Do you ever get involved in risk sharing conversations, either as the buyer or the seller, but don’t quite know how to construct a reasonable risk sharing model? I’m going to provide you with a template for risk sharing, and I’ll explain why it needs to be deconstructed from price and value.

How to build equitable risk sharing

The following 6 steps outline a process for reaching an equitable arrangement on risk sharing between you and a client.

  1. Make sure that the value you are delivering is excellent.
  2. Make sure that your price for that value is fair. This is to ensure discounting and risk sharing are not confused.
  3. Make sure the case for change has been well established.
  4. Make sure that your value has been clearly explained
  5. Assess your own appetite for risk.
  6. Sell that risk multiplier.

Template for risk sharing

In order to calculate the risk multiplier we first need to assess the risks, examples of this include:

  • Our own execution under-delivers (20%).
  • Sales executes poorly (50%).
  • Other execution failures (30%).
  • Market appetite is too low (50%).
  • Product doesn’t meet the market need (50%).

These factors and percentages lead to:

  • 200% factor for risk
  • Risk multiplier = 2.0
  • Upside return (derisked) = 50%
  • Risk appetite (positive or negative) = -20%
  • Total risk sharing multiplier = 4.0

Note: The percentages above are an assessment based on this example, they will differ across varied situations.

I hope you got value from that. There is a copy of the template in the reference notes, so you can use it yourself. Lots more lined up for next week.



Link to Risk Sharing Template