Please Don’t Partition the Pie
In the original Slicing Pie book, I proposed a concept called “partitioning” in which only a portion of the company’s shares would be subject to the Slicing Pie model. The remaining shares would be allocated to early founders or investors.
I regret this because it’s not really fair.
Unfortunately, the concept is in the original book and many of the subsequent translations of the book. If you have any of those, please enjoy the book, but ignore that part! The model in all the books is the same.
When I first started promoting the model back in 2010, I was still pondering the nuances of implementation, but over the years, I have gained more clarity on how to ensure the model keeps its promise of fairness. I removed the partitioning concept from The Slicing Pie Handbook and I caution people against using it.
Carving out a chunk of equity for any person or persons simply re-introduces all the problems of a traditional fixed split—the problems that Slicing Pie is designed to solve in the first place. Fixed splits, not matter what their form, are bound to cause problems not only because the “right” number or percentage of shares is impossible to determine, but also because even if you could get it right, it would be wrong the moment something changes.
To make matters worse, the percentage of the company subject to Slicing Pie will instantly entitle the participants to the entire amount giving them what is almost certainly too much equity.
For instance, let’s say a founder wants to keep 80% for himself and leave 20% for new employees. He hires his first employee. The moment the employee shows up for work she will instantly be entitled to 20% of the company because she is the only participant in the allocation of 20%. If the founder hired two people at the same time, each of them would instantly have 10%.
The founder could try to address this problem by participating himself in the 20% portion alongside his employees, but they would no doubt wonder why he gets the 80% chunk too. And, if you think about it, why does he get 80%? What makes him so special?
Here are some possible reasons:
- He wants to maintain decision-making rights. Okay, but there are other ways to accomplish this that still allow for a fair equity split.
- He has an incredible idea. Okay, but Slicing Pie can accommodate ideas based on their fair market value which could be based on: 1) development costs, 2) royalties or 3) competitive offers.
- He’s putting up all the cash. Okay, but Slicing Pie can easily account for cash contributions. If he’s putting up ALL the cash, including salaries, there is no need to use Slicing Pie and he needs to implement an incentive stock or option plan.
- He’s a juggernaut in his industry. Okay, but Slicing Pie will reward his status based on the observable fair market value of his contributions. If he’s so powerful that success is a done deal, he should have no problem raising funding and won’t need Slicing Pie.
- He just wants a big chunk. Hmmm…in this case ego and greed has gotten the best of him. Slicing Pie is designed to protect participants from this kind of behavior.
If you encounter a founder who thinks a partition makes sense, it may mean that he does not fully understand or trust that the model will do its work. Please put that person in touch with me and/or point them to the overcoming objections post on this blog.
If a founder does fully understand the model AND trusts that it’s fair then it’s clear that he is a person who is willing to benefit at the expense of others. Ego (“I’m so important the rules don’t apply to me” and, “I should have more than everyone else”) and greed (“I don’t want the rules to apply to me” and, “I want to have more than everyone else”) are powerful emotions and, understandably, difficult to ignore. But, people who can’t check their egos or are excessively greedy should be avoided, especially in a startup.
Even if you can get past how demoralizing it is to be taken advantage of, it’s likely that a leader like this will continue to make irrational, self-serving decisions can make it difficult for the company to survive.
If a founder is asking others to put their contributions at risk, he should be prepared to allow them to benefit from that risk. It’s not fair for him to benefit disproportionately from other’s risk. Everyone is in it together.
Think about it this way: imagine you invite a group of friends over to play poker. At the beginning of the game you said, “no matter what happens tonight I get to keep 80% of what you win.” How enthusiastic would your friends be about playing with you?
Of course, you could argue that it’s your house and you bought the drinks and it was your idea so 80% is “only fair.” They might be okay chipping in for drinks, but don’t count on them happily paying you off and don’t count on them wanting to play very long or coming back next week. Ultimately, they will resent you for taking advantage of them and the game won’t be much fun.
If it’s not fair, it’s not fun.
Startups are hard work, at least they should be fun too. Working for a company that undervalues your contribution sucks.
Even if a founder can get away with a partition, it does not make it fair. Maybe he can obscure the fact that he is taking advantage of others. This does not mean it’s the right thing to do. The world is full of examples where one group of people profits at the expense of others. It’s so common it’s cliché. People live with it because they don’t know a better way. When it comes to equity splits, Slicing Pie is the better way.
Slicing Pie will always give you the fair split. A partition is simply a fixed equity split with all the traditional fixed split problems. If you want to be unfair and you want to take advantage of others a fixed split is your best option. Slicing Pie can’t take a fixed partition and create a fair split because the underlying structure of the organization is fundamentally unfair.
If you want to be fair, use Slicing Pie. It will always give you what you deserve. If you want to benefit at the expense of others an old-fashion fixed split will give you the tools to let your ego and greed take control.