Mike Moyer - 15 Nov

Slicing Pie outlines a straightforward process for implementing a dynamic equity split in an early-stage startup to ensure the most fair equity split possible. It is ideal for bootstrapped startups where time is the primary contribution of founders, but it will well work in any type of company that doesnt have a lot of cash.

It is a universal, one-size-fits-all, self-adjusting model that maintains fairness even as things change. Startup companies change all the time. People come and go, strategies change, they consume cash (when its available), and every day people contribute more to the companys success. The only thing that doesnt change about startups is the fact that they are always changing.

I wrote this guide to make the case for a dynamic split for people unfamiliar with the model who might be considering getting involved with a company that uses the model. If you have the opportunity to participate in a startup company that uses the dynamic equity system outlined in Slicing Pie , you have the rare privilege of getting involved with a group of people who value fairness and want everyone to get what they deserve.

The model in Slicing Pie is called a Grunt Fund and, if you follow the rules, each person will get exactly what they deserve to getincluding you. From the moment you start working with a startup you begin to accrue your share of the pie. Your interests will be perfectly aligned with the other members of the team, so if you like the team and the business, you can rest assured that your money, time or other contributions will be handled with perfect fairness. If you dont like the team, you can leave and the termination rules (mentioned below) kick in and everyone is still happy.

The Fairness Equation

Most people would agree that the following calculation is fair:

So, if you invested $100,000 in a company that has a post-money valuation of $1,000,000 you would have 10%:

This is fair. You get a percentage that is in proportion to what you contributed. Most people would agree that the following calculation is not fair:

In this case your share is less than you deserve. This is probably not okay with you. If you have less than you deserve it means there is someone out there who has more than they deserve and they got it at your personal expense. The greater the personal expense the more upsetting this will be. You might even try to figure out who got more than their fair share and try to get some back with your posse of highly-paid attorneys (if you can afford them). This happens all the time. (Have you seen the Facebook movie ?)

Even if you agreed to this arrangement in advance, its still not really fair. The only reason people agree to this kind of treatment is if they had no other choice or if they didnt know any better. This, too, happens all the time. People have a habit of taking advantage of others when they sense desperation or ignorance.

If youve ever been caught on the short end of this equation (as many of us have) you are probably going to try to avoid this situation in the future by making sure you cover your own butt. The greater the pain you endured, the greater your interest will be in covering your own butt even if it means someone else has to lose. This leads us to the other calculation that is also not fair:

In this case you have more than you deserve. In many cases the more money, knowledge or power one person has over the other person the greater their share will be at the expense of the other.

This may be okay with you if you are comfortable with the fact that someone else, who deserved more, had to take less so that you could have more than you deserved. If this is you then a dynamic model isnt for you and you should not participate in one. There are plenty of opportunities out there for you to take advantage of others. Thank you for reading this far. I hope you have a nice day. You can stop reading now.

Personal Soapbox

This is about business, not politics. Im not a bleeding-heart liberal or a socialist or a communist. I am a capitalist which means I believe in private ownership of the means of production. My goals are to determine the fair division of ownership.

I am an advocate of fairness. I believe that every person deserves what they deserve. No more and no less. I dont want to work with people who want to take advantage of me or others, and I dont want to take advantage of others myself. I want to reward the people who help me get to where Im going.

Given the current startup funding landscape, this goal is hard to achieve. We live in a world where it is so common for people to take advantage of one another that we dont even realize we are doing it!

Alligators and Why We Have Them

Today nearly every startup company uses a pre-negotiated fixed equity split. In a fixed split equity is doled out to participants based in chunks, based on their potential contribution. This is kind of like paying someone their annual salary on their first day of work because they told us they were going to work hard. If it sounds silly, it is. But it happens all the time.

Its nearly impossible to create a fair fixed equity split. And even if you could, because startups change, the split that was right one day will be wrong the next. This means that in nearly every startup investment there are less-than alligators (<) representing people who have less than they deserve and greater-than alligators (>) representing people who have more than they deserve. In a fixed equity split every deal is an alligator pit.