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Kindle Notes & Highlights
by
Mike Moyer
Started reading
July 22, 2017
In most cases, it is much harder to save money than it is to earn money.
This is fair and both guys are happy knowing that they each have what they should. One might argue that earlier contribution is riskier, but measuring risk in a startup is as impossible as measuring future value.
In most cases, people attempt to negotiate, in advance, how much money, time, supplies, etc., they will need. Next, they try to determine what the ultimate proceeds will be. Then they determine a fixed split. It’s a nightmare.
There are four different situations under which a person can leave a company: Termination for cause Termination without cause Resignation for good reason Resignation for no good reason
For simplicity’s sake, we’ll pretend that Norvin only contributed time to the business. When he leaves he will lose his equity. Ouch! This isn’t great for Norvin, but leaving means the company must scramble to replace him and this causes a great deal of pain for the company. If he wants to keep his share he should see the project through
I’m going to repeat and go into more depth on the topics above to fully immerse you in the fairest equity split model ever conceived and how to implement it in any bootstrapped startup company on the planet.
A fixed split means that chunks of equity are doled out to participants in pre-set amounts in anticipation of them creating value for the firm. Startup founders are nothing if not optimistic, but accurately predicting the future is a skill that eludes most mortals. Couple that with the impossible task of measuring value-add and you have a recipe for failure.
The opportunity cost of working for a startup is equal to the amount of money you would have earned elsewhere doing a similar job.
A “slice” is a fictional unit of measure that reflects the adjusted at-risk contributions made by individual participants.
The Well is a pool of funds from which managers can make payments. They can use the money for whatever they need to, subject to the restrictions of the investor, if any. You can pay salaries or rent, for instance, with money you draw from the Well.
The Well is best for active participants in the company. For arms-length investors, a traditional convertible note or convertible equity agreement is easier, and it represents the fair market for small investments. The SAFE (Simple Agreement for Future Equity) from YCombinator is a good option.
Once you agree on the fair market salary for your job, you will want to convert the annual salary into an hourly rate. Do this by dividing the entire amount by 2,000, which is roughly the number of working hours in a year (40 hours times 50 weeks). I’m assuming at least two weeks of vacation time here.
Participants simply track the hours they spend working to determine the fair market rate of their contribution of time. In “real” jobs you don’t track your hours, you just work as much as you need. We use hours tracking for Slicing Pie to provide the right incentives and align people’s interests.
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.
The next major concern I hear about time tracking is the concern that there is much more to building value in a company than simply logging hours. That is true, but without time-tracking you will never understand one person’s contribution relative to another. One person may work full time and another just a few hours per week. Unless you want to guess what each person is doing you should keep track.
The hourly rate of a contract or freelance employee is likely to be much higher than their fair market salary. An individual who might be able to secure a job for $40,000 per year or $20 per hour might easily command $50 per hour as a freelance employee. This is normal because they have to make a living on fewer hours (to accommodate hours spent selling and admin work). Also, employers get the benefit of avoiding things like employment taxes (sometimes), benefits, and other expenses associated with long-term employees.
This assumes, of course, that the revenue generated can be directly attributed to the idea.
Not every idea deserves a royalty. The idea has to enable a business to generate revenue and create a competitive advantage. For this to be true, the idea has to be good and unique enough that it creates some sort of “ownable” intellectual property, usually in the form of a patent or copyright.
In some cases, the time and money spent developing the idea before the company started could be translated into slices using the relevant calculations. In these cases, the development of the idea would be part of the development of the company and the royalty would not apply.
Slicing Pie is about doing right by the people who help you succeed and it’s important to clarify a few things to prevent one group of people from inadvertently taking advantage of others.
Profit distributions are made after all other financial obligations have been met. This includes fair market salaries. This means that each participant will not only get their fair market salary, but also they will receive their fair share of the profits when and if the company decides to distribute profits. I hope your profits far exceed your fair market salaries!
Any investment that covers a part, but not all, of the company’s cash requirements is an angel investment and should be treated as a convertible note, SAFE (simple agreement for future equity) or as a loan and included in the Well as described earlier.
If you are ready to raise money for your startup, or if you are ramping up sales revenue, you may want to check out another one of my books, Pitch Ninja, which covers a method for delivering a very persuasive presentation. For more information, just visit www.pitch.ninja
Slicing Pie is a financing tool for founders who don’t have access to a lot of cash. If a founder does have access to a lot of cash, they do not need Slicing Pie. They can just pay for everything and keep all the equity for themselves.
As a rule, equity financing is “expensive” relative to debt financing. In other words, it’s “cheaper” to borrow money than it is to use slices. However, borrowing money may leave you with debt if the company fails.
Whenever possible, avoid putting cash in people’s pockets. If possible, use the money on things other than paying for people’s time or non-cash contributions.
the Well is a holding account for larger amounts of money contributed by participants. Well funders are usually participating members of the team, but sometimes this money comes from friends & family.
Loans can come from anyone, even founders, but the company must pay back the loan. A typical loan has a market-rate interest payment and principal payment. The person who makes the loan does not get slices for loaning the money because the company is making payments. If the company isn’t or can’t make a payment, the unpaid portion of the payment will convert to four slices per dollar for the person who is paying the loan, or the person who made the loan but isn’t getting payment. Each missed payment converts to slices.
A convertible note is a loan that converts to equity at the same terms of the Series A investor. Similarly, a SAFE (simple agreement for future equity) also relies on the terms of the Series A investor. Do an internet search for more on how these agreements work. In the Slicing Pie model, both SAFEs and convertible notes can be offered for investments from “arm’s-length” angel investors instead of slices. An arm’s-length angel is someone who is simply backing the company financially, and not taking an active role in advising or managing the company.