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Kindle Notes & Highlights
by
Mike Moyer
Started reading
September 15, 2020
Slicing Pie is based on a simple principle: a person’s % share of the rewards should always be equal to that person’s % share of what’s put at risk to attain those rewards. When a person contributes to a startup company and does not get paid for their contribution, they are putting their contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at-risk is knowable. It is equal to the fair market value of the contributions.
Let’s say, in our example above, that instead of selling in the second quarter, Norvin decided to bail out because he found a high-paying job somewhere else. This is resignation for no good reason. It may be a good reason to Norvin, but it’s not a good reason for the company. In the Slicing Pie model Norvin bears the brunt of the cost and he would lose the equity he earned for any intangible contributions like time. (Tangible contributions like money and equipment are treated a little differently
The calculations are not reflections of actual value; they are simply ways of determining the right split and aligning incentives. The company’s actual value is still virtually nothing.
The ideal startup team consists of people who want to work together to generate rewards and take only what they deserve. Slicing Pie is about doing right by those who help your company succeed.
Slicing Pie is used before breakeven. Equity is based on what people put at-risk. After breakeven everyone is getting paid, so equity is no longer about what’s at-risk.
Remember, a person’s % share of the rewards should equal their % share of what’s put at risk.
The opportunity cost of working for a startup is equal to the amount of money you would have earned elsewhere doing a similar job. Similarly, the fair market value of office space is equal to the amount of money the landlord can charge for that space.
Because fair market value is so easy to observe, it can be used as an important component for the calculation of ownership or other interest in the income generated by a startup company. Using easily observable values means we don’t have to guess. Most of this book and the Slicing Pie book is about how to determine fair market value and apply the formula.
Multipliers are the secret ingredient that makes Slicing Pie work.
A “slice” is a fictional unit of measure that reflects the adjusted at-risk contributions made by individual participants. Slices will allow you to calculate equity or profit sharing. This
Non-cash contributions include time, ideas, relationships (that turn into customers, suppliers, employees or investors), pre-owned equipment or supplies, and some resources such as office space. Cash contributions consist primarily of unreimbursed expenses and, of course, cash.
You may not have what you desire, but you will certainly have what you deserve.
If the company pays 100% of the fair market value it shouldn’t have to provide equity at all because the individual isn’t putting any salary at-risk.
I recommend a non-cash multiplier of two (2x) and a cash multiplier of four (4x). These numbers are set based on my personal experience with the model and they are important. Resist the urge to change them!
Cash is given a higher premium because it’s much harder to save money than it is to earn money. The multipliers recognize the difference in scarcity between cash and non-cash contributions. Most (not all) people have more time than money. The higher multiplier provides incentives to people to contribute cash. After all, cash is king!
You may not have noticed that non-cash calculations use pre-tax dollars and cash calculations use post-tax dollars.
In the Slicing Pie model, you have to measure what you can. Because of this, please keep the multipliers constant. They are a key part of why the Slicing Pie model works so well for so many companies. If you’re still not convinced, you are free to change the multipliers or eliminate them completely. Just don’t be surprised when you run into problems!
A “slice” is a fictional unit of measure that allows entrepreneurs to allocate a percentage of the pie based on observable values instead of guesses about the future. Slices reflect what someone would get paid for the same contribution to another company that could pay and a multiplier/normalizer that reflects the high risk of never getting paid at all. A company uses slices when it can’t pay cash. There are two steps to allocate equity, or profit sharing, in your business. First, convert contributions to slices: Slices = Fair Market Value x Multiplier (Cash or Non-Cash) Because cash is
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If you’re dealing with actual cash, then the fair market value is equal to the amount of cash spent. If the cash isn’t spent, it’s not at risk. It’s just sitting in the bank. Slices get allocated when the cash gets spent.
Anne pays $30 a month to take the train to the offices of her startup company and does not get reimbursed. Anne would not receive any Pie. Notice that, in the last example, Anne does not receive any Pie even though she incurred an expense that was business related and she did not get reimbursed. This is because her expense was a commuting expense and it is not customary to reimburse commuting expenses. Most employers—at least in the USA—don’t reimburse expenses associated with getting to work, so the startup shouldn’t give Pie. Similarly, if Anne buys lunch for herself, she can’t ask for Pie
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To be clear, when employees use their own money to pay for things on behalf of the company and do not get paid back, this is an unreimbursed expense. The money they use does not go into the Well because it’s spent on a specific item.
Slicing Pie does not take a person’s risk tolerance into account when calculating slices. It only accounts for actual at-risk contributions. If someone has a low tolerance for risk, they may feel a high level of anxiety when contributing money to a startup. This doesn’t change the fair market value of the money, however. Someone with a high tolerance for risk may invest their life savings, but this doesn’t change the fair market value of the money they actually invest. A basic rule about investing is not to invest any more than you can afford to lose. If you can’t tolerate the risk, don’t
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It’s important to note that when slices are received, the supplies and equipment become the property of the company. This means that if the person who contributed the equipment leaves the company, they can’t take the stuff with them. However, as you’ll see in the chapter on the Recovery Framework, the person may be entitled to some kind of payment.
In many cases, personal laptops or cellphones used in building the company would not be treated as contributed equipment and people who own them would not receive slices. The company, therefore, would not own these items and departing employees can take them when they leave. Similarly, small amounts of supplies brought from home may not warrant slices. Use your best judgment here; a person probably doesn’t deserve slices for bringing a tape dispenser and some old pens to the office. Cash contributions or tangible contributions will have special treatment in the event of separation, which I
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Now, because of the card, you can simply pay for everything you need. You can pay employees, rent, utilities, sales commissions—everything! The non-frivolous amount you would pay is the fair market value. So, if you are a smart shopper you can negotiate the right price for the things you need, but instead of paying, you’ll simply add slices to the pie! This is the basic idea, and I’ll provide more detail below.
For example, if a person is “perfectly happy” making $50,000 a year as a marketing executive, they should be willing to accept a similar amount for similar work at a startup (to be paid in Pie). However, if that person is leaving their job as a marketing executive to flip burgers at a burger startup, the fair market rate would be the rate at which the person would otherwise be paid to flip burgers at a similar establishment. Big companies, like McDonalds or In ‘N’ Out Burger, are likely to have a significant influence on the fair market rate for burger-flippers.
This is the part of the program that some people find concerning (sometimes). The first thing that people don’t like about this calculation is the thought of tracking their time. Most people, including me, don’t like tracking their time. However, few things will give you better insight into what is going on with your startup company than a time report. If you don’t know what people are spending time on, then you probably don’t have a good handle on your business.
Most time-tracking systems, including the online Pie Slicer, will ask for notes on what was done during the time logged. Your time log reports are an excellent coaching tool for helping people to better manage their time and become more productive. Not long ago, I spoke to an entrepreneur who was frustrated with his company’s inability to generate revenue—a common complaint among startups.
Time reports will not only tell you what someone is focusing on, but how productive they are. If someone is taking a lot of time to do simple tasks, you have a management issue with that person; it is not a flaw in the Slicing Pie model. If you have a chronic time-waster, you may have grounds for termination with cause (more on this later). Therefore, in the Slicing Pie model time tracking actively discourages time-wasting rather than encouraging it.
person is doing you should keep track. You don’t have to account for every minute of every day. As I mentioned before, you and your team can decide how much granularity you will accept. Some teams may be comfortable with a monthly entry that says “120 hours: did stuff,” while others may want more detail. I personally like to know what people did with the time they spent. If you still have a problem with time tracking, then you’ll have to figure out some other way to accurately measure the fair market value of a person’s time. I’ve heard lots of ideas; so far, not one works as well as time
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Royalties generally apply to “the” idea that is the idea upon which a company is founded. Ideas generated “on the job” usually don’t get royalties. If you work for a company, coming up with great ideas is part of your job. The Slicing Pie model uses the fair market value of unpaid royalties to calculate slices.
Like ideas, relationships are valuable when and if they generate revenue, investment or other financial benefit. In the Slicing Pie model, there are simple ways to calculate the fair market value.
Only offer slices to individuals who drive sales. A casual introduction probably isn’t good enough.
I recommend at least two warnings with a clear outline of the performance issue and what needs to be done to correct it. It’s not fair to fire someone for performance-related issues without first giving them the chance to correct their behavior. After all, they may not know what they are doing wrong. Or they may not know the impact their behavior is having on the firm.
lose any slices allocated from contributions except supplies, equipment and cash contributions which would be recalculated without the multipliers.
Additionally, the company has the right (but, not the obligation) to buy back the equity in an amount of cash equal to the outstanding slices.
Lastly, the employee should agree not to compete directly with the company or cause the other employees to leave. It doesn’t matter if a non-compete or non-solicitation isn’t enforceable by law in your market, it’s not fair to be fir...
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In this case, removing the multipliers has created a consequence for the employee. Knowing that this is the consequence forces employees to think twice before slacking off and hurting the compan...
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If this seems harsh, remember that startups are fragile businesses and they can’t afford to have deadbea...
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Most jobs (at least in the U.S.) are considered “at will”, meaning the company can fire anyone, for any reason, at any time.
However, the company would be within their right to ask for a non-solicitation agreement which prevents the employee from hiring the company’s employees within a specified period of time (usually one year).
The last reason for separation is when someone quits for their own reasons unrelated to the firm. Perhaps they no longer believe in the company’s vision, perhaps they found a better job somewhere else, or perhaps they won the lottery and want to retire. It may be a good reason for them, but not for the company.
A frozen pie is a good thing. In fact, it’s the point of your work! This means the people who worked to get the company to breakeven and beyond will each have what they deserve to have and will, as you will see below, share in the profits of the company. When new members come on board you can pay them their market rate and you won’t have to feel obligated to give them slices at all.
