While the mechanics of Slicing Pie are fairly straightforward in terms of tracking contributions over time, day-to-day decision making regarding financial matters can cause conflict among the team. For instance, some people may prefer equity over cash and vice versa, but who actually gets paid first when cash becomes available may not necessarily be decided on an individual’s preferences and it isn’t specified in the Slicing Pie framework.
When I designed Slicing Pie, I wanted a clear equity structure without too much ambiguity, while I haven’t created a structure for company policies (yet), I hope this article will shed some light on the topic.
A company policy is a rule of conduct that is designed to serve the interests of both the company and the individual. Policies are shared with employees and help them do their job. Company policies are usually spelled out in a company handbook or similar document.
Policies can be whatever the management team wants them to be, but oppressive policies may make it hard to attract employees and overly-generous policies may make it hard to attract investors. For example, if you don’t allow employees to take any time off, people may not want to work for you. If, on the other hand, you provide 25 weeks of paid vacation, you may have created an unsustainable perk that will scare off investors because once a perk is out there it can be hard to reign in. Imagine what would happen if your company cut it’s 25-week vacation policy to a two-week policy!
Cancelling impractical perks created by policies may hurt company morale. Marissa Mayer cancelled the telecommuting policy when she started at Yahoo! much to the chagrin of telecommuting employees.
Some policies may be too good to be true, especially when they provide unusual perks to company employees. Google provides so much free food to employees that the IRS wanted to tax it as income.
Creating your corporate policies depends on your needs at any given time. Startups tend to have less generous policies than established companies because cash is scarce and the future is uncertain. Most startups don’t offer health benefits, for instance. However, a Slicing Pie company could introduce a policy that allocated a set number of slices per month in light of the fact that some employees may have to buy individual insurance.
Company policies that impact a person’s allocation of slices in the Pie should be carefully examined to make sure they don’t cause conflict among the team. It’s okay for your policies to change over time, but oppressive changes or changes that favor one employee over another may trigger a person’s ability to resign for good reason as outlined in the Slicing Pie recovery framework.
It’s okay for startup companies to have tighter spending policies and fewer benefits than established companies. It’s unusual for newly-formed startups to offer 401(k)s and health insurance. These are more common in post-revenue companies or after Series A investment.
Policies can cover a wide range of topics from parking privileges to sexual harassment. Below are a few common compensation examples that directly impact Slicing Pie for which your company should establish a policy:
Most employees will expect to be able to take time off work when they need it. In established companies, many entry-level jobs include two weeks paid time off. More senior-level employees may have more. Set expectations in advance and make sure team members know what they are entitled to. In the Slicing Pie model, paid time off means they may be contributing slices to the Pie even when they take vacation or stay home sick. Your company should be clear about how many slices they will contribute during these times. For instance, you might establish a policy that grants a number of slices per day off that equals the daily average of the previous six weeks. This way part-time employees won’t unfairly benefit from the policy vs. full-time employees.
I, personally, use an unpaid open vacation policy during the bootstrapping stage. This means team members can take as many days off as they want, but they will not be accruing slices in the Pie while they are away. As long as a person is doing their job, I don’t particularly care how they manage their time. When my companies become cash-flow positive, I like to move to a paid open vacation policy. Employees enjoy flexibility without losing compensation. Again, as long as the job is getting done everything is fine. I’ve never had a problem with abuse of an open vacation policy and it saves me the hassle of keeping track and paying out for unused time off.
When employees travel for work and the company is not able to provide reimbursement the employee’s expenses would convert to slices with the cash multiplier. As your team grows, it’s important to set some limits. First-class airfare and five-star hotels may not be practical for a startup. Just because you’re using slices doesn’t mean you can make bad business decisions!
For a startup, you might want to specify lowest available coach-class airfare, three-star hotels and a modest per diem for meals. You could even ask employees to share rooms when practical and appropriate and not cover alcoholic beverages.
When someone uses their own car for business trips, it is customary (at least in the US) to provide per-mile reimbursement, but you’ll need to specify if the per-mile payment is treated as cash, non-cash, or split. You can set up any one of these personal car policies in the Pie Slicer so this contribution is properly tracked.
Other personal expenses could include at-home Internet service for telecommuters, parking reimbursement at work, education expenses, office supplies and other items an individual would pay for and submit an expense report. Startups don’t have to cover every expense, but you need to be clear about what you will pay or provide slices for.
Sometimes the company incurs expenses that are paid by individual employees. Perhaps an employee puts the company internet service on her credit card and is not reimbursed. This expense would convert to slices at the cash rate as long as the employee pay her bill and not the company. Other people might want to cover corporate expenses as a way of contributing more slices to the Pie. Managers will need a policy to determine who gets to pay which expenses.
In most cases, I recommend paying company expenses from the company bank account rather than running it through personal accounts. In the early days this may be impractical, but as your company grows you’ll need to get your banking organized. Slicing Pie’s Well feature allows individuals to contribute cash to a corporate savings account. When money is transferred from the savings account into a checking account to pay bills, the amount of the transfer converts to slices for each participant in proportion to their ownership of the Well account.
A policy dealing with cash contributions into the Well would be smart too. A founder might reserve this right for him or herself, or provide a right of refusal for Well contributions to individuals in the order they were hired. For instance, if the company needed $10,000 to cover short-term expenses employee #1 might have the right to contribute all or part of the cash. Rights to contribute the remainder would roll to employee #2, then #3 and so on. This provides a benefit to early participants.
Alternatively, you could offer all participants an equal opportunity to contribute in the Well. Not everyone will be willing and/or able to contribute cash.
The amount of money in the Well should be enough to cover hard corporate expenses for three to four months or for enough time to get to your next, more efficient, funding round.
If the company needs larger chunks of cash than the founders can contribute, the company should seek outside funding. Company managers will ultimately decide how much and from who they will raise this money. In many cases, a convertible note can be used to secure angel money. In other cases, especially for companies who don’t plan on going for a professional Series A round of financing, a “Slicing Pie” loan could work. A Slicing Pie loan is a typical loan with regular payments. As a debt tool, it has repayment preference over equity holders so it’s a little safer than an equity investment. However, if the company has to skip a payment, the payment would convert to slices at the cash rate.
In most cases, if you have an angel investment/loan you should draw down the loan before dipping into the Well. Your company policy will dictate whether loan payments can be made from the Well or if slices will be allocated to the angel investor.
Fair Market Compensation
As the company begins to generate revenue, it will be in a better position to pay expenses in cash rather than allocating slices. It’s in everyone’s best interest to create as few slices as possible, so the first expenses to be covered by incoming revenues are those that would otherwise consume cash. This is smart because cash has a higher multiplier than non-cash.
When all your cash needs are met, you can use the excess money to start paying non-cash expenses. I recommend that you pay salaries after all other non-cash obligations are met including rent, commissions, finder’s fees, royalties, etc. Your policy can be different, but I think salaries should be paid last.
When it comes to salaries, your company policy should dictate in which order people start getting paid for their contributions. Remember some people would rather have slices and some would rather have cash.
To avoid conflicts, you could create a policy for this. Let’s pretend a company has four employees holding, 10%, 20%, 30%, and 40% of the slices at a point in time where the company has $1,000 per week to pay salaries. Their fair market salaries at $50,000, $50,000, $75,000 and $75,000. Here is how different policies would determine the distribution of the salary budget.
- Pay everyone equally as cash is available, so each person gets $200
- Pay people in proportion to their percent of the slices, so payouts are $100, $200, $300 and $400
- Pay people in proportion to their salary, so the payouts are $200, $200, $300 and $300
- Pay people based on need
I prefer paying people in proportion to their salary. By doing this, everyone will get 100% of their salary at the same time and the Pie will bake (aka “freeze”).
Paying people on a go-forward basis will reduce their future slices so it’s best to wait until you have some predictable cash flow before you start making regular payments. The Pie Slicer software uses the unpaid portion of a person’s salary to determine an hourly rate to calculate slices. If each person is paid $200 per week that would reduce the unpaid portion of their salary by $10,400 (52 weeks). To reflect this in the Pie Slicer the salary of a $50,000 employee would be edited to $39,600 and the subsequent hourly rate would move from $25/hour or 50 slices/hour to $19.80/hour or 39.6 slices/hour on a go-forward basis.
This is different than reducing past slices.
If you have unpredictable cash flows and unpredictable need, managers can choose to make Lump-Sum payments to individual participants. A Lump-Sum payment is essentially reimbursement for past contributions and would reduce slices accordingly. Lump-Sum payments will apply first to any balances in the Well, next as reimbursement of cash expenses and finally reimbursement of non-cash contributions. The Lump-Sum feature on the Pie Slicer (available in mid-2017) will make the calculations automatically.
Your company should be mindful of how Lump-Sum payments are handled. It could be your policy to not make Lump-Sum payments, put a cap and/or monthly limit on them, or handle them on a case-by-case basis. Because they reduce an individual’s slices they increase everyone else’s percent ownership which should help alleviate conflict. I prefer to handle them on a case-by-case basis, but keep them small enough to not cause cashflow problems. A Lump-Sum payment is a business investment that should be considered using a cost/benefit analysis. If it allows a key employee to make ends meet at home so they can stay with the company, it’s probably a good investment!
Another way to manage expenses and, subsequently, slices, is to set spending limits for various positions before requiring approval by a manager or, ultimately, a board of directors (which most startups don’t have). Some positions, like customer service, may be authorized to refund a customer’s payments up to a certain amount before getting his or her manager to sign off. The manager would also have their own, higher spending limit and would also have to seek approval to exceed it.
It’s not unusual for senior-level marketing executives, who have to approve ad campaigns, to have higher spending limits than, say, a technology lead with more fixed resources. Within your spending limit policy you can specify how much of the expense the individual can cover personally in exchange for slices. This can create a logical advantage for senior managers to gain more slices than more junior-level employees. It’s usually beneficial for key employees to have more skin in the game than employees who are easier to replace.
Many people start companies or join companies to avoid bureaucracy and the introduction of policies and procedures may be resisted. Unfortunately, without them it is difficult for a company to grow and scale. Many founders are familiar with the term, “growing pains.” Companies who experience growing pains are companies who are fortunate enough to be gaining traction, but have not built the internal systems that allow it to grow without internal conflict and other issues. Clear policies can help the transition from startup to growth company.
That being said, creating traction in your business is more important than creating policies so make sure you keep your eye on the ball. Set policies as you need them and work with your team to gain consensus to avoid misunderstanding and bruised egos. Below are some sample policy documents that can get the Pie rolling. There are two sample documents, they are free!
If you want advice on other corporate policies please ask in the comments below.