Many start-ups use equity to compensate key employees and to
fund early stage activities. This approach is sensible given that,
at least in the beginning, cash is in short supply and staff can be
motivated by the prospect of shared ownership. However, the
specific allocation of shares among founders and contributors
– or the slicing of the ownership "pie" – can
be a stressful process for entrepreneurs.
In his recent book, Slicing Pie: Funding Your Company Without
Funds, Mike Moyer deconstructs the start-up equity allocation
process and proposes an interesting strategy by which founders can
fairly and respectfully dish out equity "pie" to
remunerate workers with a stake in the business.
The premise of the book is that an otherwise viable start-up
business can quickly self-destruct if the equity allocations are
arbitrary, or worse, unfair. Start-ups are inherently risky
ventures, and according to Moyer no one Grunt (he comically refers
to the various founders, employees, consultants and contractors
that build start-ups as "Grunts") should bear the risk of
failure or enjoy the fruits of success in a disproportionate
way.
Moyer cites several examples of how improper "pie
slicing" can frustrate organizational success and lead to
Grunt strife. For instance, Moyer claims that slicing the equity
pie too early (i.e. before a company even launches) is a classic
error which can lead to intra-Grunt resentment, particularly when
the subsequent contributions of the Grunts are at odds with the
initial equity allocations. On the other hand, Moyer cautions that
if equity division is inadvisably postponed until a start-up has
real value (think liquidation event), Grunts may be inclined to
exaggerate (and dispute) the value of their respective
contributions in an effort to seize more "pie" on an
exit.
To avoid these pitfalls and others, Slicing Pie sets out
a process by which founders can objectively allocate equity among
the Grunts while the value in the business is growing - so
that each Grunt is proportionately compensated for his or her
actual inputs in the business. The Slicing Pie method, an
accounting system of sorts, would allocate a value to each type of
input - be it cash, equipment, intellectual property or time
– and the assigned value of each Grunt input is tracked in
separate Grunt Funds. Theoretically, on any given day, the
aggregate value of each Grunt's inputs vis-à-vis the
other Grunts represents his or her equity stake.
In Moyer's scheme, "pie" represents not real equity
but rather a promise to allocate a fair share of equity at a future
point in time. Moyerargues that in the early days, when
Grunts come and go and there is little actual value in the
start-up, the Slicing Pie system efficiently tracks a
fluid situation.
From a legal perspective, there is clear risk that a founder may
not honour its obligations under the system, and that a Grunt may
not be allocated the equity he or she is promised when the time
comes. However, Moyer counters that true start-up participants are
risk-takers and don't need the security of a bi-weekly pay
check or share certificate. Moreover, if all participants buy-in to
the system, a culture of trust will be created and the company will
benefit from stronger intra-organizational relationships.
Overall, the Slicing Pie concept is well thought out and
can probably be implemented relatively easily by a start-up. The
trick, of course, is that all of the employees, consultants,
contractors, supplies, etc. (the Grunts) will need to engage in the
process and have faith that, when the time comes, the system will
work. For more information about Slicing Pie visit www.slicingpie.com.
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