Mike Moyer's Blog, page 5

The Only Cofounder Equity Calculator You’ll Ever Need

The entrepreneurship world is awash with startup equity
calculating advice from smart, educated, successful, well-meaning people. Some
of these people have distilled their wisdom into online apps that will help you
and your team calculate equity for the cofounders. A number of them are even
supported with research projects with input from hundreds or even thousands of
real actual founders. There is only one problem: they are all wrong (except
one).

The Fatal Flaw

The reason all cofounder equity calculators are wrong is that
they all share one fatal flaw: they require the users to have the ability to
accurately predict future events. The inputs are based on things like whose
idea was it (predicts that the idea actually matters and the company won’t
pivot), time commitment (predicts this won’t change), importance of activity
(predicts an individual’s productivity), I could go on, but you can check them
out yourself. Online equity calculators are based on traditional startup equity
models which never work because it’s impossible to predict future
events.

What You Can Predict

The only thing that never changes about startup companies is
the fact that they are always changing. Whatever you think might happen
is rarely what actually happens. So, when you base your equity splits on
assumptions that will inevitably change, you must go back and change your
equity split.

Renegotiating Equity Splits is Painful

Getting a cofounder to decrease their share of the equity is
never easy and often involves the deterioration of important founder
relationships and the involvement of legal intervention which can quickly
deplete already small financial and time resources. I’ve heard some lawyers
estimate that 60%-80% of traditional equity splits wind up in disputes that
require legal interventions. These are the kind of splits created by most cofounder
equity calculators.

Smart People with Good Intentions

I have yet to find a startup equity calculator that was not developed by a very intelligent person with the best intentions of helping hapless founders make good choices about equity. Many of them are experienced entreprenuers with status, wealth and success that exceeds my own, but the fact remains that they are providing the same kind of fundamentally flawed advice that everyone else provides.

The Slicing Pie Cofounder Equity Calculator

Slicing Pie, unlike traditional equity formulas, is based on
what people actually do during the bootstrapping stage of a company’s lifecycle
and is designed specifically to accommodate changes over time so that it stays
fair. Our equity calculator, called The Pie Slicer, helps team keep track who
deserves equity and how much. The tool automatically adjusts based on
observable changes in team membership, commitment levels, financial
commitments, and even changes in corporate strategy.

Unlike other equity calculators, The Pie Slicer easily accommodates new team members and properly adjusts based on the specific circumstances of a teammate’s departure. The Pie Slicer software always works because it is based on the Slicing Pie model.

The Only Fair Equity Calculator for Startups

Slicing Pie in Germany: Pre-Incorporation Agreements Available

Berlin: thanks to the efforts of Stefanie Strümpfler, partner of dextrae Rechtsanwälte · Fachanwälte, who customised for German founders the Cofounder Agreement template – German 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 German 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. 

Stefanie Strümpfler: German Slicing Pie Lawyer

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 Dextrae

dextrae Rechtsanwälte · Fachanwälte, as a law firm focused on commercial law, accompany and advise you nationwide and internationally in your entrepreneurial and private concerns. Our practice focuses on commercial law, corporate law, non-profit law, construction law, property development law, architectural law and real estate law; we advise and represent companies and non-profit organisations as well as freelancers, start-ups and private individuals. We see ourselves as a partner to our clients and work with them to develop practical and individual solutions. The personal support of our clients is a matter of course for us and is part of our philosophy. For more information visit www.dextrae.de 

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

Slicing Pie in Canada

Mike Moyer, inventor of the Slicing Pie Startup Equity Calculator and JP McAvoy, a Canada-based Slicing Pie-friendly lawyer discuss the Slicing Pie equity model and considerations for the Canadian legal system.

Having a Baby is Not a Good Reason to Resign

Norvin, a good baby but not a good reason!

In the Slicing Pie model having a baby is not considered “good reason” to quit and, therefore, the quitter loses her slices in the Pie. This may cause some controversy, so it’s important to understand what good reason means in the context of Slicing Pie and being fair.

Good reason (aka “for cause” or “good leaver”) implies that something outside of a person’s control created an untenable situation at work. The most common circumstance is when the company’s managers make promises that they fail to keep. For instance:

You were hired as VP of Marketing, but they want you to flip burgers instead
The company is based in Chicago, but wants to relocate to Seattle
You were promised a cash salary in six months, but it didn’t happen
You’re a commissioned salesperson, but the product does not work

The person affected by these situations did not cause them and, therefore, cannot be expected to continue working. It would not be fair to remove their slices from the Pie or otherwise impose penalties. By allowing individuals to keep their slices in the Pie, Slicing Pie logic provides protection from the behaviors of others. Startup founders are notorious for making big promises—a practice that can easily mislead participants. The resignation for good reason logic forces managers to think twice before committing to unknowable future events.

Conversely, resignation without good reason means a person quits for personal reasons outside the influence of the company and its managers. For example:

She wants to take another job for more money
He can’t afford to work without pay anymore
She doesn’t believe in the company’s vision
He doesn’t like his coworkers
She decides to become a stay-at-home mommy

If a person resigns for no good reason, he or she will lose slices from non-cash contributions and lose the multiplier for cash contributions. Furthermore, the company reserves the right to pay back cash prior to any distribution of profits or proceeds of a sale. This is a painful way to leave a company, and it should be! This forces employees and other participants to think twice before quitting.

Now, let’s get back to that cute little baby…

In many societies, having a baby is a legally protected right and terminating someone for having a baby is illegal and immoral. At its core, Slicing Pie is a moral agreement to do right by those who help a company succeed and, hence, a manager should not fire a woman for having a baby and the manager should provide a reasonable amount of time off to care for the baby and recover from the delivery (if applicable). In some countries, larger companies may be legally required to offer paid or unpaid leave to new parents, but startups are sometimes exempt from these laws. Having a key employee on leave for extended periods can have a pretty devastating effect for a startup and finding a temporary replacement may not be possible. Having a policy in place can help avoid potential conflicts. Click here to download a sample Pie Policy manual.

An able-bodied team member is expected to return to work once she (or he) has settled into a routine with the little bundle of joy. Of course, the parent has every right to decide not to return in which case he or she would be resigning without good reason. It’s not a good reason if the company didn’t break promises and the employee is physically and mentally able to work…in most cases.

Some Exceptions That Do Provide Good Reason

There are a handful of unfortunate circumstances in which there was no fault on the side of the company or the employee that provide good reason. As inconvenient as it may be, dying is a good reason to resign and the person’s slices would stay in the Pie. When the Pie bakes, the person’s designated heirs would receive the equity. Again, while it may not be the company’s fault a person dies, it would be immoral to impose a penalty for dying. The same goes for permanent or long-term disability.

Medical Leave

There’s one more circumstance worth mentioning. Leave for personal or dependent medical care. While many startups would be exempt from medical leave laws (in the US, companies with fewer than 50 employees are exempt), it would be good to stipulate a policy outlining the company’s allowance for paid and unpaid time-off for dealing with medical issues. A startup may not survive the extended leave of a key employee and there should be a point at which the employee is replaced. In this case the employee would be terminated without good reason and his or her slices should stay in the Pie.

The Slicing Pie model always follows the logic of fairness within a moral context of most cultures. When bad things happen to good people, companies need to make the right actions to support them and their families. Resignation and termination events should be as clear as possible to avoid conflicts. Babies are super-cute, but so is a successful startup company!

Author’s note: a previous version of this post made the case that having a baby did provide good reason to resign. I was wrong and I’m sorry!

Having a Baby and Other Good Reasons to Resign

In the Slicing Pie model having a baby is considered “good reason” to quit and, therefore, the quitter gets to keep her slices in the Pie (subject to dilution when more slices are added by others). This may cause some controversy, so it’s important to understand what good reason means in the context of Slicing Pie and being fair.

Good reason (aka “for cause” or “good leaver”) implies that something outside of a person’s control created an untenable situation at work. The most common circumstance is when the company’s managers make promises that they fail to keep. For instance:

You were hired as VP of Marketing, but they want you to flip burgers instead
The company is based in Chicago, but wants to relocate to Seattle
You were promised a cash salary in six months, but it didn’t happen
You’re a commissioned salesperson, but the product does not work

The person affected by these situations did not cause them and, therefore, cannot be expected to continue working. It would not be fair to remove their slices from the Pie or otherwise impose penalties. By allowing individuals to keep their slices in the Pie, Slicing Pie logic provides protection from the behaviors of others. Startup founders are notorious for making big promises—a practice that can easily mislead participants. The resignation for good reason logic forces managers to think twice before committing to unknowable future events.

Conversely, resignation without good reason means a person quits for personal reasons outside the influence of the company and its managers. For example:

She wants to take another job for more money
He can’t afford to work without pay anymore
She doesn’t believe in the company’s vision
He doesn’t like his coworkers

If a person resigns for no good reason, he or she will lose slices from non-cash contributions and lose the multiplier for cash contributions. Furthermore, the company reserves the options of paying back cash prior to any distribution of profits or proceeds of a sale. This is a painful way to leave a company, and it should be! This forces employees and other participants to think twice before quitting.

Now, let’s get back to that cute little baby…

Having a baby seems to break the rules because not having a baby was never promised by company managers and, (politics aside) having a baby is technically a choice. However, in most cultures I have come across, having a baby is considered a very, very important decision and one that is essential for survival of the human race. It also creates loads of new customers so it’s generally a good investment of time and resources. In many societies, having a baby is a legally protected right and terminating someone for having a baby is illegal and immoral. At its core, Slicing Pie is a moral agreement to do right by those who help a company succeed and, hence, having a baby is considered resignation with good cause.

Ideally, a good team member would return to work once she (or he) has settled into a routine with the little bundle of joy. And, while larger companies may be required to offer paid or unpaid leave to new parents, startups are sometimes exempt. Having a policy in place can help avoid potential conflicts. Click here to download a sample Pie Policy manual.

Some Bad Things That Provide Good Reason

Babies aren’t the only circumstance that provides good reason for a person’s resignation. As inconvenient as it may be, dying is a good reason to resign and the person’s slices would stay in the Pie. When the Pie bakes, the person’s designated heirs would receive the equity. Again, while it may not be the company’s fault a person dies, it would be immoral to impose a penalty for dying. The same goes for permanent disability.

The Slicing Pie model always follows the logic of fairness within a moral context of most cultures. When bad things happen to good people, companies need to make the right actions to support them and their families.

Slicing Pie Interview with Dr. Pelè

Mike Moyer, the inventor of Slicing Pie, speaks with Dr. Pelè, host of the Big-Ticket Clients Podcast and Slicing Pie user. Hear more about the Slicing Pie backstory and some of Mike’s other books and ventures.

See the episode below or click here for the podcast page.

Equity Splits for Failed Companies

It happens—a lot. Companies fail and fail. The 90% number you hear all the time a myth, however. The actual failure rate hovers around 50% (which is one of the reasons Slicing Pie uses a 2x normalizer for non-cash contributions). If you’re in that 50% that fails, it 100% sucks. I know, I’ve been there.

While I can’t say if Slicing Pie companies succeed more often than those with “fix & fight” equity splits, a Slicing Pie company is likely to spend less cash before they fail and, because they are keeping track of what they are doing, they will have more insight into what went wrong.

If and when you do fail, the Slicing Pie model still plays a role. Here is what you do to unwind the company in a fair way:

Step One: Liquidate

The first thing you’ll want to do is to liquidate any assets the company owns. Many bootstrapped companies have nothing, but if you do, try to generate as much cash as you can. If you have something you may want to use for a future venture. Set it aside for now.

Step Two: Settle with Creditors and Vendors

If there is remaining cash, pay off any loans or outstanding invoices. If there is not enough cash to pay all the bills, the unpaid portion of the bill goes into the Pie as slices. This means you will be adding Grunts to the Pie whether the creditor or vendor wants it or not. Unless you signed a personal guarantee, they can’t collect from you. If you did sign a personal guarantee, you will have to pay them off and add slices to the Pie.

Step Three: Disburse the Well

Any cash remaining in the Well should be returned to its owner(s) in proportion to the ownership at the time of closure. This will not affect the Pie.

Step Four: Pay Back Cash Contributions

If you still have leftover cash, pay back any cash in proportion to each person’s cash contribution using Lump-Sum Payments. This means each person’s slices will decrease based on what they are paid back.

Step Five: Pay Back Non-Cash Contributions

If you still have leftover cash, pay back any non-cash in proportion to each person’s ownership of the Pie using Lump-Sum Payments. This means each person’s slices will decrease based on what they are paid back. You can also return assets, like supplies and equipment, to the people who contributed them as non-cash contributions.

Now, if you made it this far, you will be left with two scenarios. The first is that you were able to pay everyone in full and have no slices left in the Pie with leftover cash. This means that nobody has any outstanding risk which puts everyone on an equal footing. A Pie with no slices is owned equally by the participants.

The second possible scenario is that you have no more cash and participants still have slices in the Pie.

The final Pie represents the fixed ownership in whatever is left. If there are no slices, the fixed ownership is 100%/participants. If there are slices, each person gets fixed ownership according to their percentage of the slices.

Now that the equity is fixed, the defunct entity may still have some options. For instance, it could license or sell the intellectual property including trademarks, patents, copyrights and trade secrets to other companies. (This would even apply to companies started by team members who might start a new Pie based on the original idea.)

If the company owned other assets like building, supplies, equipment, customer lists, etc. It could sell or lease them to other companies.

Proceeds of these activities would be used to first pay for the expenses and salaries related to execution, and then distributed to shareholders for as long as the activities are productive.

If all the cash and assets have been disposed of, the last step is to formally close the business. Closing the business means you must legally end your corporation with the government which usually carries a fee or even a few hours of a lawyer’s time. If the company has no cash whatsoever, someone is going to personally pay the expense. It’s usually not much, so hopefully you can all chip in to pay this expense!

Better luck next time!

Belgian Tax Authorities Issue Positive Ruling Regarding the Slicing Pie Startup Equity Model

Brussels – The Office for Advance Tax Rulings of the Belgian Federal Public Service Finance has reviewed the structure of the Slicing Pie model for the allocation and recovery of equity for early-stage startups and issued a positive ruling for the startup BUFFL, declaring that the implementation of the Slicing Pie model does not entail any adverse tax effects in the context of BUFFL. The Slicing Pie model allows startup founders to create a perfectly fair equity split among early contributors based on each person’s contribution. The model differs from traditional approaches because contributions change over time, so the final equity distribution is unknown at the outset of the venture. “As an entrepreneur I immediately saw the benefits of the Slicing Pie model, as it adapts your equity structure in a fair way to all unforeseeable circumstances in your startup journey. Even though the Slicing Pie model is much more logical and fairer than traditional methods, we were concerned that the non-traditional approach would trigger unnecessary tax consequences, “said BUFFL co-founder Seppe Stroo. “The positive fiscal ruling means we can be confident that we will not run into problems.”

Mike Moyer, the US-based inventor of the Slicing Pie model, was pleased that BUFFL received a favorable ruling, “Slicing Pie is used by thousands of companies all over the world and most countries encourage fairness, but it is always nice to verify that the model will not conflict with local tax customs. Everyone in a startup company deserves their fair share of the company’s success, including the government!”

“Founders often split up all the equity in fixed amounts during the formation of a startup,” said Thomas Daenen, founding partner at Beyond Law Firm which has become specialized in the Slicing Pie model, “the problem is that startup teams change or an individual’s commitment level changes. Such changes lead to disputes over equity splits that can be very detrimental and expensive to early-stage companies. The Slicing Pie model is designed to accommodate changes and adjust to keep things fair. It is an essential tool for startup founders.”

“Even though this decision of the Belgian Office for Advance Tax Rulings is only effective with regards to the specific situation of Buffl and cannot be regarded as a general rule, this decision confirms our position that, under specific circumstances, the Slicing Pie model may be implemented without any adverse tax consequences for the shareholders.” explains tax lawyer Clément Pirenne of Beyond Law Firm.

About Beyond Law Firm

Beyond Law Firm advises entrepreneurs and investors on how to incorporate and organize their companies and focus in particular on optimizing the set-up of innovative businesses. Their corporate team counsels clients in relation to corporate operations and questions pertaining to corporate governance, directors’ liability, etc.

With a very strong expertise in complex operations involving several jurisdictions, they represent a diverse range of domestic and international companies, VC’s and business angels in M&A in addition to private equity and (re)structuring operations.

Beyond Law Firm also has a team with extensive experience in all legal aspects related to IP, ICT, Data Protection and Privacy.

For more information, contact Thomas Daenen or visit www.beyond-lawfirm.com.

About BUFFL  

BUFFL is an agile market research company that puts companies in live connection with their target audience. BUFFL provides validation in the palm of your hand and allows innovators and marketeers to validate their assumptions in just 30 min. Using its own research platform BUFFL developed a structured innovation methodology to validate business ideas in one week.

For more information, contact Seppe Stroo or visit www.landing.buffl.be.

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

Federale Overheidsdienst Financien Issues Positive Ruling Regarding the Slicing Pie Startup Equity Model

Brussels – The Federale Overheidsdienst Financien has reviewed the structure of the Slicing Pie model for the allocation and recovery of equity for early-stage startups and issued a positive ruling for the start-up BUFFL, declaring that the implementation of the Slicing Pie Model will not entail any adverse tax effects in the context of BUFFL. The Slicing Pie model allows startup founders to create a perfectly fair equity split among early contributors based on each person’s contribution. The model differs from traditional approaches because contributions change over time, so the final equity distribution is unknown at the outset of the venture. “As an entrepreneur I immediately saw the benefits of the Slicing Pie Model, as it adapts your equity structure in a fair way to all unforeseeable circumstances in your start-up journey. Even though the Slicing Pie model is much more logical and fairer than traditional methods, we were concerned that the non-traditional approach would trigger unnecessary tax consequences, “said BUFFL co-founder Seppe Stroo. “The positive fiscal ruling means we can be confident that we won’t run into problems.”

Mike Moyer, the US-based inventor of the Slicing Pie model, was pleased to receive a favorable ruling, “Slicing Pie is used by thousands of companies all over the world and most countries encourage fairness, but it’s always nice to verify that the model won’t conflict with local tax customs. Everyone in a startup company deserves their fair share of the company’s success, including the government!”

“Founders often split up all the equity in fixed amounts during the formation of a startup,” said Thomas Dhaenen, founding partner at Beyond Law Firm which specializes in business law, “the problem is that startup teams change or an individual’s commitment level changes. Such changes lead to disputes over equity splits that can be very detrimental and expensive to early-stage companies. The Slicing Pie model is designed to accommodate changes and adjust to keep things fair. It is an essential tool for startup founders.”

About Beyond Law Firm

We advise entrepreneurs and investors on how to incorporate and organize their companies and focus in particular on optimizing the set-up of innovative businesses. We counsel our clients in relation to corporate operations and questions pertaining to corporate governance, directors’ liability and the relations between shareholders. We also assist (international) groups in the corporate housekeeping of their (Belgian) entities.

With a very strong expertise in complex operations involving several jurisdictions, we represent a diverse range of domestic and international companies, VC’s and business angels in M&A in addition to fundraising operations and joint ventures.

For more information, contact Thomas Dhaenen

About BUFFL

BUFFL is an agile market research company that puts companies in live connection with their target audience. BUFFL provides validation in the palm of your hand and allows innovators and marketeers to validate their assumptions in just 30 min. Using its own research platform BUFFL developed a structured innovation methodology to validate business ideas in one week.

For more information, contact Seppe Stroo

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

New Feature Idea: The Bakery

We are considering the implementation of a new tool for Slicing Pie companies. The “Bakery” will be kind of like Craigslist for Slicing Pie. Companies (Pies) can post job openings or solicitations for other resources they need. For instance, you could post a job to hire a developer or let people know you are looking for a used T-Shirt press for your company.

Individuals can post their profile and what they have to offer. For example, an individual could post their profile and offer consulting services or legal services or spare office space or anything they have to offer, even angel investments.

Before we dive to deep into the development process, we would like your feedback and ideas on whether you would want to use a tool like this and how we can make it great!

Please enter your comments in the form below.