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Signal Talent Value

Make a single visible, costly, and seemingly disproportionate gesture toward a specific instance of what you want to attract — paying far above market for one hire, open-sourcing infrastructure at significant cost, giving a prominent advisor equity far above their current contribution — to send a credible market signal that you value that category highly; because the costliness of the gesture is what makes it credible as information, and a credible signal attracts far more of the high-value talent or partners than direct recruiting or claims about valuation can.

Why This Is Best Practice

Origin: The Zhan Guo Ce (战国策, "Strategies of the Warring States," ~3rd–2nd century BC) contains the story of 千金买骨 (paying a thousand gold for bones): a king who wished to acquire exceptional warhorses (a scarce and strategically critical resource in the Warring States period) was told by an advisor to first buy the bones of a dead prize horse at the price of a living one — a grossly inefficient and apparently wasteful transaction. The king was bewildered: why pay a thousand gold for bones that have no strategic value? The advisor's answer: because when the news spreads that you are willing to pay a thousand gold even for bones, the owners of living prize horses will know what you will pay for the living horse. Within a year of purchasing the bones, several exceptional living horses were brought to the king.

The mechanism the advisor identified is precisely what Michael Spence formalised as signaling theory in his 1973 paper "Job Market Signaling": in markets with information asymmetry (the seller knows the quality of what they offer; the buyer cannot easily evaluate it), costly signals that would only be worth making if the signaler genuinely has the underlying attribute serve as credible information to the market. The dead horse bones are worth nothing to someone who doesn't genuinely intend to pay well for exceptional living horses — so buying the bones at high price is a signal that only a genuine high-payer would make. The market updates its estimate of the king's willingness to pay, and the supply of living horses adjusts accordingly.

Adopted by: The costly signal mechanism explains a range of talent and partner acquisition strategies that appear irrational in isolation but are economically rational as market signals. GitHub's acquisition by Microsoft in 2018 for $7.5 billion — perceived by many as a premium above the platform's fundamental value — served as a credible signal to the developer community that Microsoft was genuinely committed to developer tools and open-source development, reversing the company's decades-long reputation for developer hostility. The signal cost was real; the benefit was the shift in developer perception that enabled Microsoft to build VS Code into the dominant code editor and Azure into a developer-preferred cloud platform. Without the costly signal of the GitHub acquisition, Microsoft's stated commitment to developers would have been discounted as incremental PR. With it, the market updated.

Netflix's early content investment strategy operated as a costly signal: licensing premium content at prices that competitors argued were unsustainable was a signal to content producers that Netflix was a serious and generous buyer. The signal attracted content relationships that built Netflix's library into the streaming market's dominant catalogue, enabling the subscriber growth that eventually made the content economics sustainable. The early overpayment was not waste — it was the cost of a credible signal in a market where content producers had strong reasons to believe that streaming platforms would not maintain their initial terms.

Steve Jobs' return to Apple in 1997 began with a visible costly signal: the agreement to pay Microsoft $150 million and to bundle Internet Explorer as the default browser on Macs. This was concession that Apple's own employees and customers found inexplicable. But it signalled to the enterprise market — which needed cross-platform compatibility — and to the developer community — which needed assurance that Apple was committed to stability rather than fighting unwinnable wars — that Jobs was prioritising Apple's survival over symbolic competitive battles. The signal cost was real; the information it conveyed (we will be pragmatic, not dogmatic) was worth far more to the target audiences than any press release.

Impact: The alternative to costly signaling in talent-scarce or partner-scarce markets is direct recruiting and direct negotiation — which faces a fundamental credibility problem. In markets where many parties claim to value the same talent highly, claims of high valuation are free to make and therefore carry no information. Every company claims to offer a great culture, excellent pay, and exceptional missions. The sophisticated talent or partner that is genuinely exceptional has heard all of these claims and discounts them appropriately. A claim that costs nothing to make cannot be distinguished from a lie. A costly signal — one that would be irrational to make unless the underlying attribute is genuine — cannot be faked, and therefore carries real information.

Why best: Direct recruiting methods work for the median talent market, where credibility is not required because the talent is not scarce enough to demand it. For the specific categories of talent or partnership that are genuinely difficult to attract — where every competitor claims to value them, where the talent or partner has real options — direct recruiting fails because the signal quality is insufficient to distinguish genuine commitment from performative recruitment. Costly signals solve this problem at a specific cost: the gesture itself is expensive, but the information it conveys is disproportionately valuable if it successfully shifts the market's estimate of your commitment level.

Sources: Zhan Guo Ce 战国策 — "Yan Ce Yi" 燕策一 (~3rd–2nd century BC); Spence, "Job Market Signaling," Quarterly Journal of Economics (1973); Akerlof, "The Market for Lemons," Quarterly Journal of Economics (1970); Zahavi, "Mate Selection — A Selection for a Handicap" (1975)

Steps

Step 1: Diagnose the recruiting failure — is it a signal problem or a product problem?

Costly signaling only works when the underlying product is real. If the reason exceptional talent is not joining is that the company's actual compensation, culture, growth, and impact are genuinely below market — a product problem — a costly signal will attract initial interest that quickly converts to disappointment and departures. The signal mechanism works when:

• The company genuinely has something valuable to offer the talent category it is trying to attract
• The reason the talent is not joining is that they don't believe the offer is real or that the company is genuinely committed to that talent category
• The company's claims are being discounted not because they're wrong but because they're indistinguishable from competitors' claims

If the reason talent is not joining is that the product (compensation, culture, mission, growth) is genuinely inferior, fix the product first. A costly signal of poor product is a waste of money.

Step 2: Identify the specific gesture that would function as a credible signal to the target audience

The gesture must be:

• Costly enough to be informative: A gesture that would be worth making even without genuine commitment is not a signal. The cost must be high enough that only a party who genuinely values the category would incur it.
• Visible to the target audience: The signal must reach the people you are trying to attract. A gesture made privately has no signal value. The bones were purchased publicly; the news spread.
• Relevant to the target audience's concerns: The signal must address the specific uncertainty that the target audience has about your commitment. If developers doubt your commitment to open source, the signal should be an open source contribution. If enterprise candidates doubt your stability, the signal should demonstrate long-term commitment.
• Genuine, not theatrical: Sophisticated audiences can identify theatrical gestures (commitment that will be withdrawn when convenient) from genuine ones. The signal must be actually costly and actually irreversible.

Types of effective costly signals:

Signal type	When to use	How it works
Above-market compensation for one high-profile hire	When the talent market doesn't believe you pay well	The single hire's compensation is public knowledge in the market; it updates the market's estimate of your pay
Open-source a core technology	When developers doubt your commitment to the ecosystem	Open-sourcing is costly (you give away IP and investment); it signals you value the developer relationship over IP protection
Overpay for a prominent advisor's equity	When your ability to attract talent is limited by network access	The advisor's public association is a signal; the above-market equity signals that you value the network access, which the advisor's network will interpret as valuing them
Make a costly public commitment to a talent category	When a talent category feels commoditised or undervalued by your industry	The commitment signals you understand their value; making it costly (board commitment, compensation policy, public statement) makes it credible
Reject a profitable opportunity that conflicts with stated values	When talent doubts that your stated values are genuine	Forgoing real profit to maintain values is costly; it's the only way to prove the values are real rather than instrumental

Step 3: Deploy the signal once, visibly, without hedging

The signal achieves its information value through two channels: the content (what you paid) and the method (how clearly you paid it). Hedging the signal — making the gesture while qualifying it, suggesting it is exceptional, or framing it as temporary — reduces its information value. The market will update based on what you did, not on how you framed it.

Make the gesture:

• At the full intended magnitude, not a reduced version designed to test the market response
• Visibly, so that the target audience receives the information
• Without explicit requests for reciprocal benefit from the specific recipient — the signal is for the market, not for the recipient alone

The dead horse bones were purchased for the full thousand gold, not for nine hundred gold to leave room for negotiation. The information transmitted was "we will pay a thousand gold for bones"; nine hundred gold would have transmitted a different signal.

Step 4: Allow the signal time to propagate before evaluating its effect

The signal mechanism works through market updating, which takes time. Exceptional talent does not immediately appear the day after a costly signal is made — it takes months for the information to propagate through networks, for word-of-mouth to carry the signal to the right audiences, and for potential recruits or partners to make decisions based on the updated information.

Evaluate the signal's effect over a 6–12 month window, not in the weeks immediately following the gesture. The evaluation metrics:

• Change in inbound interest from the target talent or partner category
• Change in offer acceptance rates from the target category
• Change in the quality distribution of candidates in the target category

If the signal has worked, inbound interest and acceptance rates from the target category will have increased. If they have not, the signal may not have reached the target audience (distribution problem), may not have been sufficiently costly to be informative (magnitude problem), or may have been addressing the wrong uncertainty (targeting problem).

Step 5: Do not dilute the signal with multiple smaller gestures

A series of smaller gestures does not add up to one large costly signal. Each small gesture is individually cheap enough to make without genuine commitment, and therefore carries low information value. The signal mechanism requires that each individual gesture be costly enough to be informative on its own.

If budget constraints prevent a single costly signal at the required magnitude, delay until the magnitude is achievable — or identify a different signal type that can be made at the required scale with the available resources. A developer-focused company that cannot open-source its core technology yet can make a large, unconditional grant to an open-source foundation: the grant is a single costly gesture of the required magnitude.

Rules

• Fix the product before signaling it. A costly signal of poor product is a waste — it attracts initial interest that converts to disappointment. Verify that the underlying value you're signaling is genuine before incurring the signal cost.
• The signal must be costly to be informative. A gesture that would be worth making even without genuine commitment carries no information. The cost is the credibility mechanism. If the gesture feels cheap or convenient, it is not a signal.
• Make the signal once, at full magnitude, without hedging. Hedged signals, signals deployed in reduced form to test market response, and signals that come with explicit expectations of reciprocal benefit are not the same as unhedged costly signals. They carry reduced information value.
• Target the signal to the specific uncertainty of the target audience. The signal must address the particular reason the target talent category is not joining. If the reason is compensation disbelief, the signal must be compensation. If the reason is culture disbelief, the signal must be a costly cultural demonstration. A signal targeting the wrong uncertainty is expensive but not effective.
• Allow 6–12 months for propagation before evaluating. Costly signal effects are transmitted through market networks, which take time. Evaluating within weeks misses the mechanism entirely.

Examples

千金买骨 — the original case: A Warring States king who wanted exceptional warhorses sent an advisor on a mission to find them. The advisor bought the bones of a dead prize horse at the full living-horse price: a thousand gold. The king was confused and angry — a thousand gold for useless bones. The advisor explained: word will spread that you paid a thousand gold for bones. Anyone with a living prize horse will know that you will pay more than that for the living horse. Within a year, exceptional living horses arrived. The bones were not the purchase — they were the signal. The thousand gold was the cost of information transmission, not of a horse.

Microsoft's GitHub acquisition (2018): Microsoft acquired GitHub for $7.5 billion — a premium that many analysts considered excessive for a company with limited revenue at that time. The signal it transmitted to the developer community: Microsoft was genuinely committed to developer tools, open-source development, and the ecosystem that GitHub represented. This signal was credible because it was costly — $7.5 billion is a real commitment that Microsoft could not easily reverse. The developer community, which had been hostile to Microsoft for years due to its history with open source, updated its perception. The downstream effects — VS Code becoming the dominant code editor, Azure becoming a developer-preferred cloud platform, GitHub Copilot becoming a significant product line — were made possible by the market update the signal produced. Without the costly signal, Microsoft's claims of developer commitment would have been discounted as marketing.

Netflix's early content licensing strategy: Netflix licensed content at prices that competitors (and some Netflix investors) considered unsustainable — overpaying for a catalogue that would attract subscribers. The signal to content producers: Netflix is a serious buyer who will pay well for quality content and will maintain its terms. This attracted content producers to make deals with Netflix that they would not have made with a platform they believed would retrade on initial terms. The catalogue built through these early agreements was the foundation for Netflix's subscriber growth, which eventually made the content economics sustainable. The overpayment was the cost of the signal; the content producers' willingness to make long-term deals was the return.

Stripe's developer investment as talent signal: Stripe invested heavily in its developer documentation — often described as the best in the payments industry — at a time when most payment companies treated documentation as a cost to minimise. The investment in documentation was a signal to the developer community: Stripe values developers' time and is willing to incur real cost to make their experience excellent. This signal attracted developer talent who valued working on products treated with that level of care, and it attracted developer adoption that built Stripe's distribution network. The documentation investment was a costly signal to both talent and customers simultaneously.

Common Mistakes

Using the signal as a PR exercise rather than a genuine costly commitment: A signal that is framed as marketing — where the company simultaneously announces the gesture and requests public credit for it, and where the gesture can be reversed — is identified by sophisticated audiences as theatrical. The signal value comes from the genuine costliness and irreversibility of the gesture. Theatrical signals attract attention but do not produce the market updating that genuine costly signals do.

Diluting the signal into a series of smaller gestures: Many small gestures add up to visible activity but not to a credible signal. Each individual gesture must be costly enough to be informative on its own. A company that makes twenty small gestures toward developers — each one individually cheap to make — has spent the equivalent of one large gesture without producing the signal value. Concentrate the investment into single, clear, costly gestures.

Targeting the wrong uncertainty: Spending the signal cost on something that does not address the target audience's actual uncertainty about your commitment is expensive and ineffective. If exceptional engineers doubt your technical culture, a signal about compensation will not attract them. Understand what the target audience is uncertain about before choosing the gesture.

Evaluating before propagation: Measuring the signal's effect in the weeks after the gesture, concluding it didn't work, and abandoning the strategy too early. Market updating through network propagation takes months. Evaluate at 6–12 months with clear metrics (inbound interest, acceptance rates, quality distribution) rather than in the immediate aftermath.

Signaling a product you don't have: The signal mechanism attracts talent based on their updated estimate of your commitment. If the underlying product — compensation, culture, mission, opportunity — is not what the signal implies, you will attract initial interest that converts rapidly to disappointment and departure. The signal should be a credible indicator of genuine value, not a marketing claim for a product you intend to build later.