Slicing Pie is based on the unpaid portion of the fair
market value of each person’s contribution. In a startup, time is one of the
most common contributions from founders which means the first step in
establishing a new partnership with a co-founder is to determine the person’s
fair market salary. This is the amount that your business would pay if
it could pay. Fair market salaries are important for two reasons. First,
it gives the team the ability to track each person’s at-risk contribution (AKA “bets”)
and second, it helps the team understand the fully-loaded costs of running the
business. Under estimating costs is a common problem for startup teams leading
them to overestimate profit projections. Remember, the Pie terminates when the
company is able to pay for everything, including salaries. When the company can
pay it will pay so it’s important to set salaries that are logical in the
Negotiating a fair market salary in a startup is pretty much
the same process you would use when negotiating a job at an established
A person’s fair market salary is a function of their
education, experience, and skills in relation to the requirements and
responsibilities of the position. Consider Joe and Tom. Joe is a recent high
school graduate and Tom has a PhD in Electrical Engineering and 15 years of
experience as an automotive engineer.
Joe and Tom apply for jobs at
McDonalds. They both accept entry-level jobs as flipping burgers, they are
similarly qualified and, therefore, would have a similar fair market salary of
around $10 per hour.
Joe and Tom apply for jobs at
Tesla, Joe gets turned down, but Tom gets to design the next generation of
vehicle battery and a salary of $200,000 per year plus bonus.
Clearly, Tom is financially better off at Tesla and shouldn’t
take a job flipping burgers. If he wants to flip burgers, he must do so
at the market rate.
Assumptions of Productivity
When negotiating a salary, certain assumptions are made. In
the McDonald’s example, the hiring manager assumed that both Joe and Tom were
going to have similar productivity because neither of them has experience
relevant to the job. In the Tesla example, the hiring manager assumed that Tom’s
skills and experience would be much more valuable to the company and, because there
are a lot more high school grads looking for jobs than PhDs, the supply is
lower. Hence, a job and a high salary for Tom.
Differences in Productivity
Any assumptions made in the hiring process will be tested
over time when the employee’s performance is observed. For example, Joe may be
able to flip 200 burgers and hour while Tom can only flip 100 burgers per hour.
Or, Tom may spend half his time responding to customer service emails at Tesla.
In Slicing Pie, this begs the question: In a burger startup,
Tom (the horrible flipper) will earn more slices in the Pie than Joe (the
amazing flipper). In an electric car startup, Tom (the engineer) will be contributing
slices when he responds to customer service emails that Joe could probably be
This doesn’t sound fair, because it’s not fair. But,
it’s not a Slicing Pie problem…it’s a management problem.
In both examples, the management team needs to take action
to rectify the issue. Once the management issue is corrected, Slicing Pie will make
the proper adjustments to maintain a fair split.
The Bad Burger Flipper
In the burger example the management issue is performance
related for both guys. Each one is either performing at, below or above what
was assumed when they took the job. If the hiring manager assumed that a burger
flipper should flip 200 burgers per hour the manager needs to address Tom’s
Tom’s manager should bring the
problem to Tom’s attention and make it clear that productivity needs to
increase in order to keep the job and he is getting his first warning. Specific
goals need to be set and the manager needs to make sure Tom has the tools and
training to do the job right. If Tom doesn’t have a spatula, for instance, his
performance would be an issue through no fault of his own and his manager
should make sure he gets one.
If, after Tom has everything he
needs and is still not productive, his manager should issue a second warning
and review the goals and reassess the situation. The job of the manager is to
make sure that there are no externalities under his control that are preventing
Tom from doing his job. Training? Check! Equipment? Check! Supplies? Check! Back
to work, Tom!
If Tom has everything that Joe has
and still can’t flip burgers maybe he is in the wrong job. He was given ample
opportunity to correct his behavior and he had everything he needed, but he was
still unable to perform at an acceptable level. It would be fair to fire him
In Slicing Pie, a person can be terminated after two
warnings. This, among other things, is considered termination for cause and the
individual would lose slices from non-cash contributions such as time. This
automatic correction ensures the Pie stays fair for the remaining Grunts who
The Overpaid Customer Service Rep
When Tom takes time to answer emails, he is not designing
batteries. His work suffers. Again, his manager needs to address the issue:
Right away, the manager learns that
customer service overflow is being sent to Tom. At $100 per hour, this cost is
too high. Tom’s manager should consider hiring Joe to handle the overflow.
Slicing Pie provides and easy and logical way to add help
where needed. It would be foolish to allocate slices in the Pie to Tom for
doing low-value tasks. If Tom’s manager cut Tom’s salary for the time he spent
on customer service emails Tom would either ignore the emails or quit the job. The
only fiscally responsible decisions are to hire the right resources so each
person can maximize personal productive or fire the unproductive employees and
replace them with more competent workers.
In startups, founders often wear many hats and even take
pride in being a Jack of all trades. Many work long hours doing everything. I,
myself, fall victim to this hubris. But when you do this you wind up overpaying
for work that could be delegated to a lower cost resource. With Slicing Pie,
there is no reason to fall into this trap. Yes, adding more Grunts to the Pie
means more shareholders, but the company will move faster and be more stable
with the right team. No matter how many Grunts are in your herd, everyone will
have the equity they deserve as long as the managers make good management