How to Split Equity with Cofounders at Stanford University
Here is a presentation I gave on how to split equity with co-founders at Stanford
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Hi Mike, I really like your model but I was wondering how these constant equity changes will be legally recorded. Could you please expand on that or let me know where you’re covering that? (After watching this video I’ve just started reading your book). Thanks
Yes, the Slicing Pie model is all legal. Check out http://slicingpie.com/silcing-pie-friendly-lawyers/ for Slicing Pie-friendly lawyers
I have a concern that the “what’s my value” assumption has a fundamental flaw: It focuses on the difference in value of cash compensation vs. your market value and calls that the risk you’re taking – but that’s ONLY looking at the risk of the “investment” (equity you get) ever paying off. This is an eggregiously incomplete view of the risk inherent in taking on a start-up job, in that it only considers the risk of whether your EQUITY gets paid out, NOT on whether your salary will continue. If you KNEW that you could land another job instantly, with no risk of long-term unemployment, this might apply, but…
What about being paid your market value in cash, PLUS getting equity as compensation for the risk that you won’t have a job at any point in time? Sure, you can also ADD to that by being willing to take a “haircut” on your cash compensation, but…you have to consider the risk of job-loss, too.
You are right, there are a lot of built-in risks with a startup. This is why I use a 2x multiplier which provides and instant 100% ROI for every hour. This is designed to accommodate all the risks.
The risk of joining a startup (not getting paid and/or going out of business) is captured through the use of risk multipliers. The model builds in a 2x return on unpaid compensation and a 4x return on minor cash investments. There are still no guarantees, but in some circumstances the company has the option of buying you out at this rate (if they have the cash).
If a company can afford to pay people their full market rate salaries they shouldn’t have to provide equity at all. I’ve started a lot of companies where I simply pay people their market rate and they are perfectly happy. Similarly, I’ve worked for a lot of companies at full market rate and have not received equity and I’ve been happy to do so. For companies that pay market rates equity is used as a bonus and incentive tool. It’s less about risk.
Sorry for the late response!
If a co-founder leaves after year one, does their share shrink as the rest of the co-founders continue working through year 2, based on the total of hours put in?
Hi Eric,
Sorry for the delay in answering! Yes, the departing founder’s share will shrink as the remaining employees continue to work. This is fair. Take a look at this article I wrote on the subject: http://slicingpie.com/dilution-is-not-a-four-letter-word/
are the slides going to be added to a la mode?
you can download the slides here: http://slicingpie.com/wp-content/uploads/2014/09/Slicing-Pie-Deck.pdf
Sorry for the late response!
[…] Vous êtes rémunéré avec un package liquidités / actions, défini et négocié ensemble, en suivant l’esprit de la méthodologie Slicing Pie. […]
[…] Grunt Fund Overview Video […]
The Pie Slicer app looks quite interesting. It is going to be available anytime soon?
Yes, it’s available now! Visit SlicingPie.com
Any references how to organise this in a flexibel way on a legal level in a country like Belgium where equity is ” very rigidly law regulated” in 10 page contracts ?
Is the Netherlands similar? If so, the guys at SlicingPie.nl may have some ideas for you
Mike, i recently read your book and now feel more at ease about embarking on a start-up with a partner. He has some technology and ideas for which he would be entitled to a royalty (x2 since it would be paid only after we get funded), but not sure how to define the length of time for which he would be receiving this payment. There is a cap, right, but how do you define when to establish it?
The royalty payment should extend into the foreseeable future as long as the revenue can be attributed to the idea. If the company pivots away from the idea the royalty may not be appropriate.
When you raise outside money and start paying salaries a cash royalty may not site well with investors so you may have to end it.
Hi Mike,
How should we deal with individual’s productivity?
If an individual isn’t productive you have a management issue, it’s not a flaw in the design of the Slicing Pie model. The Slicing Pie model includes a time-tracking component that will help managers gain insight into the productivity of individuals and provide opportunities for coaching.
If someone is chronically unproductive the model has a mechanism for terminating them and recovering all or part of their equity.
Mike – just watched your video and am wondering if you have any suggestions for an established company, say a 2-person partnership for 2 years, that now wants to bring on a third person and form a Grunt Fund. Say, for example, over the past two years, the 2 original partners, both working part-time on the business, haven’t been tracking their time spent and originally agreed each would own 50% of the company.
Which of the two scenarios would you recommend:
Scenario A
The Grunt Fund starts today, with an initial value of $0, but will represent a portion of the equity of the business, X (say 80%), instead of 100% of the businesss. Each of the two original partners agree to split the remaining portion of the equity 100-X (in this case, 20%) equally. Thus the Grunt Fund would dictate, from today forward, how X% of the company would be divided, while the two original partners would each retain Y% / 2 + the portion determined by the Grunt Fund.
Scenario B
The two partners come up with some kind of value of their 2 years of contribution, and run the Grunt Fund from today forward, as if it had actually started when the 2 partners first started the company? In other words, the value of the Grunt Fund today would not be $0, but would be some kind of approximation of the effort of each partner over the past 2 years. If this is your recommendation – any tips on how to look back over 2 years of part-time effort and come up with a fair number?
Hi Mike, I have devoured all info available in your site and I’me waiting for the book to arrive. I am very exited about your approach and I’d love to see your response to Randy’s question above as I am in a similar situation. Thanks-
[…] pointed me to a much more robust model called “Slicing Pie”. You can learn about it at via this excellent presentation done at […]
[…] At the urging of his marketing friend Todd, Greg decided to pursue the strategy on his own and parted on good terms with the other company. “I told Todd I didn’t want to go it alone,” said Greg, “he decided to join me and we agreed to adopt the Slicing Pie model based on a recorded lecture from Stanford University.” […]