Book: Slicing Pie, Mike Moyer

Slicing pie

Review

A good model on how to allocate equity in bootstrapped startups. The author also offers a software that simplifies the process.

tl;dr

It’s not about the money, people want to know that their contribution is valued. A “Pie” is a promise to allocate equity when the time comes. Calculate the relative value that each person brings. The percentage of pie for each person remains fluid and changes from day to day. 

The main value ingredients:

  • Time. Calculate your market hourly rate and multiply by two. If receiving a salary, then the calculation is based on whatever compensation is put at risk.
  • Cash and business-enabling equipment is the actual value times four.

Allocate equity at the point of diminishing returns or when the idea becomes a business that has a predictable revenue stream and cost structure.

Summary

  • In my experience I’ve found that it’s not really about the money. People want to know that their contribution is important and valued.
  • Pies are essentially ideas and ideas are pretty much worthless in the beginning.
  • Whether you’re slicing pie before or after it’s baked you run a high risk of getting burned or burning someone else.
  • The fundamental problem with using equity as compensation is that equity (pie) has no actual value.
  • While it’s impossible to calculate actual value, it is rather simple to calculate relative value.
  • This means that on any given day the pie could be sliced differently.
  • The percentage of pie for each person during the Gap phase remains fluid and changes from day to day.
  • “Pie” is simply a promise to allocate actual equity when the time comes.
  • A Grunt Fund is a method for creating a dynamic split for your company’s equity.
    • Step One: Appoint a Leader
      All companies need a single leader. Someone has to call the shots.
    • Step Two: Assign a theoretical value of the ingredients provided by the various Grunts
      Each and every contribution a Grunt can make can be assigned a theoretical value that will allow you to calculate its importance relative to other contributions.
    • Step Three: Calculate the possible equity whenever you need to based on the percentage of value contributed by each Grunt
      Contribution of Individual Grunt ÷ Total Contributions from All Grunts = Individual Grunt’s Percent of the Pie
  • Slicing pie does not actually grant equity to anyone. For now it is just a way to keep track of what everyone deserves.
  • Determining Value: Ingredients provided have different values. It is essential to have a standard method for determining this value and keep it consistent.
    • Time
      • Time is pretty much the main contribution of Grunts. It is also the most important contribution.
      • Relatively speaking, the senior guy’s time is worth more than the junior guy’s time.
      • Using a Grunt Fund, the value of an individual’s time is based on whatever salary you would have paid them if you had the cash (this is their opportunity cost) times two. You double the amount because they are assuming risk by joining an early-stage start-up.
      • Grunt Hourly Resource Rate (GHRR)
      • The GHRR is the salary you would be willing to pay if you had the cash times two
      • All Grunts need to keep track of their hours on a regular basis.
      • When you negotiate the base salary that you will use to calculate the GHRR, make sure it is a salary that you would be willing to pay if you had the cash.
      • To get it right, pretend that you have raised enough money to get your company comfortably past your breakeven point and set salaries that would make sense.
      • In general, I recommend capping the maximum GHRR at $200 to keep things from getting too skewed.
    • Wages and Grunts
      • In these cases you should deduct the amount paid to the Grunt from the base salary and use the remainder to calculate the GHRR.
      • Your pie slice is based on whatever compensation is put at risk.
    • Cash
      • The theoretical value is the value of the cash or credit used times four.
      • Cash contributions are weighted heavily in a formation-stage company for several reasons.
      • Cash can be taken into the company as a loan to create a “Well” of money that can be drawn from as needed. Only when the money is spent will it be converted to pie.
    • Equipment
      • Calculate the contribution of supplies and equipment as follows:
        • If the contribution enables the business: treat as a cash equivalent if it was acquired specifically for the business.
  • Calibration and Partioning
    • Calibration
      • Early Grunts take on more risk than later Grunts.
      • Increase the theoretical value.
      • It’s best to calibrate only when enough value has been built that an early herd deserves to benefit from the higher-risk work.
    • Pie Partitioning
      • Create a “partition” in your pie which isolates a hunk for you and your fellow super-early-stage founders.
  • Subtracting a Grunt
    • Resignation Without Cause and Termination With Cause
      • The company should recalculate the theoretical value of the Grunt’s other contributions without the multipliers.
    • Resignation With Good Cause and Termination Without Cause
      • The Grunt should be able to maintain their pie minus the amount of any severance payments made (if any).
      • The company can choose to maintain a buyback option that would allow them to buyback the pie at the theoretical value (unadjusted) or fair value, whichever is higher.
  • The Magic Number
    • The Point of Diminishing Returns
    • An Actual Business. “Predictable” means that you have a revenue stream in the foreseeable future, you understand your basic cost structure and you have a plan for growth.
  • The essential ingredient in a good pie is fairness.