Mike Moyer's Blog, page 9

Pie Policy

While the mechanics of Slicing Pie are fairly straightforward in terms of tracking contributions over time, day-to-day decision making regarding financial matters can cause conflict among the team. For instance, some people may prefer equity over cash and vice versa, but who actually gets paid first when cash becomes available may not necessarily be decided on an individual’s preferences and it isn’t specified in the Slicing Pie framework.

When I designed Slicing Pie, I wanted a clear equity structure without too much ambiguity, while I haven’t created a structure for company policies (yet), I hope this article will shed some light on the topic.

SAMPLE PIE POLICIES FREE CHECK OUT

A company policy is a rule of conduct that is designed to serve the interests of both the company and the individual. Policies are shared with employees and help them do their job. Company policies are usually spelled out in a company handbook or similar document.

Policies can be whatever the management team wants them to be, but oppressive policies may make it hard to attract employees and overly-generous policies may make it hard to attract investors. For example, if you don’t allow employees to take any time off, people may not want to work for you. If, on the other hand, you provide 25 weeks of paid vacation, you may have created an unsustainable perk that will scare off investors because once a perk is out there it can be hard to reign in. Imagine what would happen if your company cut it’s 25-week vacation policy to a two-week policy!

Cancelling impractical perks created by policies may hurt company morale. Marissa Mayer cancelled the telecommuting policy when she started at Yahoo! much to the chagrin of telecommuting employees.

Some policies may be too good to be true, especially when they provide unusual perks to company employees. Google provides so much free food to employees that the IRS wanted to tax it as income.

Creating your corporate policies depends on your needs at any given time. Startups tend to have less generous policies than established companies because cash is scarce and the future is uncertain. Most startups don’t offer health benefits, for instance. However, a Slicing Pie company could introduce a policy that allocated a set number of slices per month in light of the fact that some employees may have to buy individual insurance.

Company policies that impact a person’s allocation of slices in the Pie should be carefully examined to make sure they don’t cause conflict among the team. It’s okay for your policies to change over time, but oppressive changes or changes that favor one employee over another may trigger a person’s ability to resign for good reason as outlined in the Slicing Pie recovery framework.

It’s okay for startup companies to have tighter spending policies and fewer benefits than established companies. It’s unusual for newly-formed startups to offer 401(k)s and health insurance. These are more common in post-revenue companies or after Series A investment.

Policies can cover a wide range of topics from parking privileges to sexual harassment. Below are a few common compensation examples that directly impact Slicing Pie for which your company should establish a policy:

Time-Off

Most employees will expect to be able to take time off work when they need it. In established companies, many entry-level jobs include two weeks paid time off. More senior-level employees may have more. Set expectations in advance and make sure team members know what they are entitled to. In the Slicing Pie model, paid time off means they may be contributing slices to the Pie even when they take vacation or stay home sick. Your company should be clear about how many slices they will contribute during these times. For instance, you might establish a policy that grants a number of slices per day off that equals the daily average of the previous six weeks. This way part-time employees won’t unfairly benefit from the policy vs. full-time employees.

I, personally, use an unpaid open vacation policy during the bootstrapping stage. This means team members can take as many days off as they want, but they will not be accruing slices in the Pie while they are away. As long as a person is doing their job, I don’t particularly care how they manage their time. When my companies become cash-flow positive, I like to move to a paid open vacation policy. Employees enjoy flexibility without losing compensation. Again, as long as the job is getting done everything is fine. I’ve never had a problem with abuse of an open vacation policy and it saves me the hassle of keeping track and paying out for unused time off.

Individual Expenses

When employees travel for work and the company is not able to provide reimbursement the employee’s expenses would convert to slices with the cash multiplier. As your team grows, it’s important to set some limits. First-class airfare and five-star hotels may not be practical for a startup. Just because you’re using slices doesn’t mean you can make bad business decisions!

For a startup, you might want to specify lowest available coach-class airfare, three-star hotels and a modest per diem for meals. You could even ask employees to share rooms when practical and appropriate and not cover alcoholic beverages.

When someone uses their own car for business trips, it is customary (at least in the US) to provide per-mile reimbursement, but you’ll need to specify if the per-mile payment is treated as cash, non-cash, or split. You can set up any one of these personal car policies in the Pie Slicer so this contribution is properly tracked.

Other personal expenses could include at-home Internet service for telecommuters, parking reimbursement at work, education expenses, office supplies and other items an individual would pay for and submit an expense report. Startups don’t have to cover every expense, but you need to be clear about what you will pay or provide slices for.

Company Expenses

Sometimes the company incurs expenses that are paid by individual employees. Perhaps an employee puts the company internet service on her credit card and is not reimbursed. This expense would convert to slices at the cash rate as long as the employee pay her bill and not the company. Other people might want to cover corporate expenses as a way of contributing more slices to the Pie. Managers will need a policy to determine who gets to pay which expenses.

In most cases, I recommend paying company expenses from the company bank account rather than running it through personal accounts. In the early days this may be impractical, but as your company grows you’ll need to get your banking organized. Slicing Pie’s Well feature allows individuals to contribute cash to a corporate savings account. When money is transferred from the savings account into a checking account to pay bills, the amount of the transfer converts to slices for each participant in proportion to their ownership of the Well account.

Well Contributions

A policy dealing with cash contributions into the Well would be smart too. A founder might reserve this right for him or herself, or provide a right of refusal for Well contributions to individuals in the order they were hired. For instance, if the company needed $10,000 to cover short-term expenses employee #1 might have the right to contribute all or part of the cash. Rights to contribute the remainder would roll to employee #2, then #3 and so on. This provides a benefit to early participants.

Alternatively, you could offer all participants an equal opportunity to contribute in the Well. Not everyone will be willing and/or able to contribute cash.

The amount of money in the Well should be enough to cover hard corporate expenses for three to four months or for enough time to get to your next, more efficient, funding round.

Angel Investments

If the company needs larger chunks of cash than the founders can contribute, the company should seek outside funding. Company managers will ultimately decide how much and from who they will raise this money. In many cases, a convertible note can be used to secure angel money. In other cases, especially for companies who don’t plan on going for a professional Series A round of financing, a “Slicing Pie” loan could work. A Slicing Pie loan is a typical loan with regular payments. As a debt tool, it has repayment preference over equity holders so it’s a little safer than an equity investment. However, if the company has to skip a payment, the payment would convert to slices at the cash rate.

In most cases, if you have an angel investment/loan you should draw down the loan before dipping into the Well. Your company policy will dictate whether loan payments can be made from the Well or if slices will be allocated to the angel investor.

Fair Market Compensation

As the company begins to generate revenue, it will be in a better position to pay expenses in cash rather than allocating slices. It’s in everyone’s best interest to create as few slices as possible, so the first expenses to be covered by incoming revenues are those that would otherwise consume cash. This is smart because cash has a higher multiplier than non-cash.

When all your cash needs are met, you can use the excess money to start paying non-cash expenses. I recommend that you pay salaries after all other non-cash obligations are met including rent, commissions, finder’s fees, royalties, etc. Your policy can be different, but I think salaries should be paid last.

When it comes to salaries, your company policy should dictate in which order people start getting paid for their contributions. Remember some people would rather have slices and some would rather have cash.

To avoid conflicts, you could create a policy for this. Let’s pretend a company has four employees holding, 10%, 20%, 30%, and 40% of the slices at a point in time where the company has $1,000 per week to pay salaries. Their fair market salaries at $50,000, $50,000, $75,000 and $75,000. Here is how different policies would determine the distribution of the salary budget.

Pay everyone equally as cash is available, so each person gets $200
Pay people in proportion to their percent of the slices, so payouts are $100, $200, $300 and $400
Pay people in proportion to their salary, so the payouts are $200, $200, $300 and $300
Pay people based on need

I prefer paying people in proportion to their salary. By doing this, everyone will get 100% of their salary at the same time and the Pie will bake (aka “freeze”).

Paying people on a go-forward basis will reduce their future slices so it’s best to wait until you have some predictable cash flow before you start making regular payments. The Pie Slicer software uses the unpaid portion of a person’s salary to determine an hourly rate to calculate slices. If each person is paid $200 per week that would reduce the unpaid portion of their salary by $10,400 (52 weeks). To reflect this in the Pie Slicer the salary of a $50,000 employee would be edited to $39,600 and the subsequent hourly rate would move from $25/hour or 50 slices/hour to $19.80/hour or 39.6 slices/hour on a go-forward basis.

This is different than reducing past slices.

Lump-Sum Payments

If you have unpredictable cash flows and unpredictable need, managers can choose to make Lump-Sum payments to individual participants. A Lump-Sum payment is essentially reimbursement for past contributions and would reduce slices accordingly. Lump-Sum payments will apply first to any balances in the Well, next as reimbursement of cash expenses and finally reimbursement of non-cash contributions. The Lump-Sum feature on the Pie Slicer (available in mid-2017) will make the calculations automatically.

Your company should be mindful of how Lump-Sum payments are handled. It could be your policy to not make Lump-Sum payments, put a cap and/or monthly limit on them, or handle them on a case-by-case basis. Because they reduce an individual’s slices they increase everyone else’s percent ownership which should help alleviate conflict. I prefer to handle them on a case-by-case basis, but keep them small enough to not cause cashflow problems. A Lump-Sum payment is a business investment that should be considered using a cost/benefit analysis. If it allows a key employee to make ends meet at home so they can stay with the company, it’s probably a good investment!

Spending Limits

Another way to manage expenses and, subsequently, slices, is to set spending limits for various positions before requiring approval by a manager or, ultimately, a board of directors (which most startups don’t have). Some positions, like customer service, may be authorized to refund a customer’s payments up to a certain amount before getting his or her manager to sign off. The manager would also have their own, higher spending limit and would also have to seek approval to exceed it.

It’s not unusual for senior-level marketing executives, who have to approve ad campaigns, to have higher spending limits than, say, a technology lead with more fixed resources. Within your spending limit policy you can specify how much of the expense the individual can cover personally in exchange for slices. This can create a logical advantage for senior managers to gain more slices than more junior-level employees. It’s usually beneficial for key employees to have more skin in the game than employees who are easier to replace.

Bureaucracy

Many people start companies or join companies to avoid bureaucracy and the introduction of policies and procedures may be resisted. Unfortunately, without them it is difficult for a company to grow and scale. Many founders are familiar with the term, “growing pains.” Companies who experience growing pains are companies who are fortunate enough to be gaining traction, but have not built the internal systems that allow it to grow without internal conflict and other issues. Clear policies can help the transition from startup to growth company.

That being said, creating traction in your business is more important than creating policies so make sure you keep your eye on the ball. Set policies as you need them and work with your team to gain consensus to avoid misunderstanding and bruised egos. Below are some sample policy documents that can get the Pie rolling. There are two sample documents, they are free!

SAMPLE PIE POLICIES FREE CHECK OUT

If you want advice on other corporate policies please ask in the comments below.

Pie Policies

While the mechanics of Slicing Pie are fairly straightforward in terms of tracking contributions over time, day-to-day decision making regarding financial matters can cause conflict among the team. For instance, some people may prefer equity over cash and vice versa, but who actually gets paid first when cash becomes available may not necessarily be decided on an individual’s preferences and it isn’t specified in the Slicing Pie framework.

When I designed Slicing Pie, I wanted a clear equity structure without too much ambiguity, while I haven’t created a structure for company policies (yet), I hope this article will shed some light on the topic.

SAMPLE PIE POLICIES FREE CHECK OUT

A company policy is a rule of conduct that is designed to serve the interests of both the company and the individual. Policies are shared with employees and help them do their job. Company policies are usually spelled out in a company handbook or similar document.

Policies can be whatever the management team wants them to be, but oppressive policies may make it hard to attract employees and overly-generous policies may make it hard to attract investors. For example, if you don’t allow employees to take any time off, people may not want to work for you. If, on the other hand, you provide 25 weeks of paid vacation, you may have created an unsustainable perk that will scare off investors because once a perk is out there it can be hard to reign in. Imagine what would happen if your company cut it’s 25-week vacation policy to a two-week policy!

Cancelling impractical perks created by policies may hurt company morale. Marissa Mayer cancelled the telecommuting policy when she started at Yahoo! much to the chagrin of telecommuting employees.

Some policies may be too good to be true, especially when they provide unusual perks to company employees. Google provides so much free food to employees that the IRS wanted to tax it as income.

Creating your corporate policies depends on your needs at any given time. Startups tend to have less generous policies than established companies because cash is scarce and the future is uncertain. Most startups don’t offer health benefits, for instance. However, a Slicing Pie company could introduce a policy that allocated a set number of slices per month in light of the fact that some employees may have to buy individual insurance.

Company policies that impact a person’s allocation of slices in the Pie should be carefully examined to make sure they don’t cause conflict among the team. It’s okay for your policies to change over time, but oppressive changes or changes that favor one employee over another may trigger a person’s ability to resign for good reason as outlined in the Slicing Pie recovery framework.

It’s okay for startup companies to have tighter spending policies and fewer benefits than established companies. It’s unusual for newly-formed startups to offer 401(k)s and health insurance. These are more common in post-revenue companies or after Series A investment.

Policies can cover a wide range of topics from parking privileges to sexual harassment. Below are a few common compensation examples that directly impact Slicing Pie for which your company should establish a policy:

Time-Off

Most employees will expect to be able to take time off work when they need it. In established companies, many entry-level jobs include two weeks paid time off. More senior-level employees may have more. Set expectations in advance and make sure team members know what they are entitled to. In the Slicing Pie model, paid time off means they may be contributing slices to the Pie even when they take vacation or stay home sick. Your company should be clear about how many slices they will contribute during these times. For instance, you might establish a policy that grants a number of slices per day off that equals the daily average of the previous six weeks. This way part-time employees won’t unfairly benefit from the policy vs. full-time employees.

I, personally, use an unpaid open vacation policy during the bootstrapping stage. This means team members can take as many days off as they want, but they will not be accruing slices in the Pie while they are away. As long as a person is doing their job, I don’t particularly care how they manage their time. When my companies become cash-flow positive, I like to move to a paid open vacation policy. Employees enjoy flexibility without losing compensation. Again, as long as the job is getting done everything is fine. I’ve never had a problem with abuse of an open vacation policy and it saves me the hassle of keeping track and paying out for unused time off.

Individual Expenses

When employees travel for work and the company is not able to provide reimbursement the employee’s expenses would convert to slices with the cash multiplier. As your team grows, it’s important to set some limits. First-class airfare and five-star hotels may not be practical for a startup. Just because you’re using slices doesn’t mean you can make bad business decisions!

For a startup, you might want to specify lowest available coach-class airfare, three-star hotels and a modest per diem for meals. You could even ask employees to share rooms when practical and appropriate and not cover alcoholic beverages.

When someone uses their own car for business trips, it is customary (at least in the US) to provide per-mile reimbursement, but you’ll need to specify if the per-mile payment is treated as cash, non-cash, or split. You can set up any one of these personal car policies in the Pie Slicer so this contribution is properly tracked.

Other personal expenses could include at-home Internet service for telecommuters, parking reimbursement at work, education expenses, office supplies and other items an individual would pay for and submit an expense report. Startups don’t have to cover every expense, but you need to be clear about what you will pay or provide slices for.

Company Expenses

Sometimes the company incurs expenses that are paid by individual employees. Perhaps an employee puts the company internet service on her credit card and is not reimbursed. This expense would convert to slices at the cash rate as long as the employee pay her bill and not the company. Other people might want to cover corporate expenses as a way of contributing more slices to the Pie. Managers will need a policy to determine who gets to pay which expenses.

In most cases, I recommend paying company expenses from the company bank account rather than running it through personal accounts. In the early days this may be impractical, but as your company grows you’ll need to get your banking organized. Slicing Pie’s Well feature allows individuals to contribute cash to a corporate savings account. When money is transferred from the savings account into a checking account to pay bills, the amount of the transfer converts to slices for each participant in proportion to their ownership of the Well account.

Well Contributions

A policy dealing with cash contributions into the Well would be smart too. A founder might reserve this right for him or herself, or provide a right of refusal for Well contributions to individuals in the order they were hired. For instance, if the company needed $10,000 to cover short-term expenses employee #1 might have the right to contribute all or part of the cash. Rights to contribute the remainder would roll to employee #2, then #3 and so on. This provides a benefit to early participants.

Alternatively, you could offer all participants an equal opportunity to contribute in the Well. Not everyone will be willing and/or able to contribute cash.

The amount of money in the Well should be enough to cover hard corporate expenses for three to four months or for enough time to get to your next, more efficient, funding round.

Angel Investments

If the company needs larger chunks of cash than the founders can contribute, the company should seek outside funding. Company managers will ultimately decide how much and from who they will raise this money. In many cases, a convertible note can be used to secure angel money. In other cases, especially for companies who don’t plan on going for a professional Series A round of financing, a “Slicing Pie” loan could work. A Slicing Pie loan is a typical loan with regular payments. As a debt tool, it has repayment preference over equity holders so it’s a little safer than an equity investment. However, if the company has to skip a payment, the payment would convert to slices at the cash rate.

In most cases, if you have an angel investment/loan you should draw down the loan before dipping into the Well. Your company policy will dictate whether loan payments can be made from the Well or if slices will be allocated to the angel investor.

Fair Market Compensation

As the company begins to generate revenue, it will be in a better position to pay expenses in cash rather than allocating slices. It’s in everyone’s best interest to create as few slices as possible, so the first expenses to be covered by incoming revenues are those that would otherwise consume cash. This is smart because cash has a higher multiplier than non-cash.

When all your cash needs are met, you can use the excess money to start paying non-cash expenses. I recommend that you pay salaries after all other non-cash obligations are met including rent, commissions, finder’s fees, royalties, etc. Your policy can be different, but I think salaries should be paid last.

When it comes to salaries, your company policy should dictate in which order people start getting paid for their contributions. Remember some people would rather have slices and some would rather have cash.

To avoid conflicts, you could create a policy for this. Let’s pretend a company has four employees holding, 10%, 20%, 30%, and 40% of the slices at a point in time where the company has $1,000 per week to pay salaries. Their fair market salaries at $50,000, $50,000, $75,000 and $75,000. Here is how different policies would determine the distribution of the salary budget.

Pay everyone equally as cash is available, so each person gets $200
Pay people in proportion to their percent of the slices, so payouts are $100, $200, $300 and $400
Pay people in proportion to their salary, so the payouts are $200, $200, $300 and $300
Pay people based on need

I prefer paying people in proportion to their salary. By doing this, everyone will get 100% of their salary at the same time and the Pie will bake (aka “freeze”).

Paying people on a go-forward basis will reduce their future slices so it’s best to wait until you have some predictable cash flow before you start making regular payments. The Pie Slicer software uses the unpaid portion of a person’s salary to determine an hourly rate to calculate slices. If each person is paid $200 per week that would reduce the unpaid portion of their salary by $10,400 (52 weeks). To reflect this in the Pie Slicer the salary of a $50,000 employee would be edited to $39,600 and the subsequent hourly rate would move from $25/hour or 50 slices/hour to $19.80/hour or 39.6 slices/hour on a go-forward basis.

This is different than reducing past slices.

Lump-Sum Payments

If you have unpredictable cash flows and unpredictable need, managers can choose to make Lump-Sum payments to individual participants. A Lump-Sum payment is essentially reimbursement for past contributions and would reduce slices accordingly. Lump-Sum payments will apply first to any balances in the Well, next as reimbursement of cash expenses and finally reimbursement of non-cash contributions. The Lump-Sum feature on the Pie Slicer (available in mid-2017) will make the calculations automatically.

Your company should be mindful of how Lump-Sum payments are handled. It could be your policy to not make Lump-Sum payments, put a cap and/or monthly limit on them, or handle them on a case-by-case basis. Because they reduce an individual’s slices they increase everyone else’s percent ownership which should help alleviate conflict. I prefer to handle them on a case-by-case basis, but keep them small enough to not cause cashflow problems. A Lump-Sum payment is a business investment that should be considered using a cost/benefit analysis. If it allows a key employee to make ends meet at home so they can stay with the company, it’s probably a good investment!

Spending Limits

Another way to manage expenses and, subsequently, slices, is to set spending limits for various positions before requiring approval by a manager or, ultimately, a board of directors (which most startups don’t have). Some positions, like customer service, may be authorized to refund a customer’s payments up to a certain amount before getting his or her manager to sign off. The manager would also have their own, higher spending limit and would also have to seek approval to exceed it.

It’s not unusual for senior-level marketing executives, who have to approve ad campaigns, to have higher spending limits than, say, a technology lead with more fixed resources. Within your spending limit policy you can specify how much of the expense the individual can cover personally in exchange for slices. This can create a logical advantage for senior managers to gain more slices than more junior-level employees. It’s usually beneficial for key employees to have more skin in the game than employees who are easier to replace.

Bureaucracy

Many people start companies or join companies to avoid bureaucracy and the introduction of policies and procedures may be resisted. Unfortunately, without them it is difficult for a company to grow and scale. Many founders are familiar with the term, “growing pains.” Companies who experience growing pains are companies who are fortunate enough to be gaining traction, but have not built the internal systems that allow it to grow without internal conflict and other issues. Clear policies can help the transition from startup to growth company.

That being said, creating traction in your business is more important than creating policies so make sure you keep your eye on the ball. Set policies as you need them and work with your team to gain consensus to avoid misunderstanding and bruised egos. Below are some sample policy documents that can get the Pie rolling. There are two sample documents, they are free!

SAMPLE PIE POLICIES FREE CHECK OUT

If you want advice on other corporate policies please ask in the comments below.

Seth Godin: On pie

On pie

“This is all the pie I received, but that’s okay.”

“I have a small piece of pie, but others have an even smaller piece, so I’m sharing mine.”

“I want all the pie.”

“I don’t want all the pie, just your piece.”

“The pie isn’t big enough for all of us, I’m going to work to make it bigger.”

“I have the biggest piece of pie, want to see?”

“I have the biggest piece of pie, but that’s not enough, so I’m going to work hard to take some of yours.”

“If I can’t have a big enough piece of pie, I’m going to put my fist through the entire thing and no one gets any pie.”

“If I delay gratification and wait a bit, my piece of pie will be bigger.”

“Bob has a bigger piece of pie than I do, so I’m going to go deep into debt so I can buy more pie.”

“If we eat less pie now and invest it, we can have more pie later.”

“The only fair thing to do is give everyone an equally sized piece of pie.”

“I can’t possibly eat all the pie I’ve got, but I refuse on principle to share the rest.”

“Apple? I hate apple. Why can’t we have blueberry?”

“I’m able to skirt the rules and end up with two pieces of pie when everyone is only supposed to get one.”

“No matter how much pie there is, it’s not enough, and we should risk the pie to make more pie.”

“Whoever is responsible for allocating pie is a crook, destroy the pie allocators!”

“More pie now is way better than the promise of some pie later.”

“Pie? I don’t eat pie.”

____

Thank you, Seth, for allowing us to re-post this content!

Mike Moyer Interview on The Game Changer Network

Slicing Pie is not complicated. It is a simple formula based on the principle that a person’s % share of the equity should always be equal to that person’s share of the at-risk contributions.

At-risk contributions include time, money, ideas, relationships, supplies, equipment, facilities or anything else someone provides without full payment of it’s fair market value. Every day people contribute more and more to a company in hopes that it will someday generate a profit, go public or sell. Because contributions are constantly being made, the model is dynamic. It self-adjusts to stay fair.

Slicing Pie is used by entrepreneurs all over the world . The books, videos and content provide detailed instructions on making the model work for your company. Slicing Pie is the fairest way to split equity on the planet!

Mike Moyer is the author of eight books that provide structured advice to people who want to solve specific problems like splitting equity in their startup company or delivering an awesome sales pitch. He mostly writes and speaks about business and entrepreneurship.

In addition to writing and speaking, Mike is the founder of Fair and Square Ventures, LLC where he invests in early-stage ventures and provides consulting focused on management and revenue generation.

Click below to hear Mike’s interview with Chicke Fitzgerald, host of The Game Changer Network.

Slicing Pie Case Study: statUP

Like many entrepreneurs, Isaiah McPeak had some bad experiences with fixed splits early in his career. “In one company, there were five equal partners, one of them did basically nothing which was very frustrating for the rest of us, we eventually folded,” he remembers. “In another, we wound up in a fight and had to buy out one of our partners which we thought was unfair. I didn’t want to make that mistake again and I was happy to find Slicing Pie after searching the Internet for fair equity split models.”

It took a little convincing, but Isiah was able to get his early co-founders on board to use Slicing Pie and found it to be an invaluable tool for the launch of statUP in May of 2015. “We were able to bring in a CTO and some early employees before we had cash,” he explained, “without Slicing Pie we would not have been able to do that. We were also able to secure some important consultants who worked for slices instead of cash.” Along the way, the company added new employees and parted ways with others, “Slicing Pie helped us split amicably with employees who left the company,” he added.

“We used the recommended settings in Slicing Pie, but there were still a few issues,” Isaiah noted, “first, one of our early investors had a lawyer who didn’t understand the model. It was hard to work through, but it was well worth the effort and I’d do it again. Second, we struggled with allocating the right finder’s fee when an investor made multiple rounds of investment. We should have worked out how it would be paid ahead of time. Lastly, the team had different levels of detail when tracking time so we had to make a few adjustments at the end, but it worked out fine.”

The team used Slicing Pie during the critical bootstrapping phase of statUP and were able to terminate the Pie when they raised a seed round of funding in December of 2016. Isaiah said his experience was very positive, “we couldn’t have gotten where we are without Slicing Pie. We are grateful for the concept. Even though, ironically, once understood it sounds more ‘normal’ than alternatives!”

About statUP

statUP is a skill tracking app for youth sports. Starting with soccer, we help athletes earn stats that matter to coaches. Athletes take tests, earn stats, and level up their skills. For more information visit, statUP.com.

Overcoming Objections to Slicing Pie

Slicing Pie is a new way of thinking about very old problem. Many smart people suffer from fear of the new (Neophobia) and fear of change (Metathesiophobia). Slicing Pie requires people to not only consider something new, but also change the way they think about a problem that’s been around since the Paleolithic era when cave men carved bad equity agreements in stone (I think).

Traditional splits, as flawed as they are, feel safe and snugly to people who know how to work with them. Faced with Slicing Pie, these people will furl their brows, cross their arms, and begin to squirm in their seats. I’ve seen it all.

I’ve been facing Slicing Pie naysayers for years and I’ve become more adept at responding to them. If you or your partners are feeling skeptical about the model, below are some of the more common objections I’ve heard over the years and my attempt to address them. In my experience, objections are good things. Someone who raises objections is someone who is thinking through the model and trying to understand it. Once someone gets their head around the model they are more likely to object to traditional models rather than Slicing Pie. Many skeptics turn into fans.

Slicing Pie works. I’ve never found an equity problem that Slicing Pie won’t improve. Every bootstrapped startup in the world should use Slicing Pie!

If you, or your teammates, partners, employees, lawyers, accountants, advisors, investors, suppliers, professors, mothers, fathers, sisters, brothers, uncles, aunts and drinking buddies have other objections please, please, please contact me.

If you are bootstrapping your startup, Slicing Pie will work for you, I promise. Do not split your equity another way, you will only be setting yourself up for failure!

My Partners Don’t Want to Use It

In my experience, there are three main reasons why someone would not want to use Slicing Pie.

The first reason is that they don’t fully understand how it works and why it’s fair. If this is the case, ask them to access the books, videos, games and articles on the subject or even set up a call with me. Education is the first step.

The second reason is that they understand it, but don’t want to keep track of their contributions. The Slicing Pie software makes this really easy. It takes minimal effort. So little effort, in fact, that if it’s still a deal breaker for them, they may not be the kind of person who can get stuff done.

The third reason is that they are the kind of person who is willing to benefit from an unfair split. Do not work with these people.

I Want to Maintain Control

Slicing Pie will give control to 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.

That being said, there are reasons why consolidating control to one person or group of people may be a necessity. The good news is that there are a number of structures that would allow consolidated control even—for a minority shareholder—while still providing fair financial benefits to other shareholders:

A Slicing Pie profit-sharing program would provide all the financial benefits to partners while consolidating control to select individuals.


A Slicing Pie vesting or buyback program can be set up to consolidate decision making to select individuals for a period of time.

Control is not a reason to implement an unfair split.

It’s Too Complicated, I Want Something Simple

Like many things in life, Slicing Pie is more complex than just guessing (which is how most equity splits are created). But, the basic principle is quite simple:

A person’s % share of the rewards should always equal that person’s % share of what’s put at risk to achieve those rewards.

The simplicity of Slicing Pie is what makes it work. Yes, you have to understand how to determine fair market value and yes, you have to keep track of what people are doing and how money is spent; but these are basic skills of any good business person. Real complexity comes in the form of legal disputes over fixed equity splits that always seem to come to a head when you’re trying to raise money or grow your company.

My Lawyer Said There Will Be Legal and Tax Issues

Of course there will be! Every company faces legal and tax issues no matter how it’s structured. Slicing Pie companies face the exact same issues and, like with any corporate structure, the issues need to be addressed.

Your lawyer may not have experience with Slicing Pie so it’s easier for them to steer you in a direction they are more familiar with, but that doesn’t mean there’s something wrong with Slicing Pie. It simply means your lawyer doesn’t want to learn about something new. Tell your lawyer that Slicing Pie has been successfully implemented all over the world and that I will personally spend some time with them to bring them up to speed on how it works. If they still don’t like it, find a new lawyer.

There’s Too Much Uncertainty

Some people think that dividing up equity in fixed chunks provides more certainty than a dynamic program like Slicing Pie. That is a misconception. The truth is that all equity splits are dynamic because they all change. No matter what founders do with their split in the beginning it’s bound to change as the mix of team members and investors and partners change (as is always the case). Slicing Pie simply gives you a fair, logical, automated way of managing this change. The alternative is to constantly renegotiate the fixed split. That’s why I call it the “Fix & Fight” model.

Nobody Likes Tracking Their Time

Me neither! Tracking time is kind of a hassle, but you and your team can determine how much granularity you want to track. You can track by hour or day or week or month or even year!

The increments need to be useful enough to capture differences in commitment. If you’re tracking by day, for instance, a person working one hour per day is clearly not as committed as a person working 14 hours a day. If your whole team is working full time, it may be less of an issue than a team with different levels of commitment.

Once people understand that their equity level depends in part on their level of time commitment, tracking becomes less of an issue. Additionally, good time records are an invaluable tool for managing employees and investor due diligence. Imagine being able to show a potential investor detailed records of how your company developed, who did what and how you spent money—it’s an incredible tool.

Productivity is More Important Than Hours On the Job  

I agree, but most jobs in the non-startup world pay people for based on time, not on productivity.

Imagine being in a job where each week your manager would assess your productivity and only pay you what she thought you were worth that week. It would be an insane nightmare.

Slicing Pie reflects reality. In the non-startup world, people are expected to perform and are paid on a regular basis based on the expected performance. Really productive employees get bonuses or raises and unproductive get fired.

Some jobs are easy to tie to productivity. Sales or piecework, for instance, can be paid for performance. If your work is highly variable this is much harder and often impractical.

It’s Too Much Work

Tracking inputs does take a little discipline, but all good businesses require discipline. Slicing Pie sits on top of things most good businesses do anyway.

Most business track sales, investments, commissions and expenses anyway. Most people are comfortable with saving receipts and keeping track of out-of-pocket business expenses. Most people can manage their personal schedule and are in-tune with how they spend their time. If someone on your team thinks these things sound like too much work, maybe you should reconsider their participation.

Investors Won’t Like It

Professional investors want a clean, fair, logical, conflict-free cap table which is exactly what Slicing Pie delivers. It also delivers records of who is doing what and how money is spent- pure gold during due diligence.

Traditional fixed splits tend to create disgruntled absentee owners, team member disputes and complex cap-tables with multiple classes of stock and poorly-negotiated shareholder’s agreements. Investors definitely won’t like that!

My Advisors Told Me to Stick with Traditional Approaches  

If you’re advisors are telling you this, they don’t understand the model. Get them up to speed by sharing this book, pointing them to SlicingPie.com or connecting them with me personally. Business is constantly in flux and a good advisor should be informed on best practices. Slicing Pie is a significant improvement over traditional models. If your advisor doesn’t appreciate the model, please find a new advisor, or don’t take their advice and use Slicing Pie anyway.

 

 

 

 

Re-Calibration Tool

Use this spreadsheet to determine how many shares the company should buy-back from participants so the new split aligns with the Slicing Pie allocation. Buying back shares, rather than issuing new shares, could help avoid unnecessary taxes. Talk to a Slicing Pie Lawyer about what’s best for you!

Click Here to Download the Spreadsheet

Lump-Sum Payments

Occasionally, an individual will need (or want) cash for their own use. If the company is in a position to provide cash, it can do so by making a lump-sum payment to the individual in any amount. In Slicing Pie, cash payments reduce at-risk contributions so when a lump -sum payment is made it will reduce the individual’s slices. To make sure the reduction is fair, you should apply the payment in the following way:

First, the lump-sum payment will, in effect, reimburse the individual for cash contributions reducing slices at the cash rate until all cash payments have been reimbursed.
Second, any remaining amount will be applied to the individual’s Well balance, if any. This will not reduce slices, but will decrease the person’s ownership in the Well.
Third, the remainder will be applied to non-cash contributions.

I do not recommend making lump-sum payments in excess of the individual’s total contribution.

By applying the payments in this order, you make the most efficient use of the money and reduce slices appropriately.

For example, Tom is a Grunt who has 4,000 slices and a $1,000 balance in the Well. His slices break down like this assuming his Pie is using the the recommended cash multiplier of four and non-cash multiplier of two:

Contribution
Amount
Slices*


Cash
$250
1,000


Non-Cash
$1,500
3,000



TOTAL
4,000

 

He asks the company for a lump-sum payment of $1,750.

The payment is applied first to his cash contributions: $1,750 – $250 = $1,500. This eliminates slices from cash contributions:

Contribution
Amount
Slices*


Cash
$0
0


Non-Cash
$1,500
3,000



TOTAL
3,000

 

Next, the remaining $1,500 is applied to his Well balance which is $1,000 (see above). $1,500 – $1,000 = $500. This does not affect his slices, but does reduce future slices he might get when Well money is used.

The remaining $500 is applied to his non-cash contributions: $1,500 – $500 = $1,000.

Contribution
Amount
Slices*


Cash
$0
0


Non-Cash
$1,000
2,000



TOTAL
2,000

Tom now has 2,000 slices in the Pie and $1,750 in his pocket.

It’s logical that cash payments would first cover cash expenses. It’s also logical that if Tom needs money it would come out of the Well. By reducing cash expenses first, you remove slices from the Pie creating a natural disincentive for Tom to ask for lump-sum payments. If you reduced the Well first and allowed the cash slices to remain, Tom would not experience any consequences for asking for the money. Slicing Pie always aligns incentives with the interests of the firm.

If you were to apply the lump-sum to non-cash payments before the Well balance you would be allowing Tom to get slices for paying himself (if the money was drawn from the Well). This actually creates an incentive to ask for the money which is also gaming the system which is not in line with the spirit of the model.

To illustrate this, pretend Tom has $1,000 in the Well and $1,000 in non-cash contributions:

Contribution
Amount
Slices*


Cash
$0
0


Non-Cash
$1,000
2,000



TOTAL
2,000

 

If you apply the payments to non-cash first, he now has an incentive to ask for a lump-sum payment. The money would eliminate his non-cash contribution:

Contribution
Amount
Slices*


Cash
$0
0


Non-Cash
$0
0



TOTAL
0

 

But, if the money was drawn out of the Well, Tom would receive slices:

Contribution
Amount
Slices*


Cash
$1,000
4,000


Non-Cash
$0
0



TOTAL
4,000

 

So, Tom has basically paid himself using Well money which leave less money in the bank and rewards him with twice the slices! This is not fair and, therefore, against the rules of Slicing Pie. Gaming the system would be grounds for termination for cause.

There is nothing wrong with making lump-sum payments to Grunts who need money as long as you apply the payment properly and reduce slices accordingly. Slicing Pie not only ensures a perfect split, but also aligns incentives of all participants.

Introducing The Slicing Pie Handbook

Building upon the worldwide success of the Slicing Pie equity formula, The Slicing Pie Handbook teaches, guides and inspires entrepreneurs to boldly enter business partnerships knowing that financial gains will be fairly distributed to all participants. The book provides actionable, detailed instructions for creating an airtight business partnership in a world where unfair agreements are the rule, not the exception.

Author Mike Moyer, a career entrepreneur, angel investor and faculty member in entrepreneurship at both Northwestern University and the University of Chicago, is an experienced entrepreneur who has been involved in many partnerships with both happy and not-so-happy endings. He invented the Slicing Pie equity model to provide a logical framework to allocate business profits and other income to early company participants. “The Slicing Pie Handbook provides not only step-by-step instructions for implementing creating a foolproof partnership agreement, but also for fixing partnership agreements already in place,” explained Moyer.

It’s easy to overlook the importance of laying the right foundation for a business partnership. Noam Wasserman, author of The Founder’s Dilemmas, wrote the foreword for The Slicing Pie Handbook. As a faculty member at Harvard University, he conducted a longitudinal study of startup companies and found that many founders formed partnerships based on “quick handshakes” and equal equity splits which often lead to important issues for the company and team. The Slicing Pie model provides a framework to avoid problems associated with traditional methods.

“The Slicing Pie model has been used successfully in companies all over the world,” said Moyer, “the new book will make it even easier for entrepreneurs to implement the model in their own startups. The traditional models for equity ownership are simply inadequate for today’s fast-paced entrepreneurial environment. Slicing Pie is the only way a team can guarantee a fair split.”

I Want My Money Back! Losing Investors in Slicing Pie

Although I don’t think it happens very often (at least in my experience), sometimes people who invest their money in a startup get cold feet and want their money back. Conversely, founders may accept investments that they later decide they do not need. Slicing Pie is designed to accommodate unforeseen changes of heart when it comes to cash investments.

If your company is growth-oriented and plans on raising professional investments during a Series A round, most friends & family and small angel investors will be happy accepting a convertible note or SAFE (simple agreement for future equity). These tools represent the fair market for small investment and will not contribute slices to the Pie.

However, in many cases, individuals who spend cash will contribute slices in a number of ways:

They pay company expenses and do not get reimbursed
They contribute cash to the Well that is subsequently withdrawn and spent

A person who covers $1,000 in expenses for a company using the recommended cash multiplier of 4 would contribute 4,000 slices in the pie. Later, if they want their money back, or if the company wants to give them their money back, the Slicing Pie recovery rules apply.

In the event of separation, Slicing Pie creates appropriate consequences for the at-fault party to discourage people from making decisions or engaging in behavior that could harm others. If a participant is at-fault, they lose their slices for non-cash contributions and slices for cash contributions would be recalculated without the multiplier (Some slices may be protected if the company opts for loyal employee protection.) The company could force a buyback at $1 per slice. If the company is at-fault the participant would keep all their slices in the Pie. The company can offer a buyback at $1 per slice.

The recovery framework rules in Slicing Pie apply to all participants (with limited exceptions for advisors). Remember that a participant can be leave a company for four different reasons as outlined in the book:

Fired for good reason
Resign for no good reason
Fired for no good reason
Resign for good reason

The first two reason are the fault of the person leaving and the second two reasons are the fault of the company.

Like an employee, an investor could be fired for good reason if they commit acts of moral turpitude like stealing from the company or harassing employees. However, there generally aren’t any performance issues for investors so they can’t be fired for performance-related issues. It’s more likely that they will, for their own personal reasons, ask for their money back. This is, in effect, resignation for no good reason.

To complete the buyout, money sitting in the Well can immediately be returned to the individual. It was never an at-risk contribution so it is not part of the Pie and is not subject to the recovery rules. Next, existing slices would be recalculated without the multiplier. The slices would remain in the Pie and the company can buy them back a $1 per slice payable whenever the company can afford to pay it before break even or Series A. If the company waits until after break even or Series A, the Pie would freeze and the investor would own a permanent share of the company. They would be entitled to a share of the dividends when paid. And, if the company sets a value, their share would reflect the new value, not the buyout price. It is for this reason that a quick buyback is preferred.

Conversely, if the company wants to get rid of an investor they are essentially firing them for no good reason. Again, cash in the Well would be paid back immediately, but the remaining slices would keep the multiplier and the company can offer to buy them back at $1 per slice keeping in mind that they can’t force a buyback. So, if Joe covers $1,000 of expenses for your company and you’re using the 4x multiplier, you will have to offer $4,000 to get rid of him. He doesn’t have to take it if he doesn’t want to.

Lastly, if a company has a significant change in strategy or team, it may not be the company the investor signed up for and, therefore, they would be entitled to resign for good reason. They would immediately get their Well balance back and offer their shares back to the company with the multiplier. Nobody can force a company to buy out slices because startups in the bootstrapping phase don’t have cash.

Looking at investors through the same lens as an employee allows the Slicing Pie model to maintain a perfect split and allow founders to navigate an otherwise perilous negotiation.

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