Ah, equity. One of the more troublesome and tricky parts of starting a new company. Unless you’re starting a company by yourself, and bootstrapping it, you’re going to end up having the equity conversation, which usually goes like this:
“So, how should we split this up?”
“I mean, probably 50/50, right?”
“Well, I’ve got a lot more time to work on this, that doesn’t seem fair”
…and so on. Until the end of the company.
Fixed equity splits like this are the source of many a difficult conversation, and unfortunately, are the source of many a lawsuit when things start to go south (and if you think things will never go south, you’ve got your head in the sand).
Enter Slicing Pie, a new way to think about equity splits. Designed by Mike Moyer, Slicing Pie advocates for dynamic equity splits, instead of fixed equity splits, where the share of equity changes fluidly over time, based on the contributions of the owners.
The basic way that the model works is this:
Each owner’s share of the company is their contributions, divided by the total contributions of all the owners. If I work 10 hours, and you work 20, then my share of the pie is 10/30, or 33%, while yours is 66%. Next week, if you don’t work at all, and I work 10 more hours, my share is 20/40, or 50%, and yours is the same. Equity splits change dynamically according to the work put in, relative to the total amount of work.
In the book, Moyer walks through many different cases, accounting for time contributions vs. monetary contributions, terms for entering and leaving under this arrangement, how to track and account for all the slices of the pie, legal issues you need to consider, and much more. He also discusses when the pie “freezes”, and moves from a dynamic split to a fixed split, and when and why you’d want to do that. Suffice to say, the book is quite comprehensive, and will give you everything you need to implement this today.
If you’re starting a new company, or have started one and realized that the fixed equity split is a terrible idea, I’d highly recommend you read the book. It’s a quick read, and it’ll have a tremendous impact on your current and future ventures.
Just to make it easy for you, grab the book on Amazon here.
Have you implemented the Slicing Pie model in your company? What’s your experience been?