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Kindle Notes & Highlights
by
Mike Moyer
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.
If you simply keep track of what people bet, you can calculate exactly what portion of the rewards they deserve. It’s quite simple!
There are two primary components of Slicing Pie: The Allocation Framework that tells us how much each person should get; and, The Recovery Framework, which tells us what to do when someone leaves the company.
Therefore, the person who contributes cash to a company is putting more at risk than the person who contributes time or other non-cash contributions.
company’s actual value is still virtually nothing. Let’s say that Anson decides that the company should move to be closer to their largest client, who is 500 miles away. Merrily doesn’t want to uproot her family and move and decides to resign. This is resignation with good reason. Anson’s decision to move the company puts Merrily in a bad situation through no fault of her own. In this case, the company must bear the cost of this departure. Merrily is allowed to keep her slices in the company.
Your % share of the reward = Your % share of what’s at risk The reward I’m talking about is financial and comes in the form of profits/dividends or the proceeds of a sale. What’s at risk are contributions of time, money, ideas, relationships or anything else participants invest in a startup and don’t get paid. Everyone deserves a slice of the rewards that properly reflects their slice of what’s put at risk to achieve those rewards.
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.
After breakeven or in established companies, equity is sometimes part of a bonus or retention strategy.
When everybody is getting paid for their contributions (after breakeven), they will no longer be putting their contributions at risk. At
Although the Slicing Pie model can be part of a legal contract (you will find contract templates at SlicingPie.com), at the core of the model is a moral agreement.
The fair market value of a year of a person’s time, for instance, is equal to their salary for a similar job at a company that had the means to pay. So, if you forego that salary to work for a startup (doing similar work), you are betting that amount of money. The opportunity cost of working for a startup is equal to the amount of money you would have earned elsewhere doing a similar
Like many things in business, keeping track of time and money can be tedious. The Pie Slicer application is an online tool that is designed to make this process as painless as possible. You can find it at SlicingPie.com
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.
convert an individual contribution into slices, simply multiply the fair market value of the contribution (less cash payments) by the cash or non-cash multiplier. You subtract cash payments, if any, because cash payments reduce the amount of risk taken. 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.
Multipliers/Normalizers Multipliers/normalizers assign a risk premium for the contributions, adjust for the difference between cash and non-cash contributions and help determine the fair buyout price if and when someone separates from the company. The multipliers impose important consequences for the at-fault party.
I recommend a non-cash multiplier of two (2x) and a cash multiplier of four (4x).
Slices = Fair Market Value x Multiplier (Cash or Non-Cash)
Because cash is more difficult to come by than other types of contributions, I recommend a cash multiplier of four (4x) and a non-cash multiplier of two (2x).
A cash contribution is a contribution that consumes an individual participant’s actual cash, usually in the form of an unreimbursed expense or cash expenditure from the company account. A cash contribution can also be tangible property with cash value like equipment or supplies. The formula to determine slices is as follows: Slices = Fair Market Value x Cash Multiplier 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.
example, Julie and Chuck want to help Anne start a cinnamon roll shop, and they each put $10,000 into a company savings account for a total Well of $20,000. Anne needs $1,000 to cover the current month’s expenses, so she transfers the money to the company checking account. Because both Julie and Chuck have 50% ownership of the cash in the Well, $500 is attributed to each of them, and they each receive 2,000 slices of Pie (cash times four). The following month, Anne draws an additional $4,000 from the Well. Julie and Chuck each receive 8,000 slices. Anne is careful only to draw what she needs,
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Anson pays $250 for a train ticket to take a company trip to Amsterdam and does not get reimbursed from the company account. Anson would receive 1,000 slices.
The Well is used to hold larger amounts of money for future expenses. Money in the Well could be used to reimburse employees, in which case the owners of the Well would receive slices, not the employee.
A non-cash contribution is pretty much anything an individual contributes without an outlay of cash. Time is an example of a non-cash contribution. There are no direct expenses associated with the time I spend working on a startup. Similarly, there are no direct costs associated with introducing the company to a qualified prospect I might know.
Slices = Fair Market Value of Contribution x 2
A Slicing Pie salary negotiation, therefore, is like any other salary negotiation. A manager should ask herself, “If I could pay cash for this person’s services, how much would I pay?” A potential employee should ask himself, “If this company paid me and did not give me equity, how much would I be perfectly happy to accept?”
Ideas It is not uncommon for people who have ideas to think they are entitled to a big chunk of equity just for having the idea. The instinct to want to benefit handsomely from “your baby” is real and it’s very common. In the context of fairness, however, slices are only given when the fair market value is put at risk, and the way to determine the fair market value of the idea is to determine what kind of compensation an inventor would otherwise receive. In the non-startup world, an inventor of an idea often receives a royalty on revenues. Inventors, authors, and musicians routinely collect
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Sometimes, a lump-sum advance, may be appropriate. An advance is a chunk of slices from which future royalty payments will be deducted until the advance is paid back, then regular royalty payments can be made (in slices).
If someone joined the company after the company could afford to pay, they would get their fair market salary and would not get a portion of the profits. This is fair because they did not take any risk. They can participate in the company’s bonus program going forward.
If the company needs cash prior to breakeven it can raise enough money to meet its financial obligations in the foreseeable future. This is a Series A investment and the new investors will take equity based on the negotiated value. All participants in the company will be subject to the terms and conditions of the Series A investors.
Pitch Ninja, which covers a method for delivering a very persuasive presentation. For more information, just visit www.pitch.ninja
Many founders discover the Slicing Pie model after they have already succumbed to a dreaded fixed split. This chapter outlines the process for retrofitting the Slicing Pie model using the Retrofitting/Forecast Tool spreadsheet that you can download at: www.SlicingPie.com/retrofit-forecast
