In Slicing Pie, Northwestern and Booth School of Business professor Mike Moyer describes the process by which young start-up companies should tackle the often mismanaged problem of splitting company equity. More specifically, Moyer explains how a founder can use equity as a way to entice early employees into working for them even though they have little to no capital in hand. At the center of his equity-splitting philosophy is the idea of fairness. He believes that the most meaningful and successful start-up companies are founded around a great deal of trust, ensuring everyone involved in the start-up remains motivated throughout the growth stage of the company. The process described by Moyer was created with the hopes of helping start-ups ensure that the early stage of their development is not hindered by any underlying injustice stemming from the splitting of company equity.
An early stage equity discussion, or as Moyer puts it, “That Little Awkward Conversation”, can be one of the biggest potential threats to a nascent company. Start-ups never seem to get the timing of their equity allocation quite right. More often than not, a young company’s future is thwarted by problems stemming from some sort of preliminary equity talk. This conversation often results in a lack of trust creation that will destroy the company before it can begin solving the problem it has targeted.
Premature equity talks can ruin the potential development of a company, so a company should wait for the right time to have this discussion. According to Moyer, that time is after the company has generated a consistent revenue stream. With that being said, Moyer acknowledges that there is a fine line regarding when you should discuss equity—too soon and your idea may fail to sprout, too late and you might ruin 5 years of great memories over something that should have been hashed out earlier.
Moyer debunks the traditional idea that fixed or ‘static’ splits should be used when he writes, “[fixed-splits] always result in problems of fairness.” This dilapidated concept of dividing equity a singular time early in the start-up process and letting it remain static for the rest of the company’s life is not practical in a dynamic start-up environment. Regardless of when you decide to split your company’s equity, if you are doing it via a fixed-split you can guarantee that unfairness will run rampant in your organization, leading to a variety of organizational problems.
To combat the prevalent but ineffective fixed-split system that is often used, Moyer proposes a new method, one that is the inspiration for the title of his book. Moyer’s discussion of company equity takes on a simple yet highly accurate analogy of “slicing pie.” At the center of this slicing pie method lays the concept of evenly splitting (slicing) company equity (pie) amongst the various employees (grunts) that work together within a start-up.
Moyer’s idea of slicing pie centers around the concept of a Grunt Fund, which is a theoretical division of equity that can fluctuate depending on the relative value that a given grunt has provided the company at a given time. The advantage of dividing equity this way is that a grunt’s stake in a company can vary depending on how much a given grunt has done for the start-up. Situations that normally disrupt the fairness of a fixed-equity like losing a grunt are easily accounted for in the dynamic method offered by Moyer. Not nailing down equity positions initially is the only way to ensure a fair split of equity once it is time to slice the company’s pie on cash-in day.
In order to reap the benefits of a Grunt Fund, a company must first appoint a trustworthy leader to rule over the entire process. After a strong and morally wholesome leader has been selected, it is imperative that a company then determines the theoretical value of the collection of assets brought to the table by the herd of grunts. This can include a grunt’s time, the equipment or facilities they provide, their intellectual property, their relationships, and the amount of cash they bring to a company. After establishing the company’s theoretical value, a given grunt’s value can be determined by dividing their individual contribution by the total contribution gathered from all grunts.
The Grunt Fund should be used up until the point where a business begins to really take off; in other words, when you have an actual business model with predictable returns or when you receive a cash investment of over $1,000,000. At this point the real benefits of the Grunt Fund begin to show themselves. Given that a start-up has taken the steps to calculate their Theoretical Base Value (TBV), and that they have kept an accurate account of the value that individual grunts have provided to their company thus far, determining a grunt’s percentage stake in the company becomes relatively easy. Instead of making qualitative guesses about numbers or referring to a fixed-split that occurred earlier in the company’s history, all a founder has to do is divide a grunts individual value by the company’s TBV and voilà, you have their fair share of the company.
Abiding by the principle of fairness within the Grunt Fund method will vastly improve a company’s ability to properly reward its grunts with pie. As Moyer puts it, “Pies are hot and sometimes, if not handled correctly, Grunts can get burned.” The Grunt Fund method is merely a moral contract, and Moyer emphasizes this idea throughout his book. It is not a legal contract; it is in place to help reduce the misappropriation of equity when the pie is sliced. Following the Grunt Fund ideology will allow a founder to split company equity better when its time to pay grunts, although it is ultimately up to the founder to institute the fair reparation of equity and ensure that no one gets burned in the process.
After reading Slicing Pie, I believe that Moyer’s Grunt Fund methodology is vastly superior to traditional fixed equity splits as it gives a more accurate calculation and reparation of equity according to what the grunt has actually contributed to a company. The dynamic nature of the Grunt Fund ensures that any situations that traditionally result in an imbalance of equity reparation are properly accounted for. When its time to slice pie, every grunt’s individual contribution is accounted for and the result is a fair allocation of equity to all. This is what makes a company truly successful, and the elements of trust and fairness are what allow the Grunt Fund to produce such effective results.
If you're currently amidst an equity agreement or are interested in learning about a new approach to using sweat equity, grab Slicing Pie and check it out for yourself!
