Crossposted from edgeryders.eu

Many people around the world are trying to bring about change. If you are hanging out in Edgeryders, you are likely one of them. What we are trying to change, exactly, depends on individual levels of hybris. It can be personal habits, a city, a business, or the whole world. But, at any level, we have two decisions to make:

• What to start. There are many things we could attempt, but most of the interesting ones are hard. Most will fail. And our resources are scarce: we only get one or two tries every few years, at best. Which one do we pick?
• When to stop. Picture this: you have been trying to make a certain change for a couple of years. You have not completely failed: you are still standing, and making some progress. But it is not clear your succeeding, either. Your movement is gaining activists, but you are not making a dent in the issue you care about yet. Your company is viable, but it cannot afford to pay market rate salaries yet. Are you winning or losing? Should you keep at it or cut your losses and quit?

I recently spent some time going through the work of Eliezer Yudkowsky. He has a knack for applying tools from epistemology to real-life problems. He has some advice to offer, especially on what to start.

His argument is this: many things, in the world, are broken. But this does not mean they are also exploitable. An exploitable situation is one that is broken, and you can gain immediate advantages by fixing it, and no one is already trying to fix it. At least, not in the same way as you.

Financial markets are not exploitable. If you can figure out a way to “beat the market”, others will imitate you, because this will make them money. Soon everyone will be back on a more or less equal footing. In econ-speak, markets are efficient: if there is any free energy lying around, it is easy for anyone to eat it. So, there is never any free energy lying around. Yes, you economists out there, markets are not always efficient. But this is a story for another day.

Policy errors are not exploitable, for a different reason. Imagine you figure out that the Bank of Japan is making a mistake on its monetary policy. Then what? You cannot make money by delivering a better monetary policy to the people of Japan. The Bank is a monopolist. There is free energy, but you are not allowed to eat it.

So what is exploitable? Yudkoswky’s example is this: he was able to treat his wife’s Seasonal Affective Disorder. This is a common condition, and a treatment exists, but did not work in this case. So, Yudkowsky tried a tweak of the method that did not exist in the medical literature, and that turned out to work. He beat the whole medical profession to it. How did he pick this one fight? Well, he cares about his wife, of course. But besides that?

Yudkowsky thinks tractable problems are those with

a system with enough moving parts that at least two parts are simultaneously broken, meaning that single actors cannot defy the system.

Two of the broken parts in the SAD treatment are academia and academic grantmakers. Academics need to publish in the best journals, or perish. Grantmakers need to see their grants turn into publications in the best journals. Research on the effect of tweaks of existing treatments, reasons Yudkowsky, does not make the best journals. So, it is conceivable that it does not get funded: it does not happen at all. At this point he had a hypothesis: “This tweak on SAD treatment has not been researched.”

Preliminary testing of the hypothesis was easy. A session of Googling, plus skimming a second-hand book on SAD reported nothing. At this point, Yudkowsky decided that trying his tweak was worth a shot. He spent a few hundred dollars on materials (as certain type of light bulbs), and ran a test.

In the toy model of medical research above, neither academics not grantmakers have any incentive to deviate from what they are doing. Mathematicians say the model is in Nash equilibrium. Yudkowsky calls these equilibria inadequate.

The situation is: only inadequate equilibria are exploitable. But only a few of them are: inadequacy is everywhere, but most of it is unexploitable. The money quote is this:

you do not generate a good startup idea by taking some random activity, and then talking yourself into the idea that you can do better than existing companies. Even when the current way of doing things seems bad, and even when you do know a better way, 99 times out of 100 you will not be able to make money by knowing better. If somebody else makes money on a solution to that particular problem, they’ll do it using rare resources or skills that you don’t have. Including the skill of being super-charismatic and getting tons of venture capital to do it.

The solution is to “scan and keep scanning” for “winnable battles”. Warning: they are rare, not only in business but in any competitive environment. And almost always, they don’t involve fixing the systems, but improving it a bit.

Following this advice implies navigating a course between realism and ambition. You should not be modest and defer: sometimes you can do better than anyone else. But you should be humble: most of the times, you cannot.

The same attitude seems useful for deciding when to quit. Most of the times, things that do not succeed fast, will never take off. But sometimes they will. You need to “scan and keep scanning”, and decide when it is time to call it quits.

I’m curious: how do you choose your own battles? And how do you decide when to abandon the battlefield?

Photo credit: Cathy Davey on Flickr.com

In early 2017 my partners and I founded a new company in Estonia, Edgeryders Osaühing. This has become much easier since the launch of Estonia’s e-residency scheme in 2014. We explained our reasons in a separate post. It took quite a lot of research to figure out how to do it: it makes sense to share it, in the hope that it will help those of you considering the same move.

Preparation

1. Budget time and effort. In theory, starting a company through the Estonian e-residency scheme is fast and low-effort. In practice, it takes time and effort. You are, after all, dealing with a completely new (to you) legal system.  Estonian professionals are still getting up to speed with e-residency: expect glitches and misunderstandings. For us, doing it was one of those important-not-urgent things. We chose to do it on the side, with low- to no disruption of our day-by-day.  It took us about 8 months to go from decision to foundation, and another two months to get the bank account up. We spent about 1,500 EUR, including one year of assistance but excluding the e-residency charges themselves and one trip to Tallinn.
2. Take some time to understand the e-residency scheme. It’s a novel concept, and many people misunderstand it. The main things you need to know:
   • e-residency is a government-guaranteed digital identity scheme. Through it, e-residents can access Estonian online services such as company foundation, banking, taxation. They can also sign documents and contracts.
   • e-residency does not give you the right to enter Estonia, or live in it.
   • e-residents do not pay personal income tax in Estonia, but in their country of physical residence.
   • e-residency is quite well documented (starting a company through it, not so much). The official website is a good place to start.
3. Seek help.  Establishing a legal entity is useless unless you can use it to do actual business. As a foreigner, Estonia’s rules and regulation will look alien to you. Also, any company needs a physical legal address in Estonia, and PO boxes are not allowed.  Here is a list of business service providers you can hire to assist you and provide you with an address. If you are starting a one-man business, our Estonian friends recommend Leapin. Anything else will need an accountant: we are small and simple, but Leapin turned us down saying our needs are too sophisticated for their offer. Our accountant is Witismann and Partners, in Tallinn. They have been very patient and helpful. If you contact them, please mention us.
4. Beware KYC. The Estonian government is committed to fast, frictionless online services. But Estonia still has international obligations to watch out for money laundering operations. In practice, banks and accountants need you to prove your identity and residency before they can take you on as a customer. This process is called Know Your Customer (KYC). Consequences for you: paperwork, with literal paper implied. This was the single most frustrating part of our experience of incorporating in Estonia.
   • At the time of writing, banks in Estonia insist on a visit to one of their branches in person. This should change, so check back on it. Every person who wants to be a user of online banking needs to visit. Our provisional solution: one of us flew to Tallinn, opened the account and got login credentials for the online banking. This makes us operational. We will add other users later.
   • All partners had to go through KYC with the accountant, but here you can do it in remote. We tried several solutions – all bad, because this is bureaucracy at its most dreadful. The least bad we found is this:
   • Authenticate a (paper) photocopy of your passport at an Estonian embassy (see below).
   • Get a utility bill in English (or Russian or Estonian – good luck with that). If this is not possible, ask your bank to write you a letter in English certifying that you have a personal account there. Make sure it shows your physical address.
   • Send your accountant the authenticated copy of the passport and the original of the bill/bank letter.

Execution

1. Get e-residency. All partners in the company need to become e-residents. For practical reasons, it’s best to also have anyone you want on the management board to do so. Application is online and very simple, and costs 100 EUR. Once it comes through, every e-resident needs to collect her physical e-residency card in person.  Cards are not mailed, and you are not allowed to send someone else in your place. You can do this either in Tallinn or at Estonian diplomatic representations. This can be an inconvenience, because Estonia is a small country with relatively few embassies around the world (list of Estonian diplomatic missions). If you do not have one of them near, get your KYC obligations out of the way on the same day as you pick up your card.  We recommend you make 2-3 copies of your passport and get them authenticated by them while you are there. In Brussels this service is by appointment, and it costs 30 EUR per copy. Also ask the accountant if they insist on other authenticated documents, then get all the authentications done in one visit.
2. Install, test and debug the software and the hardware. E-residency cards communicate with your computer via a card reader and some software. You should not expect this to Just Work. Take time to install, test and debug. For all its pathfinding ambitions, the Estonian government is still a government, and so it runs mostly on Windows. Mac users should restart their computers before attempting to do anything with e-residency cards. Linux users should do the same, and also look at these improved installation instructions that @Matthias wrote. The cards come with cheap card readers. In general, these work, but I already had to replace mine. Pro tip: the e-residency help desk is really great and very responsive, via email or phone.
3. Incorporate. You can do this through the Company registration portal. The way we did it: we set up a Skype meeting with the accountant, and they guided us step-by-step. There are three steps.
   • One person fills a form called a “petition”. This is a request to the government to authorise the establishment of the new company.
   • Each shareholder needs to digitally sign the petition. You can save the process at any time in case one of the partners struggles with the tech. The last partner to sign sends the petition to the relevant authority by pressing a button on the site.
   • Pay a tax (at the moment 190 EUR). If you are working with an Estonian accountant (as you should), they take care of this for you. A few days later the government informs you that your company is now live, and you receive a registry number.
4. Get a bank account. At the moment, three banks support the e-residency scheme, but more should be added. Before you apply to one of the three, make sure you have a business plan ready. They will ask you questions: how much money do you think you will receive? From which countries? What are your estimates based on? Where is your money going to come from? Your accountant can help you smooth things out. In our case, I think it helped a lot that I sent them a recent profit-and-loss statement downloaded from our cloud accounting platform. We bank with LHV Pank. Our Estonian friends recommend it, because it is the only Estonian bank currently in this game, so it is the fastest to adopt government innovations as they come through. But it seems all banks in Estonia offer very competitive conditions and good service.
5. Register for VAT. Estonia has very low ceilings for operating without a VAT registration, so you will need to do this soon. Beware: whatever your turnover, you are not allowed to file quarterly returns for VAT. VAT is always monthly. To register:
   • Go to this page of the Tax and Customs Board’s website. Download the PDF form called “Application for registration as a person liable to VAT”.
   • Enter the relevant information, sign the file digitally and e-mail it to the to the TCB (kmkr@emta.ee). Processing takes about a week.
6. (Optional) change your articles of association. When you incorporate,  the E-Registry portal generates standard articles of association for you. You have no way to customise them. But you can do it later. The procedure is this:
   • Download your own articles of association from the e-Business register. To do that, access your company’s record (for example by searching for it). Then select “Documents in the business file” from the “Choose information” drop-down menu. Then add to cart and pay (2 EUR) to download the files. Two of them are the articles of association, in Estonian (pohikiri) and English.
   • Make the changes you need on the English version.
   • Get the changes translated into Estonian. Articles of association have to be in Estonian, sorry. Save this into a PDF.
   • Log into the Company Registration portal. Choose “Submission of application”. Click on “Changing the data of an enterprise ” and choose the name of your company.
   • In the page that opens, click on the button “Start the petition for an entry regarding alteration”. You are taken to a page where you can later any data of the company. Click on “Alter the articles of association”, then  “Add the articles of association as a file”. Select the PDF you saved from you computer and click on “+Add the articles of association as a file”.
   • At this point you have created a petition, like the one you created for incorporation. Next, shareholder need to digitally sign the petition and send it to the authorities for approval.