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Slicing Pie and the Fat, Stubborn Grunt

One of the most common ways people discover Slicing Pie is when they are in the midst of renegotiating a previously executed traditional fixed split and are frantically looking for a better way. Because fixed splits are unfair, unwinding them can be difficult, especially if you’re trying to create a new fixed-split agreement which will lead to the same problems. I call this the “Fix & Fight” cycle and it can be very stressful.

It is often during the Fix & Fight cycle that someone finds Slicing Pie and shares it with the team. The good news is that if you found Slicing Pie after setting up a traditional fixed equity split, it’s easy to switch using the Slicing Pie Retrofit Guide and Spreadsheet. The tool will help you determine how many slices should be in your Pie and to whom they are allocated, providing a starting point from which to build.

But, what if one or more of your partners pushes back?

There are two primary reasons why someone would push back on using the Slicing Pie model. The first—and most common—is that he or she doesn’t “get it.” As obvious and logical as the model is, people sometimes raise objections. I’ve published a guide on overcoming objections that may come in handy. Once it “clicks” with your partner, you can move forward with the retrofit.

But, what if your partner understands Slicing Pie and still pushes back? This, too, is a solvable problem, but fixing it is a little more painful because you’re going to have to pay this person off with slices in the Pie.

Fat Grunts and Skinny Grunts

In a traditional equity split there are always two kinds of people: 1) those who have more than their fair share and 2) those who have less. I call those with more “fat Grunts” and those with less “skinny Grunts.” The first thing you’ll need to do is apply the Retrofit tool to see what a fair split should look like and who the skinny and fat Grunts are. Skinny Grunts rarely push back if it means they can finally get their fair share. Fat Grunts, on the other hand, have something to lose and may not want to be fair. Consider this split:

In this example, the team created an even split at the outset of the venture. Things didn’t move along as planned and the team applied the Slicing Pie retrofit formula to see where equity should be at this point in time. Mike is a skinny Grunt. He has less than he deserves. So is Merrily. Anson and Leo are fat Grunts because they have more than they deserve. Anne has the right amount, coincidentally.

Switching to Slicing Pie is the best way to ensure the fairest split, but if you’re dealing with a fat Grunt who won’t switch to Slicing Pie and you are a minority shareholder, you may be stuck in an unfair situation that probably won’t change. You will have to decide how much unfairness you can tolerate and quit when you’ve had enough of a toxic environment. Having a stubborn, fat Grunt on a team is demoralizing.

If, on the other hand, you have controlling interest or majority support you can simply force them to use Slicing Pie. Control can be contractual or based on the Pie. In this example, Mike, Anne and Merrily own 60% of the company and could successfully vote to move to Slicing Pie. They can’t, however, vote to take someone’s equity away from them. Doing so would cross an ethical line, even if it’s in the name of fairness. The three of them would have to get the others to agree so they can avoid potential legal battles.

If they forced the fat Grunts to take less equity the affected individuals would probably be quite angry and could cause problems for the company. Targeting a few people and deliberately diluting only their share looks bad to outsiders including judges, arbitrators and potential investors, employees or even customers.

This does not mean that their share is non-dilutable. In fact, there should never be such a thing as non-dilutable equity. It’s a deal breaker for any sane investor. All equity should be dilutable, but every team member should experience the same dilution. Yes, during a Slicing Pie retrofit you will be asking some people to give up slices. Most will do so willingly because they value fairness. Those who don’t do so actually can make a pretty compelling case that they shouldn’t be targeted. Many equity splits are handshake deals, but some are in writing. But, according to most legal jurisdictions a contract—verbal or written—may be binding. However, just because it’s legal, it doesn’t mean it’s fair.

Managing a Fat, Stubborn Grunt

Calling someone a “fat, stubborn Grunt” isn’t very flattering and it’s not meant to be. A fat, stubborn Grunt has shown himself to be the kind of person who is willing to benefit at the expense of the team. Not cool.

So, let’s pretend that of our two fat Grunts, Anson is cool with the switch to Slicing Pie, but Leo is a dick and won’t budge. You can still switch to Slicing Pie, but you have to pay Leo off with slices:

 

By allocating additional 50,000 slices to Leo, his share after implementing Slicing Pie will be the same as his share before implementing Slicing Pie so he will have no legal or ethical grounds for complaint. In fact, he actually got a nice bonus. Now if he tries to fight the deal he is less likely to curry favor with judges and arbitrators and less likely to be taken seriously if he badmouths the company in front of potential investors, employees or customers.

The next step is to separate from the employee. You need to do this for two reasons: 1) he has demonstrated that he cares little for the rights of others and 2) he has overcharged you for his services to date. Leo can now resign for good reason or the company can terminate without good reason. In both cases he would get to keep his current slices, but would not be contributing any additional slices so his share will dilute over time just like any other Grunt who stops contributing. When the Pie terminates at breakeven or Series A, Leo will vest or otherwise secure his shares along with all the other Grunts.

You could keep him as part of the team, but this episode will cast a pall over working relationships that probably isn’t worth whatever talents and skills he brings to the table. In the words of Taylor Swift, “’cause baby, now we’ve got bad blood, you know it used to be mad love.

It’s kind of a drag having an absentee owner, especially one who took advantage of everyone. Equity owned by disgruntled former employees is called “dead” equity, and it should be avoided if possible. You can’t force him to give back or accept a buy out, but you can make him an offer. In Slicing Pie I recommend a buyout price of $1 per slice (or whatever your local currency is). In practice, however, parties can negotiate a buyout. So, if the company, or other team members, wants to make an offer to buy out the departing Grunt, go for it. If he turns the offer down you can keep negotiating or walk away. In this case you might start with $5,000 to buy out his slices which is the fair market value of his original contribution.

Leo’s stubbornness has led to an unfair pay off. However, everyone else on the team shared the expense proportionately, so while there is probably some resentment towards Leo, everyone else has been treated fairly relative to one another and working relationships remain intact.

This type of unfair bonus payment is unfortunate, but unwinding traditional splits often results in unfair payouts and legal fees. Allocating slices is probably the least expensive option and will make the transition as smooth as possible. The upside is that once Slicing Pie is in place, these types of disputes will be avoided.

 

 

  • Kevin D

    Hi Mike,

    we do actually have exactly this Problem with our company. But the point is not that some fat grunts does not want to switch to Slicing Pie. We are just stuck in negotiations about the fair GHRR. We had developed a legal tech tool with which lawyer and other legal practitioners can work better, faster, more convenient.

    In your book, you write that the Key is that the GHRR is set fairly *relative* to the GHRR of the team mebers…..The Founder who had the Idea and who is a top of his class lawyer with 4 years of working experience who could earn 65 €/h and more per hour hiring at a law firm, thinks that a GHRR of 57€ is appropriate. The lowest GHRR (of the junior developer) is 21 €. The other team members are somewhere in between. Some of the Team thinks, the relative diffference of the highest GHHR relative to lowest GHRR the is too big, some others think it’s quite fair. What do you think?
    Thank You!
    Kevin

    • Hi Kevin,

      57€ is about 114,000€/year and 21€ is about 42,000€/per year. If you pitched these salaries to a Series A investor I think you could make a good case for both. These sound reasonable as long as they reflect the skills, experience, education, etc. of the recipient and is logical for the job requirements and responsibilities.

      If you raise the lower one you may be over paying for a development resource. If you lower the higher one you will be underpaying and might lose the resource.

      Take it one step further. If you let the 21€/hour go and replace him or her with a Filipino developer who would do the same work for 5€/hour you would still be paying the fair market rate for the resource.

      Always ask yourself: if I was paying cash, how much should I pay? If you have the cash, pay in cash. If not, allocate slices.

      -Mike