Although I don’t think it happens very often (at least in my experience), sometimes people who invest their money in a startup get cold feet and want their money back. Conversely, founders may accept investments that they later decide they do not need. Slicing Pie is designed to accommodate unforeseen changes of heart when it comes to cash investments.
If your company is growth-oriented and plans on raising professional investments during a Series A round, most friends & family and small angel investors will be happy accepting a convertible note or SAFE (simple agreement for future equity). These tools represent the fair market for small investment and will not contribute slices to the Pie.
However, in many cases, individuals who spend cash will contribute slices in a number of ways:
- They pay company expenses and do not get reimbursed
- They contribute cash to the Well that is subsequently withdrawn and spent
A person who covers $1,000 in expenses for a company using the recommended cash multiplier of 4 would contribute 4,000 slices in the pie. Later, if they want their money back, or if the company wants to give them their money back, the Slicing Pie recovery rules apply.
In the event of separation, Slicing Pie creates appropriate consequences for the at-fault party to discourage people from making decisions or engaging in behavior that could harm others. If a participant is at-fault, they lose their slices for non-cash contributions and slices for cash contributions would be recalculated without the multiplier (Some slices may be protected if the company opts for loyal employee protection.) The company could force a buyback at $1 per slice. If the company is at-fault the participant would keep all their slices in the Pie. The company can offer a buyback at $1 per slice.
The recovery framework rules in Slicing Pie apply to all participants (with limited exceptions for advisors). Remember that a participant can be leave a company for four different reasons as outlined in the book:
- Fired for good reason
- Resign for no good reason
- Fired for no good reason
- Resign for good reason
The first two reason are the fault of the person leaving and the second two reasons are the fault of the company.
Like an employee, an investor could be fired for good reason if they commit acts of moral turpitude like stealing from the company or harassing employees. However, there generally aren’t any performance issues for investors so they can’t be fired for performance-related issues. It’s more likely that they will, for their own personal reasons, ask for their money back. This is, in effect, resignation for no good reason.
To complete the buyout, money sitting in the Well can immediately be returned to the individual. It was never an at-risk contribution so it is not part of the Pie and is not subject to the recovery rules. Next, existing slices would be recalculated without the multiplier. The slices would remain in the Pie and the company can buy them back a $1 per slice payable whenever the company can afford to pay it before break even or Series A. If the company waits until after break even or Series A, the Pie would freeze and the investor would own a permanent share of the company. They would be entitled to a share of the dividends when paid. And, if the company sets a value, their share would reflect the new value, not the buyout price. It is for this reason that a quick buyback is preferred.
Conversely, if the company wants to get rid of an investor they are essentially firing them for no good reason. Again, cash in the Well would be paid back immediately, but the remaining slices would keep the multiplier and the company can offer to buy them back at $1 per slice keeping in mind that they can’t force a buyback. So, if Joe covers $1,000 of expenses for your company and you’re using the 4x multiplier, you will have to offer $4,000 to get rid of him. He doesn’t have to take it if he doesn’t want to.
Lastly, if a company has a significant change in strategy or team, it may not be the company the investor signed up for and, therefore, they would be entitled to resign for good reason. They would immediately get their Well balance back and offer their shares back to the company with the multiplier. Nobody can force a company to buy out slices because startups in the bootstrapping phase don’t have cash.
Looking at investors through the same lens as an employee allows the Slicing Pie model to maintain a perfect split and allow founders to navigate an otherwise perilous negotiation.