway structure, where work begins only after clients complete their scheduled payments.
Importance of Understanding and Managing Risk in Business
According to Hormozi, there's a direct relationship between risk-taking and compensation in entrepreneurship. He suggests that people typically overestimate downsides and underestimate upsides in risk-taking. Using investor Howard Marks as an example, Hormozi explains how the greatest opportunities often lie in situations where risks are perceived as higher than they actually are. He points to Jeff Bezos as someone who succeeded by understanding and managing risk better than most.
Strategies For Increasing Leverage and Getting Paid More
Hormozi outlines several strategies entrepreneurs can use to increase their earning potential. He advocates for royalties and licensing agreements that generate income independent of time invested, preferably taking payments from top-line revenue. He suggests offering warranties and guarantees as premium services, similar to Apple Care. Hormozi emphasizes the importance of controlling fund flow, citing examples of franchisors and payment processors who ensure their compensation by managing money flow. He notes that even employees can leverage these principles by negotiating lower base salaries in exchange for outcome-based bonuses or equity deals.
1-Page Summary
Additional Materials
Counterarguments
- While outcome-based compensation can incentivize performance, it may also encourage short-term thinking and risk-taking that is not in the long-term interest of the company or client.
- Full upfront payment models can deter potential clients who are wary of paying for services before they are rendered, potentially limiting market size.
- Pay-as-you-go systems might lead to cash flow issues for service providers if the project scope expands or if there are delays in payment.
- Layaway structures could be less attractive to clients who need immediate work done and are willing to pay for the convenience of a quicker start.
- Risk management through insurance or taxation may not always be feasible for all types of businesses, especially smaller ones with limited resources.
- The direct relationship between risk-taking and compensation does not account for the fact that some entrepreneurs may succeed through cautious strategy and risk aversion.
- The idea that people overestimate downsides and underestimate upsides in risk-taking is a generalization and may not apply to all individuals or situations.
- Using royalties and licensing agreements to generate income may not be applicable to all types of businesses, particularly those that offer non-scalable services or products.
- Offering warranties and guarantees as premium services may not always lead to increased revenue if the cost of servicing these warranties exceeds the additional income generated.
- Controlling the flow of funds as a way to ensure compensation may not be practical or ethical in all industries, and could lead to conflicts of interest or abuse of power.
- Negotiating lower base salaries in exchange for outcome-based bonuses or equity deals can be risky for employees if the company underperforms or if the equity does not appreciate in value.
Actionables
- You can diversify your income by creating digital content like e-books or online courses that you sell for a one-time fee, mimicking the full upfront payment model. By doing this, you're not only generating income but also learning how to market and sell products, which is a valuable skill in any business venture.
- Consider starting a side hustle where you offer a service like social media management with payment tied to the growth metrics of your client's accounts, reflecting an outcome-based compensation model. This approach allows you to understand the dynamics of performance-based work and could potentially lead to more lucrative opportunities as you demonstrate your ability to deliver results.
- Explore peer-to-peer lending platforms where you can act as a lender, taking on calculated risks for potential rewards, similar to how insurance mechanisms work in business. This will give you firsthand experience in assessing risk and reward, helping you understand the principles of risk management in a controlled, small-scale environment.
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Models For Structuring Business Transactions and Getting Paid
The structuring of business transactions greatly impacts the risk and reward balances for service providers. Here's a look at several models that businesses use to ensure payment for their services.
Six Ways to Structure Transactions and Get Paid
Payment For Time Worked: From Lowest Risk and Reward (Post-Completion) to Upfront Payment
"Hormozi presents a hierarchical perspective on transaction structures, starting with the W-2 employment agreement, which typically involves receiving payment after work is completed—barring termination, this ensures the worker gets paid with minimal risk.
Moving up the tier, the second method improves on this risk-reward ratio: a pay-as-you-go system. This allows for payments to be made in increments during the course of work, which can offer more regular cash flow and reduced risk, provided the payments continue over the duration of the project.
The third model flips the first entirely, with the client paying in full before the work begins. Hormozi emphasizes that this is most feasible for business owners and is exemplified by surgeons who require payment before surgery—this shifts the financial risk from the service provider to the consumer.
Outcome-Based Compensation Models
Aside from time-based models, Hormozi also alludes to outcome-based compensation models where payment is tied to the successful delivery of specific results. However, further details about these models are not provided in the content given.
High-Level Models Involve Risk Management Through Insurance or Taxation
Finally, at a hig ...
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Models For Structuring Business Transactions and Getting Paid
Additional Materials
Clarifications
- A "W-2 employment agreement" refers to a standard employee-employer relationship in the U.S., where the employer withholds taxes and provides benefits. Employees receive regular paychecks and have legal protections, reducing their financial risk. The employer assumes most business risks, such as non-payment or project failure. This setup contrasts with independent contractors who bear more payment risk.
- A pay-as-you-go system means clients pay for services incrementally as work progresses, rather than all at once or only after completion. This approach helps maintain steady cash flow for the service provider and reduces the risk of non-payment. It also allows clients to assess ongoing work before committing more funds. This model is common in projects with multiple phases or milestones.
- When a client pays in full before work begins, they risk losing their money if the service provider fails to deliver. The service provider receives payment upfront, so their financial risk is minimized. The client assumes the risk of non-performance or dissatisfaction. This shifts the burden of trust and potential loss onto the consumer.
- Outcome-based compensation models pay service providers only when specific results or goals are achieved. For example, a marketing agency might get paid based on the number of leads generated or sales made. This aligns the provider’s incentives with the client’s success, sharing both risk and reward. It is common in consulting, sales commissions, and performance-based contracts.
- Insurance protects service providers by transferring financial risks, such as liability or loss, to an insurer in exchange for premiums. Taxation can act as a risk management tool by funding government programs that stabilize the economy and provide social safety nets. Both mechanisms help businesses mitigate potential financial losses and ensure continuity. T ...
Counterarguments
- While the W-2 employment agreement is considered low risk, it may not always ensure minimal risk due to potential job insecurity and the possibility of delayed or missed payments from employers.
- Pay-as-you-go systems, although reducing risk by providing regular cash flow, may still expose service providers to the risk of non-payment for portions of the project if the client defaults partway through.
- Clients paying upfront may provide security for the service provider, but it could also discourage potential clients who are wary of paying for services not yet rendered, potentially reducing the service provider's market.
- Outcome-based compensation models can be challenging to define and agree upon, as measuring "successful delivery" can be subjective and may lead to disputes between the service provider and the client.
- Risk management ...
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Importance of Understanding and Managing Risk in Business
Alex Hormozi highlights the relationship between risk-taking and compensation in entrepreneurship, emphasizing the need for a keen understanding and management of risks to attain substantial rewards.
Entrepreneurs Know More Risk Leads To Greater Rewards
Entrepreneurs like Hormozi believe that taking risks is essential for achieving greater compensation in business.
Conventional Wisdom Overrates Risk and Underrates Potential, Leading Many to Play It Safe
Hormozi suggests that humans have a tendency to overestimate the downside and underestimate the upside in risk-taking. He points out that smart people or hard workers aren't always the ones who get highly paid—it's those who take on risk that tend to earn more. Hormozi discusses the concept of "mispriced bets," using investor Howard Marks as an example, who made billions by investing in areas perceived as risky when they were not as risky as believed.
Risk-Savvy Entrepreneurs Find Opportunity in Perceived Risks
The successful entrepreneur Hormozi highlights that, to achieve outsized returns, one must bet against conventional wisdom, which typically overrates the probability of failure. He uses an example from Peter Lynch, noting that while a stock's value can only go down to zero, it has infinite potential to grow. Shifting to business models where one takes on more risk can lead to higher pay, but Hormozi notes this is advisable only when one is "good" at their craft.
He emphasizes the concept that significant rewards come to those who are bold and take on risks that aren't as perilous as they seem, as the winners finance the cost of many exper ...
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Importance of Understanding and Managing Risk in Business
Additional Materials
Clarifications
- "Mispriced bets" occur when the market incorrectly values the risk or potential of an investment. Investors identify them by analyzing data, market sentiment, and fundamentals to find opportunities where the true value is higher than the price suggests. They exploit these discrepancies by investing in undervalued assets or avoiding overvalued ones. This strategy requires deep knowledge and careful risk assessment to profit when the market corrects the mispricing.
- Howard Marks is a well-known investor famous for his expertise in risk assessment and value investing. He co-founded Oaktree Capital Management, specializing in distressed debt and undervalued assets. Marks is significant because he identifies opportunities where market fear causes assets to be undervalued, allowing investors to profit when risks are mispriced. His investment philosophy emphasizes understanding true risk rather than reacting to perceived risk.
- Peter Lynch was a famous investor known for his successful stock-picking strategies. The idea that a stock's value has limited downside means the most you can lose is the amount you invested, as a stock cannot go below zero. The unlimited upside refers to the potential for a stock's price to increase indefinitely if the company grows and succeeds. This asymmetry makes investing in stocks attractive despite the risks.
- "Betting against conventional wisdom" means making decisions that go against the common beliefs or popular opinions held by most people. Conventional wisdom in this context refers to the widely accepted ideas about what is safe or risky in business and investing. Entrepreneurs who succeed by betting against it identify opportunities others overlook because they challenge these common assumptions. This approach requires careful analysis and confidence to act differently from the majority.
- The insurance industry profits by collecting premiums from many customers who pay for protection against potential losses. "Nothing happens" means that the insured events (like accidents or disasters) do not occur frequently, so insurers keep most premiums without paying out claims. This allows insurers to earn money by managing risk pools and predicting loss probabilities accurately. Thei ...
Counterarguments
- While taking risks can lead to greater rewards, it can also lead to significant losses, and not all entrepreneurs are equipped to handle the consequences of failed risks.
- Overestimating the downside of risk can be a protective mechanism that prevents individuals from making impulsive decisions that could jeopardize their business or personal finances.
- High pay can also be attributed to factors other than risk-taking, such as innovation, market demand, strategic partnerships, and operational efficiency.
- The concept of "mispriced bets" may not be universally applicable, as what appears to be a mispriced opportunity to one investor may be accurately priced according to another's risk assessment.
- Betting against conventional wisdom can sometimes result in failure if the consensus is based on sound reasoning and accurate information.
- The potential for unlimited upside in assets or businesses is often tempered by market conditions, competition, and regulatory environments, which can limit growth potential.
- Not all entrepreneurs have the same capacity for risk due to differences in financial resources, industry knowledge, and personal circumstances.
- The idea that significant rewards come to those who take bold risks overlooks the fact that many successful businesses are built on cautious, incremental growth rather than high-stakes gambles.
- While the insurance industry profits from managing risk, it also faces challenges such as catastrophic events, regulatory changes, and market competition that can threaten profitability.
- The risk of ...
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Strategies For Increasing Leverage and Getting Paid More
Entrepreneurs have various strategies at their disposal to shift risk, reward themselves, and enhance leverage in getting paid more.
Entrepreneurs Shift Risk and Reward Via Royalties, Licensing, Warranties, and Fund Control
Hormozi suggests that understanding and managing risk is key to increasing leverage in business.
Royalties and Licensing Let Entrepreneurs Earn Without Directly Trading Time
Hormozi discusses compensation models where payment is not tied directly to time, such as royalties and licensing agreements. Royalties are payments that come off the top line revenue, historically associated with payments made to royals for the use of their property. He advises entrepreneurs to aim for payments that come off the top to ensure they get paid first and irrespective of profit and loss. An example would be agency models that take a percentage of spend or consulting agreements based on a percentage of profit or revenue.
Warranties, Guarantees, and Risk-Management Enhance Business Leverage
Hormozi further explains that entrepreneurs can offer insurance-like products such as guarantees and warranties to manage risk and increase business leverage. By taking on additional risk for a premium, similar to how traditional insurance companies operate, businesses can get paid for providing reassurances that may never be claimed, as seen with products like Apple Care.
Prioritize Entrepreneur Payment With Controlled Fund Flow
Lastly, Hormozi stresses the importance of controlling the flow of funds to ensure payment. Using the example of franchisors and payment processors, he notes that those who control the money flow - ...
Here’s what you’ll find in our full summary
Strategies For Increasing Leverage and Getting Paid More
Additional Materials
Counterarguments
- Royalties and licensing agreements may not be suitable for all types of businesses, especially those that do not have intellectual property or unique products that can be licensed.
- Focusing solely on top-line revenue ignores the importance of profitability and may encourage unsustainable business practices that do not consider the long-term health of the company.
- Offering warranties and guarantees can backfire if the cost of honoring these promises exceeds the premiums collected, potentially leading to significant financial losses.
- Controlling the flow of funds can create a power imbalance and may lead to conflicts of interest, especially if the entity controlling the funds does not act in the best interests of all parties involved.
- Taking on unaccounted-for risks can be dangerous if not properly evaluated and managed, as it may lead to unexpected liabilities that outweigh the potential rewards.
- Outcome-based bonuses and equity deals for employees can be risky and may not provide the financ ...
Actionables
- You can diversify your income sources by creating digital products that offer ongoing value without continuous effort, such as e-books, online courses, or membership sites, which can provide a form of royalty or licensing income.
- By developing content that requires a one-time effort but continues to sell, you create an asset that can generate revenue based on customer purchases rather than your time. For example, if you're knowledgeable about photography, create an online course teaching photography skills. Once it's set up, you can earn from each sale without additional work, similar to earning royalties.
- Consider negotiating a revenue share agreement if you freelance or consult, where your compensation is tied to the revenue you help generate for the client rather than a fixed hourly rate.
- This approach aligns your interests with the client's success and can lead to higher earnings potential. For instance, if you're a marketing consultant, propose a deal where you receive a percentage of the sales from the campaigns you run, ensuring that your compensation reflects the value you bring.
- Explore peer-to-peer insurance models as a way to manage risk a ...
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