Mike Moyer's Blog, page 4

Mike Moyer talks about Slicing Pie on Startup Hustle

Addison Comline Assisting Entrepreneurs with Slicing Pie

Addison Comline provides trusted advice to bring clarity, insight and direction for clients wherever they are in their business journey. The firm is made up of professionals with deep on the ground experience in business negotiation,  capital structuring, valuation, contract drafting and the execution of transactions. 

The combination of corporate finance and legal services in one firm results in a convenient one-stop team, able to solve out of the ordinary business challenges and opportunities. Managing the entire transaction process, the firm can ensure that clients are successfully guided through the complex and often risky environment of corporate finance, legal, governance and tax issues.

Addison Comline has been advising clients on how to split equity with founders for over a decade. We have found that achieving an equitable equity split in a start-up business is almost impossible using the fix-now methodology. The Slicing Pie model achieves a fair outcome for all equity participants. In addition, each participant will actively move to see the business reach break-even faster than under the traditional model.

The firm has worked with numerous South African entrepreneurs who are eager to resolve the challenge of splitting equity in their new start-up. The relationship between founders can be heated, hence an independent advisor can often help in such matters.

The South African and broader African economy are focused on starting and growing new businesses as these are expected to provide the bulk of employment opportunities required by emerging economies.

The Slicing Pie model is another positive step in helping entrepreneurs start businesses.

Please refer to their website: www.addisoncomline.co.za for further details on the firm, partners and respective services offered.

About the Partners

Guy Addison holds an Honours degree in Business Science (UCT) and post graduate qualifications in Accounting and Law. He is a qualified Chartered Accountant and member of the Association of Arbitrators. Guy has worked with listed and private companies on share structures, strategy and governance challenges for over two decades.

 Keith Comline holds an Honours degree in Business Science, LLB as well as an MBA from the University of Cape Town and Graduate School of Business, respectively. Keith has worked extensively in corporate finance, mining, intellectual property, commercial, litigation and property aspects of law.

Slicing Pie Salary Survey – 2020

Welcome to the 2020 Slicing Pie Salary Survey!

If you would, please complete the forms below. The first form is the survey and the second form is the optional entry into the drawing for the Mike Moyer Startup Library. All those who enter will also recieve a summary of the results from the survey!

Please enter your name and email below if you want to be included in the drawing for Mike Moyer's Startup Library including signed copies of The Slicing Pie Handbook, Pitch Ninja, Tradeshow Samurai, and Business Basics.

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This form and the information you provide is not associated with the information in the above survey.

The Slicing Pie model is available for Spanish founders for the pre-incorporation phase

Barcelona: thanks to the efforts of Drd. Alexandru Lazar, partner at IntLaw Abogados, who customised for Spanish founders the Cofounder Agreement template – Spanish founders can now use the dynamic equity split based on Mike Moyer’s slicing pie method for their projects until incorporation.  This is great news for Spanish early stage founders, as it gives them the opportunity to use the ‘fairest equity split tool’ and avoid many potential issues that are caused by fixed equity split in too early stages. 

The solution is based on the standardised templates developed by Jana Nevrlka, the founder of Cofounding.info who coordinates the development of the slicing pie solution for European founders together with great help and support of Mike Moyer and other local slicing pie experts. 

Mike Moyer, the US-based inventor of the Slicing Pie model, was pleased to hear the development  “Slicing Pie is used by thousands of companies all over the world and most countries encourage fairness, but it is always nice to give founders that extra certainty that the model is aligned with the local rules and have local Slicing Pie expertise available.”

About Alexandru Lazar

Drd. Alexandru Lazar, is a Lawyer and Partner at IntLaw Abogados. Alexandru. He customised the slicing pie solution for Spanish start-ups! He is a member of the Barcelona Bar Association and of the Balearic Island Association. His activity is generally focused on M&A and Corporate, Insolvency, Corporate Compliance, Microfinance, International Trade and Relations and Commercial Law and Fashion Law. He is Associated Law Professor at UPF, Academic Director of the LLM in Compliance at EIS, Academic Co-Director in the LLM in Fashion Law at ISDE and IED, and member of the Academia Real de Jurisprudencia y Legislación de España, in the category Colaborador Asociado. Alexandru is also the founder of the Legal Outside the Box.

About Cofounding

Cofounding is a set of tools – Book and Cofounder Agreements templates – and Services built around a proven Cofounding framework, developed by Dr. Jana Nevrlka. Jana is driven by the mission of “No more failed business partnerships!” .. that could have been prevented and is focused on helping founders build cofounding teams that win and last. For more information visit www.cofounding.info

About Slicing Pie

Slicing Pie is a universal, one-size-fits-all solution for the allocation and recovery of equity in an early-stage, bootstrapped company. It is a formula that allows founders to divide equity based on the fair market value of each participant’s contribution. It is a fair, logical and structured way to align everyone’s interests and incentives. Slicing Pie is used all over the world. It is, by far, the fairest way to split equity in an early-stage, bootstrapped startup!For more information, contact Mike Moyer or visit www.SlicingPie.com

Wisy App Breaks Funding Records in Panama

“Panama is not a place for big technology innovation,” says Min Chen, CEO of Wisy.app, a company that arms big brands with offline consumer behavior data through interactive online experiences. “Our seed round was six times larger than the previous record in Panama.”

Chen, who moved to Panama with her family from China when she was a child, grew up working in her parent’s technology repair shop. “Times changed,” she remembered, “we were a technology shop that got left behind by technology. People stopped fixing stuff, they just replaced it.” Looking back, she felt that her parents would have had a better chance of survival if they had better access to market data. In fact, she saw a huge gap in how brands understood consumer behavior in the field, especially consumer goods companies who depend on small businesses for distribution. So, after 12-years as an innovation consultant, Chen decided to create a solution.

The original goal was to create a comprehensive database of small businesses that sold consumer goods. To do this, the company engaged consumers through an augmented reality game that captured what they bought and where. It soon became clear that the tool closed the information gap for brands by allowing them to “leapfrog” the channel and access consumer behavior data. A company, like Nestle for example, could launch a new beverage and capture information about who was buying it in stores even when traditional point-of-sale data is not available. It was a concrete link between the brand and offline consumer behavior. She and her two cofounders saw an opportunity to scale and set out to create a platform that allows brands to create customized experiences in less than a day.

Chen and her partners had all had bad experiences with previous partnerships and they struggled to come up with a fair equity model as they bootstrapped the new company. “A classmate from Carnegie Mellon (Chen earned a master’s in software engineering on a Fulbright scholarship) introduced me to Slicing Pie and it was a life-changing moment,” recalled Chen, “the model is a reflection of real life and the journey of a startup.” The team unanimously agreed to implement Slicing Pie and documented their decisions and progress in regularly published meeting minutes. “The Slicing Pie model made it possible to add new team members and even move out those who didn’t share our passion. We now have four core founders. It worked perfectly!”

Using Slicing Pie, the team built traction and secured important Fortune 50 clients that enabled them to raise a substantial seed round to accelerate growth and begin relocating to Silicon Valley where they hope to access important human resources and additional capital. She notices, “founder relationships are a major concern for investors, the Slicing Pie model puts them at ease knowing that the team is being treated fairly. Our reports have been invaluable during due diligence. Slicing Pie was an important part of our story.”

Now that Wisy.app has raised enough capital to cover salaries and expenses, their Pie “baked” and each founder secured a share of equity that accurately reflects their contribution. Happy to be past the bootstrap stage, Chen says, “lots of Panamanians are looking to us to become the country’s first unicorn so we are working harder than ever before!”

Doing Right by the Environment and His Partners

Taking a break from his technology career, Robbie Maltby spent a year traveling through Central America talking to entreprenuers. “I’d been practicing mindfulness with a local group for some years before this and had gotten quite involved in the sustainable living scene so the plan was to visit as many ecovillages as possible to see if I could learn something to take home.”

Many of the entreprenuers he met were digital nomads with the freedom to choose their workday and location. Robbie wanted to capture some of this freedom for himself and focus on helping to regenerate the environment. He reached out to his network and formed a team of freelancers to start Pure Earth, a company that would produce cool products made from sustainable materials. A portion of each sale would put directly to work on projects to help the environment.

The Pure Cup Reusable Coffee Cup from Pure Earth

In 2020 the company launched their first product, the Pure Cup, a reusable coffee cup with an environmentally friendly story. “The cup is made with rice husks, a natural agricultural bi-product normally burned after harvest,” he explained, “additionally, Pure Earth is committed to planting one tree for each item sold. Most products like this have a negative impact on the environment. With carbon offsets companies can neutralize the impact, but the idea with Pure Earth is that each product has a net-positive environmental impact.”

Robbie knew that a project like this required a dedicated team who valued ownership in the company, but he also knew the dangers of unclear partnerships, having experienced them in previous roles where he saw just how much of a drain they could have on staff morale. Years before, he had heard of the Slicing Pie model and had a chance to participate in a Slicing Pie company, NuMundo. “It was a clear choice for Pure Earth. Not only was it the most logical startup equity model I’d heard of, but the time tracking element seriously improved my time management skills and the way I work. Plus, it was all written out and included handouts and formulas, so I basically didn’t even have to think of how to compensate new recruits!”

The Slicing Pie model, used by bootstrapped startups all over the world, divides up equity based on the relative fair market value of each person’s contribution in terms of unpaid compensation or unreimbursed expenses. Mike Moyer, inventor of the Slicing Pie model and the author of The Slicing Pie Handbook explained, “unpaid contributions are essentially ‘bets’ on the company’s future profits or capital gains. Each person’s share of the equity is based on each person’s share of the bets. It always creates a fair split because it’s based on easily observable facts instead of unknowable predictions of future events which is the basis of other equity split models.”

Pure Earth is working on new products to release under this same mission of having a net-positive benefit to the environment. “Our focus is on kitchen and housewares, but we are open to ideas,” said Robbie. If you have an idea for Pure Earth contact Robbie at robbie@pureearth.eco. Maybe you, too, can get a slice of the Pure Earth Pie!

Mike Moyer on The Wealth Standard

The Illusion of Control

I hear this all the time from founders: “I need to have 51% of the equity so I can ‘maintain control!’” Yes, if you own 51% you will probably technically have control, but I cringe when I hear this because it ignores the real issue: do you deserve control? This is a more complicated issue than whether a person can legally impose a 1% voting advantage over other participants.

The Slicing Pie model is primarily focused on the potential financial benefits of a startup—profits or capital gains—rather than the operations of the organization. However, when the Pie bakes, the person who has the most at risk will have the most equity, and, therefore, the most votes. There may not be anyone with a single majority ownership, which means the team will have to continue to cooperate to make key decisions. This is probably a good thing. After all, if you’re one of the few startups to make it far enough to bake the Pie, something is clearly working! In my experience, cooperative teams are better than a single person calling all the shots.

So, the Slicing Pie logic generally puts the right people in
control. But some founders still think they need 51%. The big warning here is
that a person’s desire to maintain control should not take precedence over
being fair. If consolidating control is, for some reason, more important than
logical control, there are ways to do it.

The specifics will vary from country to country and I’m not
a lawyer, but I can give you a high-level overview. In the US, there are two
common forms of corporate structure. An LLC or a Corporation (either a C-Corp
or an S-Corp).

In an LLC, there is a concept called “manager-managed” in which an appointed manager has decision-making rights regardless of his or her membership interests. Blocking a manager’s decision or removing a manager generally requires a “super majority” of voters, which is usually two-thirds, but can be whatever you agree to in the operating agreement.

In an S or C-Corp you can consolidate control through the
number of shares each person has. So, issuing 51% to one person would give them
control, but this number will still have to be adjusted when the Pie bakes. The
final outstanding share count should align allocations to the final Slicing Pie
split. If your company issues new shares, it may trigger an income tax
event. Buying down shares
will help you avoid unnecessary income taxes.

Alternatively, you can issue restricted shares to each
participant and use Slicing Pie to determine vesting when the Pie bakes. Always
be sure to file an 83(b) election with the IRS within 30-days (talk to a lawyer
or accountant for more information). Unvested shares, however, still have
voting rights so you will need to create a new class of shares that have the
exact same financial benefits as the common shares, but limit voting. In an
S-Corp this is the only way you can create a new class of share.

On a side note, when considering creating multiple classes
of shares, proceed carefully! People can and do pull all sorts of shenanigans
with classes of shares and doing so will never, ever make your split fairer.
Each class of share introduces changes to the owners’ rights which means
someone thinks he or she is magical or special and somehow deserves to benefit
at the expense of others. If an investor asks for a special class of share keep
in mind that he or she is taking advantage of your desperation. It’s not
going to be fair, but it may be unavoidable. Just make sure your core Pie
participants are all experiencing the same consequences of the deal.

One of the first questions you should ask before consolidating
control is: why? This may seem obvious, but when you really think about the
answer you may be surprised at the answer. Control is simply the right to make
unilateral decisions. It does not ensure good decisions. If your decisions are
so unpopular with your team that you have to force them, you may not be
making very good decisions. Slicing Pie always allocates the most control to
the people who have the most to lose if things go wrong. This ensures that the
decision-makers’ incentives are aligned with the non-decision makers.

The best way to keep control is to put the most at risk. If
you’re not willing to do this, you have to be willing to let someone else help
make decisions.

The Problem with Equity as Compensation

When thinking about how to hire a team or acquire resources
for your startup, it’s important—very important—to understand the difference
between equity and compensation. I often hear people say that they are “paid
with equity” or “earn equity” at their company. And, while it is technically
possible to pay someone with equity, it is rarely the case and certainly should
not be the case in a bootstrapped startup company.

In order to pay someone with equity, the equity must have a marketable value. Early-stage, bootstrapped companies don’t have any value and, therefore, can’t use equity to pay for anything, including salaries.

Let’s say your company has a marketable share price of $10 per share, issuing a contributor 10 shares instead of $100 cash isn’t really a thing. You must get the shares from somewhere, if you issue 10 new shares you will dilute existing shareholders making all shares worth less than the intended $10. So, you would probably have to buy the shares from an existing shareholder for $100 and incur some unnecessary transaction costs. And, of course, the IRS will tax the shares as income even though the receiver did not get any cash to pay the taxes. Never mind the fact that founder’s shares often have a litany of unnecessary restrictions. It’s a whole lot easier just to pay cash!

Paying someone with equity with a marketable price is just not practical. In a startup with a $0 value, it’s not possible. No matter how many $0 shares I give someone the total will still add up to $0. Founders often make up a value which usually has little or no basis in reality, and now we have the same problems as if there is a value (see above).

Equity is not compensation, it’s an investment. To acquire it, a person must invest. If the person gets a share without investing, then you’re just giving equity away willy-nilly. (If you’re doing that, please contact me because as long as you’re giving away free equity, I’d like some too!)

Just Pay People…If You Can.

The way a company compensates a contributor is by paying them a fair market rate. If a person is getting paid a fair market salary that person owes the company their best work in return. This should be true regardless of the person’s ownership in the company.

If the person does not provide his best work in
exchange for what he is getting paid, he probably feels that he is underpaid.
In this case, the fair market salary is, in fact, not the fair amount
and needs to be adjusted. Or, it is the fair amount, but the guy is
resentful of his own personal life choices and wishes he was more valuable.
Either way, equity ownership shouldn’t matter.

Consider this scenario: A guy goes to work for Apple computer and is paid a fair market salary. He just happens to personally own a few shares of AAPL.

His stock ownership has nothing to do with his
compensation. Apple wouldn’t deduct the dividends or capital gains from his
stock ownership from his salary. His compensation is totally separate
from his investment in the company. When he leaves the company, no matter
what the reason, he would still be entitled to dividends and capital gains
from his ownership of Apple shares.

His stock ownership has nothing to do with performance and should
not affect his work product in any way because Apple is paying him a salary for
his best work. Giving him Apple stock (AKA “grant”) is pointless because
it would amount to overpayment which is an inefficient use of capital
for Apple.

His ownership of Apple stock is, however, a really good
indicator of his belief in Apple’s future. This makes giving him shares
even more pointless because if the guy believes in Apple, he should be willing
to invest in order to acquire shares. The outcome of a grant, therefore, is to simply
overpay an employee with stock they don’t care enough about to buy themselves!

Stock ownership, therefore, indicates a participant’s confidence and excitement in the future of the company. It does not cause confidence and excitement in the future. (I’m saying this because it’s logical, I have not personally researched the psychology here and would welcome the opportunity to see a legit study on the subject.)

Only True Believers Buy Equity

Employees who believe in the company tend to bring their
A-game to work and offering them the opportunity to invest will
help you attract the right kinds of employees. Giving shares to
participants is pointless, selling shares to participants is golden.

Selling shares to participants requires the shares to have a
knowable price so people can properly assess the investment. In other words, a
known number of shares has a known investment. But, what if those things are
unknown? This is where Slicing Pie comes in…

Shares in early-stage, bootstrapped companies are worth
nothing. We can give them to people but, as outlined above, that is pointless.
On the other hand, we can’t sell them either because selling them requires setting
a price. Setting a stock price during this stage is just a random guess.

Before a company can be priced or valued, the company must
produce something of marketable value, such as revenue, profits, users,
intellectual property and other things investors actually care about.

Slicing Pie allows people to “invest” in the future outcome
of the company. But, unlike an established company, startups have no value so
it’s not a traditional investment, it’s a gamble. Because it’s a gamble,
the price and percentage ownership of the shares isn’t absolute, it’s relative
based on each person’s bet.

In a traditional investment, the investor invests a known
amount of money for a known number of shares. In a Slicing Pie “investment” the
bootstrapper investor doesn’t know how much he or she will ultimately invest,
what form the investment will take (unpaid time, money, and other resources),
nor how much equity he or she will end up with. These amounts are revealed over
time and finalized when the bootstrapping stage is over.

The Slicing Pie commitment, however, is the same (or very similar) to the traditional investment in that the participant isn’t getting the shares for free. The key difference is that in an established company investors invest known dollar amounts for a known number of shares and, therefore, end up with a known percentage. In Slicing Pie, bootstrappers commit unknown resources for an unknown number of shares and an unknown percentage. The unknown elements are what makes the deal a gamble and not a traditional investment. In both cases, however, the gambler and the investor believe in a positive outcome.

When a bootstrapped company uses a traditional fixed equity
split, the participant gets a known chunk of equity for doing nothing
and is then expected to make an unknown investment of time, money,
resources, etc. No matter how much he or she invests, the equity doesn’t
change. When the investment gets bigger than the individual’s perceived value
of the equity, the participant either loses motivation to continue or is forced
to dispute the allocation. Equity disputes often involve expensive legal
proceedings, emotional turmoil and strained relationships with cofounders. Many
decide it’s not worth the trouble, so they quit and demand buyouts from other
founders. If your company buys out a quitter, it is rewarding extremely
unproductive behavior!

The moral of the story is this: equity isn’t a creator
of motivated team members, it’s an indicator of motivated team members.
Giving equity to someone who wouldn’t otherwise invest is simply a waste of
time and money but giving them the opportunity to buy equity or acquire
it through Slicing Pie will tell you who believes in your company vision!

Pie and Productivity

Slicing Pie is based on the unpaid portion of the fair
market value of each person’s contribution. In a startup, time is one of the
most common contributions from founders which means the first step in
establishing a new partnership with a co-founder is to determine the person’s
fair market salary. This is the amount that your business would pay if
it could pay. Fair market salaries are important for two reasons. First,
it gives the team the ability to track each person’s at-risk contribution (AKA “bets”)
and second, it helps the team understand the fully-loaded costs of running the
business. Under estimating costs is a common problem for startup teams leading
them to overestimate profit projections. Remember, the Pie terminates when the
company is able to pay for everything, including salaries. When the company can
pay it will pay so it’s important to set salaries that are logical in the
market.

Negotiating a fair market salary in a startup is pretty much
the same process you would use when negotiating a job at an established
company.

Setting Salaries

A person’s fair market salary is a function of their
education, experience, and skills in relation to the requirements and
responsibilities of the position. Consider Joe and Tom. Joe is a recent high
school graduate and Tom has a PhD in Electrical Engineering and 15 years of
experience as an automotive engineer.

McDonalds

Joe and Tom apply for jobs at
McDonalds. They both accept entry-level jobs as flipping burgers, they are
similarly qualified and, therefore, would have a similar fair market salary of
around $10 per hour.

Tesla

Joe and Tom apply for jobs at
Tesla, Joe gets turned down, but Tom gets to design the next generation of
vehicle battery and a salary of $200,000 per year plus bonus.

Clearly, Tom is financially better off at Tesla and shouldn’t
take a job flipping burgers. If he wants to flip burgers, he must do so
at the market rate.

Assumptions of Productivity

When negotiating a salary, certain assumptions are made. In
the McDonald’s example, the hiring manager assumed that both Joe and Tom were
going to have similar productivity because neither of them has experience
relevant to the job. In the Tesla example, the hiring manager assumed that Tom’s
skills and experience would be much more valuable to the company and, because there
are a lot more high school grads looking for jobs than PhDs, the supply is
lower. Hence, a job and a high salary for Tom.

Differences in Productivity

Any assumptions made in the hiring process will be tested
over time when the employee’s performance is observed. For example, Joe may be
able to flip 200 burgers and hour while Tom can only flip 100 burgers per hour.
Or, Tom may spend half his time responding to customer service emails at Tesla.

In Slicing Pie, this begs the question: In a burger startup,
Tom (the horrible flipper) will earn more slices in the Pie than Joe (the
amazing flipper). In an electric car startup, Tom (the engineer) will be contributing
slices when he responds to customer service emails that Joe could probably be
doing.

This doesn’t sound fair, because it’s not fair. But,
it’s not a Slicing Pie problem…it’s a management problem.

The Issue

In both examples, the management team needs to take action
to rectify the issue. Once the management issue is corrected, Slicing Pie will make
the proper adjustments to maintain a fair split.

The Bad Burger Flipper

In the burger example the management issue is performance
related for both guys. Each one is either performing at, below or above what
was assumed when they took the job. If the hiring manager assumed that a burger
flipper should flip 200 burgers per hour the manager needs to address Tom’s
performance.

Warning One

Tom’s manager should bring the
problem to Tom’s attention and make it clear that productivity needs to
increase in order to keep the job and he is getting his first warning. Specific
goals need to be set and the manager needs to make sure Tom has the tools and
training to do the job right. If Tom doesn’t have a spatula, for instance, his
performance would be an issue through no fault of his own and his manager
should make sure he gets one.

Warning Two

If, after Tom has everything he
needs and is still not productive, his manager should issue a second warning
and review the goals and reassess the situation. The job of the manager is to
make sure that there are no externalities under his control that are preventing
Tom from doing his job. Training? Check! Equipment? Check! Supplies? Check! Back
to work, Tom!

Fired!

If Tom has everything that Joe has
and still can’t flip burgers maybe he is in the wrong job. He was given ample
opportunity to correct his behavior and he had everything he needed, but he was
still unable to perform at an acceptable level. It would be fair to fire him
for non-performance.

In Slicing Pie, a person can be terminated after two
warnings. This, among other things, is considered termination for cause and the
individual would lose slices from non-cash contributions such as time. This
automatic correction ensures the Pie stays fair for the remaining Grunts who
are performing.

The Overpaid Customer Service Rep

When Tom takes time to answer emails, he is not designing
batteries. His work suffers. Again, his manager needs to address the issue:

Warning One

Right away, the manager learns that
customer service overflow is being sent to Tom. At $100 per hour, this cost is
too high. Tom’s manager should consider hiring Joe to handle the overflow.

Slicing Pie provides and easy and logical way to add help
where needed. It would be foolish to allocate slices in the Pie to Tom for
doing low-value tasks. If Tom’s manager cut Tom’s salary for the time he spent
on customer service emails Tom would either ignore the emails or quit the job. The
only fiscally responsible decisions are to hire the right resources so each
person can maximize personal productive or fire the unproductive employees and
replace them with more competent workers.

In startups, founders often wear many hats and even take
pride in being a Jack of all trades. Many work long hours doing everything. I,
myself, fall victim to this hubris. But when you do this you wind up overpaying
for work that could be delegated to a lower cost resource. With Slicing Pie,
there is no reason to fall into this trap. Yes, adding more Grunts to the Pie
means more shareholders, but the company will move faster and be more stable
with the right team. No matter how many Grunts are in your herd, everyone will
have the equity they deserve as long as the managers make good management
decisions.