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Slicing Pie Handbook by Mike Moyer

Slicing Pie Handbook by Mike Moyer

by Parker · 197 things on Twos

Perfect Equity Splits for Bootstrapped Startups
The slicing pie principle: % share of the reward = % share of what’s at risk
Foreword
73% of teams split the equity within the first month of the startup, at the heights of the uncertainty about their startup’s strategy and business model, their roles in it, and their levels of commitment to it
The most common “organic” approach is to adopt vesting, in which the individual has to earn his or her equity stake instead of being granted it fully at the time of the split.
In the U.S., this vesting is almost always time-based, but about 10% of teams adopt milestone-based vesting, which requires clearly-definable milestones, a concrete division of labor within the team, and other characteristics lacking in many founding teams.
Vesting is a huge improvement over the static splits that pervade Founderdom. However, in many cases, time is a weak proxy for the creation of value in a startup, making it an imperfect basis on which to split.
Chapter One: Meet Slicing Pie
It is designed for bootstrapped startups and is used prior to cash flow breakeven or the first major funding event.
When a person contributes to a startup company and does not get paid for their contribution, they are putting their contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at-risk is knowable. It is equal to the fair market value of the contributions.
If you simply keep track of what people bet, you can calculate exactly what portion of the rewards they deserve.
Slicing Pie is dynamic model because it changes over time. This is because every day brings more bets of time, expenses, facilities, supplies and anything else the company needs to move forward. Keeping track of these things takes a little discipline, but it’s not a huge deal and the benefits are enormous.
If you invested $100,000 in a company that has a post-money valuation of $1,000,000 you would have 10%.
Sooner or later, all splits will need be adjusted. In traditional equity models, the split often adjusts—incorrectly—after some kind of founder conflict.
The Allocation Framework that tells us how much each person should get; and,
The Recovery Framework, which tells us what to do when someone leaves the company.
If the company pays you your full market rate you are not putting anything at risk and, therefore, deserve no equity. If the company pays you less than your market rate, then you deserve equity in proportion to the amount that you’re not getting paid. The same goes for the recent grad.
There are two primary types of contributions a person can contribute to a startup: cash and non-cash. For example, time is a non-cash contribution and an unreimbursed expense is a cash contribution.
In most cases, it is much harder to save money than it is to earn money. Therefore, the person who contributes cash to a company is putting more at risk than the person who contributes time or other non-cash contributions.
Your share % = the adjusted fair market value (FMV) of your contribution / the total adjusted FMV
Your share % = your slices / all slices
People contribute money, time, ideas, relationships and other resources.
In the Slicing Pie model, whether they are investing cash, time or other resources they can rest assured that at any given time they will always have exactly what they deserve relative to every other person, who will also have exactly what they deserve.
There are four different situations under which a person can leave a company:
Termination for cause
Termination without cause
Resignation for good reason
Resignation for no good reason
Let’s say, in our example above, that instead of selling in the second quarter, Norvin decided to bail out because he found a high-paying job somewhere else. This is resignation for no good reason. It may be a good reason to Norvin, but it’s not a good reason for the company. In the Slicing Pie model Norvin bears the brunt of the cost and he would lose the equity he earned for any intangible contributions like time. (Tangible contributions like money and equipment are treated a little differently to mitigate the potential for fraud.) For simplicity’s sake, we’ll pretend that Norvin only contributed time to the business. When he leaves he will lose his equity. Ouch! This isn’t great for Norvin, but leaving means the company must scramble to replace him and this causes a great deal of pain for the company. If he wants to keep his share he should see the project through to the end. After he leaves, Anson owns 100% of the company, but has no partner.
The calculations are not reflections of actual value; they are simply ways of determining the right split and aligning incentives. The company’s actual value is still virtually nothing.
Let’s say that Anson decides that the company should move to be closer to their largest client, who is 500 miles away. Merrily doesn’t want to uproot her family and move and decides to resign. This is resignation with good reason. Anson’s decision to move the company puts Merrily in a bad situation through no fault of her own. In this case, the company must bear the cost of this departure. Merrily is allowed to keep her slices in the company.
Everybody is happy. Even Norvin is happy in his new job knowing that it was his choice to leave the company and that he doesn’t deserve a slice of its success because he left them hanging when they needed him.
Instead of wrestling alligators you can concentrate your attention on building a company with people who want to treat you fairly.
Chapter Two: Fix & Fight
There are lots of reasons traditional models cause problems, but the main problem is that most people use fixed equity splits based largely on future value creation. A fixed split means that chunks of equity are doled out to participants in pre-set amounts in anticipation of them creating value for the firm. Startup founders are nothing if not optimistic, but accurately predicting the future is a skill that eludes most mortals. Couple that with the impossible task of measuring value-add and you have a recipe for failure. Of course, when things don’t go perfectly according to plan, the team will have to go back to the drawing table, renegotiate the split and argue about value creation. The new split will rely on their new prediction of the future which, like the old one, will also be wrong.
Chapter Three: The Slicing Pie Principle
The Slicing Pie Principle is: Your % share of the reward = Your % share of what’s at risk
The reward I’m talking about is financial and comes in the form of profits/dividends or the proceeds of a sale. What’s at risk are contributions of time, money, ideas, relationships or anything else participants invest in a startup and don’t get paid.
Everyone deserves a slice of the rewards that properly reflects their slice of what’s put at risk to achieve those rewards.
Slicing Pie is about doing right by those who help your company succeed.
After breakeven, an individual’s new contributions are no longer at-risk, because they are getting paid.
Slicing Pie is used before breakeven. Equity is based on what people put at- risk. After breakeven everyone is getting paid, so equity is no longer about what’s at-risk.
After breakeven or in established companies, equity is sometimes part of a bonus or retention strategy.
Your Share (%) = What you put at risk / Everything that's at risk
Slicing Pie is not complex. It is simple and obvious. To apply the model, however, you will have to keep track of what each person puts at risk.
Even if a fair allocation could be achieved using a fixed model, the allocation would cease to be fair the moment something changes or unanticipated events occur. All startups go through change.
The allocation framework tells you how to give slices to individuals as they make contributions to the company. It is a dynamic model, meaning that it changes over time. This means that at any given time all participants will have exactly what they should have, regardless of changes in the strategy or the team. With fixed allocations, it is impossible to have a fair split—each person always has too much or too little.
The recovery framework tells you what to do when someone leaves the company. In some cases, the company will be able to recover outstanding slices for no or low cost; in other cases, the person leaving will be entitled to keep their share or sell it back at a fair premium. It depends on the nature of the separation. The recovery framework ensures that each participant understands the consequences of their decisions as they relate to ongoing participation in the firm.
An absentee owner is someone who owns equity or profit sharing in your company but is no longer actively involved. It is best to avoid this situation if possible. The recovery framework provides a means for buying out ex-employees if and when appropriate.
Greed is when a person has a strong desire to have more than they deserve. A person may act within the law to capture value for themselves at the expense of others, but just because something is legal doesn’t mean it’s fair.
The amount of risk each participant is accepting when they make a contribution is very specific and measurable. It is equal to the amount that they otherwise get paid by someone else for the same contribution. This amount, also known as “fair market value,” is easily observable in the marketplace.
The fair market value of a year of a person’s time, for instance, is equal to their salary for a similar job at a company that had the means to pay. So, if you forego that salary to work for a startup (doing similar work), you are betting that amount of money. The opportunity cost of working for a startup is equal to the amount of money you would have earned elsewhere doing a similar job.
The only reason a rational person would be willing to join a startup and accept this risk is if they believe that their ultimate compensation will far exceed the amount they would otherwise get paid. Unfortunately, the chance of this happening is very low, and the risk of receiving nothing is very high. Indeed, startups are extremely risky.
A “slice” is a fictional unit of measure that reflects the adjusted at-risk contributions made by individual participants. Slices will allow you to calculate equity or profit sharing. This is not the same thing as a share, which is a legal unit of ownership.
You and your team can keep track in whatever level of granularity that you are comfortable with, but I recommend logging hours on a daily or weekly basis and organizing time and expenses based on projects.
Like many things in business, keeping track of time and money can be tedious. The Pie Slicer application is an online tool that is designed to make this process as painless as possible. You can find it at SlicingPie.com
Individual's share (%) = individual's slices / total slices of all participants
All fixed splits become unfair the moment something changes, leading to disagreements among early participants that can escalate and possibly destroy a company.
The Slicing Pie model is a framework for the fair allocation and recovery of equity or profit sharing based on the fair market value. The fair market value of a contribution is the amount of money that the contributor would have been paid by someone else for the same contribution in a given market. This, combined with a risk multiplier/normalizer, gives us everything we need to calculate a perfectly fair split among all participants in a startup.
At the heart of the Slicing Pie model is a moral contract. It is about doing right by those who help you succeed.
Chapter Four: Allocation Framework
Non-cash contributions include time, ideas, relationships (that turn into customers, suppliers, employees or investors), pre-owned equipment or supplies, and some resources such as office space.
Cash contributions consist primarily of unreimbursed expenses and, of course, cash.
Individual's share (%) = individual's slices / total slices of all participants
If you use this model, you will always have what you deserve. You may not have what you desire, but you will certainly have what you deserve.
The only real certainty you get from a fixed split is the certainty that you will have to renegotiate your split when something doesn’t go as planned!
Renegotiating an equity split is a painful experience that rarely leaves people feeling good. It puts startup participants at odds and can easily lead to the demise of the business.
To convert an individual contribution into slices, simply multiply the fair market value of the contribution (less cash payments) by the cash or non- cash multiplier. You subtract cash payments, if any, because cash payments reduce the amount of risk taken. If the company pays 100% of the fair market value it shouldn’t have to provide equity at all because the individual isn’t putting any salary at-risk.
Think of the multipliers as a built-in retention tool for companies and a built-in severance program for employees.
I recommend a non-cash multiplier of two (2x) and a cash multiplier of four (4x). These numbers are set based on my personal experience with the model and they are important. Resist the urge to change them! The multipliers make the model work. Without them, you will be less successful in achieving a fair split.
Cash is given a higher premium because it’s much harder to save money than it is to earn money. Most (not all) people have more time than money. The higher multiplier provides incentives to people to contribute cash. After all, cash is king!
Non-cash calculations use pre-tax dollars and cash calculations use post-tax dollars.
Investors want to make sure that managers make smart decisions with their money. A higher multiplier for cash means that startup managers will think twice before spending money knowing that cash is more “expensive” than non-cash when it comes to slices. This not only helps ensure they are being conservative with cash, but also provides an incentive to generate revenue faster. This is what investors want. The higher cash multiplier aligns the interests of the management team and the investors.
The risk may appear to go down as the company gains traction and generates revenue, but if the company loses a major customer, the risk may go up. Similarly, if a company grows so fast that they can’t provide a meaningful level of service, risk could go up.
For best results, make sure your cash multiplier is more than your non-cash multiplier and that your non-cash multiplier is higher than one.
Slices = Fair Market Value x Multiplier (Cash or Non-Cash)
Chapter Five: Cash Contributions
A cash contribution is a contribution that consumes an individual participant’s actual cash, usually in the form of an unreimbursed expense or cash expenditure from the company account. A cash contribution can also be tangible property with cash value like equipment or supplies.
Slices = Fair Market Value x Cash Multiplier
If you’re dealing with actual cash, then the fair market value is equal to the amount of cash spent. If the cash isn’t spent, it’s not at risk. It’s just sitting in the bank. Slices get allocated when the cash gets spent.
The Well is a pool of funds from which managers can make payments. They can use the money for whatever they need to, subject to the restrictions of the investor, if any. You can pay salaries or rent, for instance, with money you draw from the Well.
Money in the Well does not convert to slices at the time of deposit. Instead, slices are created when the company spends the money.
When money is drawn from the Well and put into a company checking account to pay bills, it converts to slices for each Well participant in proportion to their current ownership of the Well money.
Norvin pays $2,500 for the cost of an attorney to write a customer contract and does not get reimbursed from the company account. Norvin would receive 10,000 slices.
It is not customary to reimburse commuting expenses.
Generally speaking, if it’s not customary to cover an expense for employees in your country or local market, you don’t have to provide Pie.
Slicing Pie does not take a person’s risk tolerance into account when calculating slices. It only accounts for actual at-risk contributions. If someone has a low tolerance for risk, they may feel a high level of anxiety when contributing money to a startup. This doesn’t change the fair market value of the money, however.
Fair Market Value = Amount of Cash Spent
Slices = Price Paid x Cash Multiplier
Transferring ownership of a pre- owned asset into a company isn’t the same as spending cash. It’s a non-cash contribution. Therefore, it represents a different level of risk and slices are at the non-cash rate. If the supplies or equipment are less than a year old, the model uses the purchase price.
Slices = Price Paid x Non-Cash Multiplier
If the supplies or equipment are more than a year old, the model uses the resale price. You can find the current resale price fairly easily by looking on eBay.com, Craigslist, or industry classified listings for similar supplies or equipment.
Slices = Resale Price x Non-Cash Multiplier
It’s important to note that when slices are received, the supplies and equipment become the property of the company. This means that if the person who contributed the equipment leaves the company, they can’t take the stuff with them.
In many cases, personal laptops or cellphones used in building the company would not be treated as contributed equipment and people who own them would not receive slices. The company, therefore, would not own these items and departing employees can take them when they leave.
Small amounts of supplies brought from home may not warrant slices. Use your best judgment here; a person probably doesn’t deserve slices for bringing a tape dispenser and some old pens to the office.
Chapter Six: Non-Cash Contributions
To convert non-cash contributions into slices, use the following calculation: Slices = Fair Market Value of Contribution x 2
A manager should ask herself, “If I could pay cash for this person’s services, how much would I pay?” A potential employee should ask himself, “If this company paid me and did not give me equity, how much would I be perfectly happy to accept?” If there is an overlap between these two numbers, a deal can be struck; if not, you can part ways as friends.
Once you agree on the fair market salary for your job, you will want to convert the annual salary into an hourly rate. Do this by dividing the entire amount by 2,000, which is roughly the number of working hours in a year (40 hours times 50 weeks). I’m assuming at least two weeks of vacation time here.
On a side note, I recommend an open vacation policy. This means people can take as much time off as they need as long as their work is getting done. This not only treats people like adults who can manage their own time, but it also avoids the problem of managing slices for paid time off.
Slicing Pie automatically rewards extra work if you are using the hourly rate. So, if someone works 50 hours per week they will contribute slices for 50 hours of work instead of 40 hours (a full-time work week in the US). Slicing Pie provides incentive for putting in the extra work as necessary.
The paid portion of the salary does not reward extra work in the same way. In addition to rewarding extra time, this provides a disincentive to take cash from the company, which is what you want if you’re trying to conserve cash.
Fair Market Value of Time = Hours x Hourly Rate (plus overtime, if applicable)
Few things will give you better insight into what is going on with your startup company than a time report. If you don’t know what people are spending time on, then you probably don’t have a good handle on your business.
Your time log reports are an excellent coaching tool for helping people to better manage their time and become more productive.
A quick review of the reports showed that very little of the teams’ time had been spent on selling. Most of their time had been spent on development, customer service, research and other administrative tasks. They turned their attention to getting out and selling and within a few weeks they had some new customers. Without a good understanding of how time was being spent, this guy may still be scratching his head.
Time reports will not only tell you what someone is focusing on, but how productive they are. If someone is taking a lot of time to do simple tasks, you have a management issue with that person.
If you have a chronic time-waster, you may have grounds for termination with cause.
Time spent on a startup does not magically make it more valuable. You are expected to perform at the same level for a startup that you would be for a real job. More experienced people usually have a higher hourly rate, which encapsulates their skills, education and expertise. You pay more for good employees because they can produce more for less money. You also pay more for good employees because they are supposed to come up with more great ideas than other employees.
A good bonus program should be tied to company performance. A bonus program may not make sense for a company that isn’t making money.
I recommend a payment schedule that increases the buyout price to 200% of the base price for freelancers
Fair Market Value of Time = Hours x Rate
Think about it this way: a normal employee charges an annual rate and gets the benefit of being able to keep his slices (subject to termination rules). A contract employee charges a contract rate and, in exchange for a higher rate, is subject to a buyback. At the end of a year the company can’t force a buyback.
If the contractor is going to be working with you over an extended period of time, it would be better to negotiate a fair market salary and include them as an employee, rather than a contractor. Because contractor rates are so much higher than full-time rates it’s not fair to the other employees. Use contractors for limited engagements.
In the context of fairness, slices are only given when the fair market value is put at risk, and the way to determine the fair market value of the idea is to determine what kind of compensation an inventor would otherwise receive. In the non-startup world, an inventor of an idea often receives a royalty on revenues. Inventors, authors, and musicians routinely collect royalty checks as compensation for their ideas.
Royalties generally apply to “the” idea that is the idea upon which a company is founded. Ideas generated “on the job” usually don’t get royalties. If you work for a company, coming up with great ideas is part of your job.
Fair Market Value of Ideas = Royalty Rate x Revenue Generated from Ideas
A well-connected person who simply makes introductions may not deserve slices. But a person who can help convert them into value certainly does. Relationships turn into value when they lead to revenues, investments, or other formal relationships with the company.
When relationships turn into sales, the individual responsible for the sale is generally entitled to a sales commission on the revenue generated. Rates will vary by industry, but a commission of 5%-10% is typical. Pay the rate that is appropriate for your industry and make sure you pay the same commission to all salespeople.
Fair Market Value = Revenue x Commission Rate (%)
Founders and other senior managers do not generally take a commission, for instance. Advisors usually don’t take commission either.
When someone’s relationship creates a new investment, that person would be entitled to a finder’s fee. But again, they should do more than just make an introduction; they should stay active throughout the process as needed.
A typical finder’s fee would be 5% for the first $1,000,000 and 2.5% for every million after that.
Fair Market Value = (First Million x 5%) + (The Rest x 2.5%)
Sometimes, a relationship will turn into a new hire. In these cases, a referral fee may be appropriate. Choose an amount you are comfortable with and offer it to anyone who refers an employee. Typically, you would wait at least six months before providing the slices, so you will have time to make sure the employee sticks around!
$250 to $500 is a good place to start. Referral fees are quite common in the United States and can be a great way to reward current employees for participating in the recruitment process.
Fair Market Value = Market Rate Rent for Space Used
Chapter Seven: Recovery Framework
There are four primary reasons an individual would separate from a company:
Fired for Good Reason
Performance-related issues are the most common. But, if there is a performance issue, the individual must be given a chance to correct their behavior. I recommend at least two warnings with a clear outline of the performance issue and what needs to be done to correct it. It’s not fair to fire someone for performance-related issues without first giving them the chance to correct their behavior.
Other good reasons to fire someone would be stealing, sexual harassment, threatening coworkers, drug abuse, and other extreme behavior.
When an employee is fired for good reason, their decisions negatively impact the company. Consequently, they will lose any slices allocated from contributions except supplies, equipment and cash contributions which would be recalculated without the multipliers. Additionally, the company has the right (but, not the obligation) to buy back the equity in an amount of cash equal to the outstanding slices.
Lastly, the employee should agree not to compete directly with the company or cause the other employees to leave. It doesn’t matter if a non-compete or non-solicitation isn’t enforceable by law in your market, it’s not fair to be fired and then go work for a direct competitor or steal employees.
Removing the multipliers has created a consequence for the employee. Knowing that this is the consequence forces employees to think twice before slacking off and hurting the company, or choosing to engage in other negative behaviors.
Startups are fragile businesses and they can’t afford to have deadbeat employees who do bad things.
Fired for No Good Reason
If the employee is fired through no fault of their own (also called “without cause”), they get to keep all their slices.
The company can offer to buy the slices back in an amount of cash equal to the outstanding slices, but the employee should not be obligated to sell.
If a management team terminates an employee through no fault of their own they should be prepared to face consequences that include compensating the employee for the risk they accepted by participating in the startup.
The company can’t prevent the individual from going to work for a competitor either. It’s not fair to fire someone for no reason and then limit their job prospects. This doesn’t mean the person can steal ideas and customers, but it does mean they can go join the competition.
The company would be within their right to ask for a non-solicitation agreement which prevents the employee from hiring the company’s employees within a specified period of time (usually one year).
Resigned for Good Reason
The good reasons include:
Adverse change in title or responsibilities. If the Vice President of Marketing was demoted to the Head Burger Flipper, the person would have a good reason to leave.
Adverse change in compensation that does not affect other participants at the same level. If the management team cuts the individual’s salary or raises their own by significant amount, but does not take similar action against others at the same level.
Relocation of the company more than 50 miles from its original location. The person may not be able to manage the commute. Extending the commute puts an unfair burden on the employee.
Death or disability. This happens, unfortunately.
Adoption of the Slicing Pie model after a fixed-split agreement is in place. If you’re retrofitting Slicing Pie a person may want out of the deal. In fact, any unexpected change of a person’s equity would be good reason.
Changes to Pie Settings. This, in effect, changes the compensation program.
Leaving a company for good reason is essentially the same as being fired for no good reason. The employee gets to keep all their slices. The company can offer to buy the slices back for an amount of cash equal to the outstanding slices, but the employee should not be obligated to sell. They should not be asked to agree to a non-compete.
Resigned for No Good Reason
Perhaps they no longer believe in the company’s vision, perhaps they found a better job somewhere else, or perhaps they won the lottery and want to retire. It may be a good reason for them, but not for the company. No matter what the reason, they are leaving a company that needs them and will have to suffer the consequences, which are the same as being fired for good reason.
They will lose any slices allocated from contributions except supplies, equipment and cash contributions which would be recalculated without the multipliers.
The company may buy back the slices if they have the money and a non-compete/non-solicitation agreement would be appropriate.
This is the same consequence as being fired for good reason. If employees make choices that adversely impact the company, they have to suffer the consequences.
It’s best to sever ties completely with someone who may have left on anything but amicable terms.
When you buy someone out who was terminated for good reason or resigned for no good reason you are essentially paying them back for cash and tangible contributions. Their “investment” of time, money and other contributions didn’t pay off, which is fine because leaving was their fault or choice anyway.
When you buy someone out who was terminated for no good reason or resigned for good reason, they get compensated for the risk they took. They are getting what they would have been paid on the open market times the multipliers. This provides a nice rate of return.
When someone sells slices back to the company they are getting a chunk of money and forgoing a share of future profits.
If the company has the cash, managers can offer to buyout slices at the current rate ($1 per slice in the US). Remember, this doesn’t mean slices are “worth” something, it is just means to compensate people for taking a risk and providing a means to put cash in their pockets.
It’s important to note, while I recommend $1/slice, the company can certainly offer more or less than that. The employee can take it or leave it. The company can make any offer it wants, it just can’t force a buyback.
If an employee needs cash, they can request a buyout. This is different from a company offer because if the employee is making the request, they are essentially “backing out” of the deal and removing their at-risk contributions.
If the company has the money, it can provide lump-sum payments which will reduce the employee’s at-risk contributions—starting with cash contributions—up to their total at-risk contributions.
It’s not fair for the company to buy back the slices and then turn around and sell the company for a far better return. If a transaction takes place within a year of a buyout that would have led to higher return, the person should be paid the difference.
This is known as “claw back” and it prevents the managers from firing everyone, buying back their slices at one price, and then selling the company at a higher price.
If the person was fired for good reason or resigned for no good reason, the claw back would not apply.
Slicing Pie is about doing right by the people who help you succeed and it’s important to clarify a few things to prevent one group of people from inadvertently taking advantage of others.
Because advisors are usually successful people who may have acquired some wealth, they may have unusually high fair market salaries. So high, in fact, that it may not be practical to pay them such a high rate. I recommend capping their hourly compensation at 200 slices/hour and asking them to contribute at least ten hours before cutting them in. For this, they enjoy the benefit of being immune to termination as described above.
When it comes to advisory board members, there is rarely such thing as termination for cause. Advisors would typically keep their shares with the multipliers.
If they told you they no longer wanted to work with you, this is the equivalent of resignation for no good reason and you could recover their slices.
Friends and family investors who put cash into the Well can’t really be fired either as long as their primary role is investment. They would keep their slices with the multipliers, no matter what happens. You could offer to buy them out with the 4x multiplier (which would be a nice return), but they shouldn’t be forced to sell.
If an investor wants their money back they can ask for it, which is the same thing as resignation for no reason. In these cases, you would have to pay them back without the multiplier if and when you can afford it.
If a terminated participant is entitled to a royalty for their intellectual property, they will continue to contribute slices unless the company pays the royalty in cash.
If the terminated participant owns the facilities they will continue to contribute slices unless the company starts paying rent.
Chapter Eight: Freezing the Pie
A frozen pie is a good thing. In fact, it’s the point of your work! This means the people who worked to get the company to breakeven and beyond will each have what they deserve to have and will, as you will see below, share in the profits of the company. When new members come on board you can pay them their market rate and you won’t have to feel obligated to give them slices at all.
When the company is paying 100% of its expenses it will generate profits. After the IRS takes their fair share, the company can either save the money so it can invest in the company in the future (aka “retained earnings”) or distribute the profits to shareholders (aka “dividends”). When and if dividends are paid, the Pie will determine how much everyone gets.
If you have good employees, provide good value, and (most importantly) have real traction showing a predictable marketing model, you should be able to negotiate a high price.
If the company needs cash prior to breakeven it can raise enough money to meet its financial obligations in the foreseeable future. This is a Series A investment and the new investors will take equity based on the negotiated value.
Chapter Nine: Financing the Pie
Whenever possible, avoid putting cash in people’s pockets. If possible, use the money on things other than paying for people’s time or non-cash contributions.
When you approach the venture capitalist you should be prepared to show them a cap table. A cap table, or capitalization table, shows who owns equity in your company and how much in terms of a number of shares or percentages or both. VCs look for logical cap tables, a happy team and as few absentee owners as possible.
When founders spend their own money, the Pie accumulates slices using the cash multiplier. Founders should make financing decisions that minimize the use of slices.
Chapter Ten: Legal Issues
Whether you like it or not, the government is on your startup team. It provides the legal and economic framework—good or bad—in which your company exists. They, like you, deserve their fair share. Do not try to evade taxes. Pay what you owe, but not more than you owe.
Chapter Eleven: Retrofit/Forecast
“Date Work Began in Earnest” is the first date the individual began working on the project with the intent of becoming part of the team. In some cases, casual contributors may not have made any real commitment to the project and may not be included.
Remember that Slicing Pie allocates equity based on the relative amount of risk taken by each person. The amount of risk taken is equal to whatever a person would have been paid by someone else for the same contribution.
Minor working capital is money deposited into a corporate checking account for the purposes of paying bills.
Expenses are business-related costs incurred by an individual. Personal living expenses do not count.
Chapter Thirteen: Objections
Slicing Pie will give control the person with the most at risk. This is how it should be. The person with the most to lose should be able to exert control over major decisions. It’s not really fair for someone with less at risk to exclude someone with more at risk. So, if you want to maintain control, be the person who contributes the most.
A person’s % share of the rewards should always equal that person’s % share of what’s put at risk to achieve those rewards.
You can track by hour or day or week or month or even year!
If someone on your team thinks these things sound like too much work, maybe you should reconsider their participation.