Slicing Pie by Mike Moyer

These are my the notes that I have taken while reading Slicing Pie by Mike Moyer. This isn’t meant to be a Cliff Notes’ version or a substitute for reading the book, so please support Mike and buy a copy of his book.

Additional notes I’ve taken while reading other books can be found here.

Introduction

To get funded, you need a product (or a working prototype), a management team, a business plan, and (if you’re lucky) a few paying customers. If you don’t have cash, you can use equity in your startup.

Equity is a great substitute for money when you’re starting and don’t have cash. However this equity has virtually no value right now and it’s tough to predict the future.

You need to (1) convince people it will have a lot of value in the future and (2) provide a logical explanation of how you calculated the amount of equity you are giving them.

When you give away equity, you are allocating a percent of the rights to the future cash the business generates. By accepting equity, I’m acknowledging that I may never get paid so I need to accept future equity (future cash) that I believe will be worth more than what I would otherwise get paid now (current cash).

The scenario always plays out over time. A new company hits it big and interpersonal relationships become strained because many people feel undervaled and like they got screwed. It’s not only about the money, people want to know their contribution is important and valued.

When a falling out occurs, it generally means that one person in the relationship didn’t feel they were being treated fairly. This may be accidental - the intent may be to treat everyone fairly, but because of mistakes dividing equity early on - there is a perception of deliberate injustice.

If you and a partner clean a house together - you get paid when the job is complete (and work for nothing until then). You’re essentially building equity in an asset (clean house) that will eventually be converted to cash when the owner of the house pays you. So the key question is, “how much do we each get?” A 50-50 split doesn’t make sense if you show up with cleaning supplies and scrub the kitchen and bathrooms while your partner shows up with nothing and just sweeps the hall. You and your partner value the cleaning supplies differently, and he thinks he should make more per hour because he has more cleaning experience than you.

Slicing Pie

All pies are worth nothing when they are first created.

Time is probably the most significant ingredient a grunt has to offer. Not all time is created equal - a CTO is worth more than a junior programmer, but that doesn’t mean both shouldn’t be treated fairly.

A grunt is happy sharing the pie with other grunts as loing as he or she was treated fairly in the process. If you don’t feed a grunt enough pie, they will feel undervalued and might leave the herd. If you feed a grunt too much pie, the other grunts may feel undervalued, give up and leave the herd.

Grunts want to feel like they’re part of the herd as well. That means their opinions are taken seriously and their contributions are valued.

The most common mistake entrepreneurs make is slicing the pie before it’s baked (hoping to avoid arguments later on).

People think vesting shares over time creates a safety net in case things don’t work out. The problem is that you still need to pre-determine the amount of pie the grunt will receive (and thus trying to predetermine the value of that pie).

The problem with using equity as compensation is the value of the pie is highly subjective.

While it’s impossible to calculate actual value, we can calculate relative value.

The Grunt Fund

The grunt fund allocates equity while the pie is being based by allocating revenue based on the relative theoretical value of the ingredients at any given time.

Yes, on any given day the pie could be sliced differently.

We provide “pie” instead of actual equity (“pie” = a promise to allocate actual equity when the time comes)

Every contribution a grunt makes can be assigned a theoretical value that will allow you to calculate its important relative to other contributions. The contributions grunts make have no actual or real value - they only have theoretical value.

If you imply that there is actual value to some of the ingredients, you may find some of the grunts want real money - even if you don’t have it.

Theoretical value of pie represent a promise to allocate a fair share of equity when the time comes.

Creating a Grunt Fund

Time is pretty much the main (and most important) contribution of Grunts. Determining the value of someone’s time is difficult since they often think they’re worth much more or less than they actually are

Grunt Hourly Resource Rate

Take whatever salary you would have paid them if you had the cash times two (double the amount because they are assuming risk by joining an early stage startup). Divide that number by 2000 (40 hrs / wk * 50 wks / year).

The theoretical value of cash or credit is 4x. (Note - grunts who get wages can’t simply re-invest the cash in an effort to get more pie at a higher rate).

Relationships are valued based on commission.

Using a Grunt Fund

Early grunts take on more risk than later grunt, so there’s “calibration”

Three early grunts put in $30k of theoretical value and have been working six months and want to bring on more people. You want to reap some of the benefits of your hard work - you allocate equity at 33% each on a Theoretical Base Value (TBV) of $90k. If you believe the business is now worth $300k, you would move forward as if you had contributed $100k each. If a new grunt contributed $100k of value and everyone else stood pat, they would have earned 25% of the company. Keep in mind that the new work the grunts contribute will consume pie at a slower rate.

We can also “partition” part of the pie (which maintains its percentage no matter what) instead of “calibrating” the pie.

Subtracting a Grunt

Grunts leaving startups take a huge toll on them - whether it’s a lost interest in the project, no longer sharing the vision, other obligations (such as family).

Fair treatment includes how much pie the leaving grunt is entitled to (plus things like pie buy back or non-competition)

Resignation without cause: Lose all pie (except for contributions like money but without the multiplier). You are creating an incentive not to leave.

Resignation with good cause: Reasons include adverse change in title or responsibilities, adverse change in compensation that does not affect other participants at the same level, relocation of the company (more than 50 miles from its original location), death or disability. The grunt should be able to maintain their pie minus any severance pay (if any), the company shouldn’t be entitled to a non-compete.

Termination without cause: They should be treated the same way as if they left for good cause.

Termination with cause: Serious misconduct (theft, dishonesty, assault, embezzlement, fighting, etc.), habitual neglect of duty or incompetence, conduct incompatible with the employee’s duties or prejudicial to the employer’s business, willful disobedience - they should be treated as though they resigned without cause.

The Magic Number

When to stop using the grunt fund:

Grunt funds are best for early stage companies that haven’t built real value yet.

Getting Burned

A Grunt Fund is a moral contract, not a legal contract. It tells us how to treat each other fairly but it doesn’t cover our butts. If your first instinct is to protect yourself against your fellow grunts, you have probably chosen the wrong herd.

Going out of business

Two reasons why startups fail (1) the company can’t meet its financial obligations (2) founders learn enough about the market to decide it isn’t as cool as they initially thought.

Making Grunt Funds Work

Notice that when you get the short end of the stick, you often feel resentment toward those who put you in that situation.