Sometimes people ask me if Slicing Pie is “legal.” The short answer is: yes, absolutely, Slicing Pie is completely legal and is never illegal. The long answer is slightly more nuanced because Slicing Pie isn’t a legal framework, it’s a moral framework – it’s a way of doing right by those who help you build a valuable business And, just like any other equity model that has ever existed, it is subject to the unique laws of individual countries.
There are almost 200 countries on this planet and countless more throughout the universe (be happy you don’t live on Tatooine). Each has their own governments and legal systems and tax systems and business structures and all sort of other things that apply when you live and/or work there.
Slicing Pie works the same in all of them. No exception. This is because Slicing Pie helps founders make decisions that are fair to everyone involved. Everyone gets what he or she deserves. Based on my experience, fairness is a universal goal and if it’s fair in one place it’s fair in another.
Getting what you deserve and fully realizing the benefits of what you get, however, will vary based on your local laws, taxes, and customs. In the US, for example, non-resident aliens can’t legally own shares in an S-Corp. A non-resident alien might deserve the shares, but the law prohibits him or her from owning them. In these cases, Slicing Pie will do its job of determining a fair split, but the local laws will create a barrier to accessing the rewards of equity ownership. This does not mean there is anything wrong with Slicing Pie. It may mean, however, that there is something wrong with the local laws. In many cases a clever lawyer or accountant can recommend a structure that will work. A US S-Corp could convert to a C-Corp which allows foreign owners. There’s not always a clean solution however, and you may have to find some way to work within a restrictive legal environment. You should never abandon being fair.
Here is another example. Let’s say two partners in different countries split equity using Slicing Pie and subsequently distributes a dividend payment. One partner lives in a high-tax country and the other lives in a low-tax country. Slicing Pie still created a fair split, but the recipient of the income must comply with local laws. Simply granting equity in one country might trigger a tax consequence, but no taxes in another. Those who live in high-tax countries must comply with local laws even if their partners in other countries pay lower taxes. Oppressive tax laws don’t mean you should give up on fairness altogether.
It’s important to note that any legal or tax laws—fair or unfair—apply to every equity split no matter how it is conceived. When you use a conventional fixed split you will not only have an unfair split, but also you’ll still be subject to the same laws. If someone implies that Slicing Pie isn’t “legal” it is the same as saying fairness itself isn’t legal. I can’t imagine living in a country where the intent of fairness is deliberately penalized and citizens are legally required to make foolish, unfair decisions. Even the harshest regimes would at least give lip service to fairness.
Most legal systems, however, were designed with traditional equity split models in mind and are intended to maximize income opportunities for the government. This can make implementing Slicing Pie a little clunky in some places. A good Slicing Pie-friendly attorney will help your team implement as smoothly as possible. Traditional splits, by the way, are clunky too. Just because they are easy to set up, doesn’t mean they work. All equity splits change over time, Slicing Pie simply provides a logical way to make the changes, traditional models must be constantly renegotiated.
Most people want to be treated fairly, but some companies operate in an environment that inhibits and obscures fairness. Slicing Pie provides a logical model that shines a light on fairness and creates a structure to achieve it. It sits on top of the legal structure. Slicing Pie works, but the laws may not.
If you live in a place with a legal system that does not accommodate fairness and logic you have three choices:
- Move to a country that does (a popular option for many founders),
- Do your best to work within the constraints of your system
- Change the laws.
Times are changing and so are laws. As communities continue to embrace entrepreneurship their politicians will create policies that reflect the absence of cash in early-stage startups. The recent US tax reform bill, for instance, alleviates certain tax burdens on vested shares. Australia made similar adjustments a few years ago. Changing the law is a real possibility. Many startup communities are already in discussions with lawmakers who are shaping the future environments for startup companies. Fairness should be a requirement and implementing a legal structure for achieving fairness should be simple and clean.
Slicing Pie is about doing the right thing, do your best to avoid letting local laws hold you back!