6

House Cleaning Case Study

In the introduction to Slicing Pie there is a story about partnerships. In the story you and I decide to clean a house together for $50 and things get complicated.

[box type=”info”] If you haven’t read the book you can have a free sample that includes the housecleaning story.[/box]

Here is how the story would have played out if we used a Grunt Fund to divide up what we should make for the single cleaning gig.

If I secured the gig and I needed help I could ask you to join me in cleaning the house.  We could agree that we are each worth about $10 per hour on the open market so our [tooltip text=”Grunt Hourly Resource Rate or GHRR!: this is the theoretical value of one person’s time relative to another person’s time. It is not an actual value, it is used to calculate an individual’s percent of the pie.”]Grunt Hourly Resource Rate (GHRR!)[/tooltip] would be $20 to account for the risk that we might not get paid (which in this case is low).

I showed up with the bucket of cleaning supplies that cost $10. However, I had the cleaning supplies at my house so it was not an expense incurred for this gig. The supplies have been used so the bottles aren’t full. We agree that the supplies are, however, business enabling and agree to allocate $5 in pie for the supplies.

So we go clean the house and it takes four hours. Four hours at our GHRR is $80 times two so the [tooltip text=”Theoretical Base Value or TBV: because start-up companies are assumed to have no actual value in a Grunt Fund we use theoretical values with allow us to understand how important one contribution is relative to another contribution. The TBV is the sum off all the theoretical values of all contributions from all participants. It is used to calculate an individual’s percent of the pie.”]Theoretical Base Value (TBV)[/tooltip] is $160 plus the supplies bringing the total TBV to $165. Notice that this theoretical value is much, much higher than the actual value of the gig which is $50. This is fine. The Grunt Fund doesn’t track actual value it tracks relative value. The TBV will allow us to allocate the proceeds fairly. In this case I get 51.5% (85/165) or $25.75 and you get 48.5% or $24.75. This is perfectly fair. We both worked, but I get a little extra for the supplies which probably wasn’t all used up so I can take the rest home.

Let’s say that when we are actually on the job I’m working hard while you are slacking (as described in the book). I, as the senior partner (Grunt Funds always have a leader), can ask you to pitch in a little more and outline specifically what I want you to do. You now have the choice to either pitch in or leave. If you leave you will forfeit your slice of the pie which is fair because I now have to do all the work. If you stay you are expected to pitch in. If you pitch in everything will be fine.

However, if you continue to slack off it is perfectly fair for me to fire you on the spot. Again, you would forfeit your slice of the pie. If I failed to provide clear instructions and an opportunity to correct your behavior I have no good reason to fire you. If I fire you anyway you would be entitled to the slice of the pie that you earned.

The Grunt Fund fairly allocates the proceeds of the gig in proportion to our respective contributions. Additionally, it provides a fair way of managing your poor performance and provides a choice for you to bail out or pitch in. I, as the manager, also have choices. I can either give you an opportunity to pitch in or I can pay you to leave. All possible scenarios are perfectly fair.

This is a very simple example, but it does illustrate the power of the Grunt Fund and its ability to help measure relative value contributed to an organization.

 

 

 

 

 

 

  • Hi, Could you please define your Acronyms prior to usage?
    You shouldn’t make assumptions that people will know what they mean. e.g.TBV, GHRR. I now have to run around to find the definitions.
    Apart from that great examples

    • Mike Moyer

      Hi Mark,

      TBV stands for Theoretical Base Value and GHRR stands for Grunt Hourly Resource Rate (I fixed this in the post, thanks for the note!)

      -Mike

  • Hi Again,

    Just going through the book and i keep getting stuck on the full definition of TBV and i keep trying to find the reference to it, there is no mention of it in the Index in either V1.2 or V2.0 of the book. Your link on the site is a definite improvement, however it would be more useful to have it go to a web page of definitions rather than a PDF (which also does not explain or mention the TBV acronym). Probably useful to have an appendix of the definitions you use in the book. I can see a useful Web App coming out of this 🙂

    • Mike Moyer

      I’ll add a tooltip

  • YesAlpha

    I have just started reading your book, and came to this example.

    A quick clarification: Why wouldn’t it be bit more fair, if the division was (Total Value – agreed cost of supplies) x % of sweat equity? In your example, it would be 50-5 = 45 ; which would be divided as per the proportionate share in theoretical value? ; so the person bringing the supplies get 27.5; other get 22.5 (as the % share in theoretical value happens to be 50/50 in this case)? And the split remains same whether we assume our “sweat cost” at $ 2/ hour or $ 10/hour… in your case, if the sweat value is assumed at $ 2 (and not $ 10/ hr), the person bringing the supplies gets compensated much higher which may seem unfair to other partner/

    The reason I am thinking about a “waterfall approach” is that “hard cash” [ supplies] injection by one partner is certainly more real, measurable than the “perceived” / “estimated” value of contribution $10/hr. Not every skill has a measurable, comparable market rate, and its not easy to agree on that especially in the unequal splits.

    Would be grateful to know your views on this.

    • Slicing Pie assumes that parties involved can agree on a fair market value for the labor. In the non-equity split world labor is exchanged for cash. Unpaid compensation is part of the model.

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