Slicing Pie Isn’t an “Option” It’s the Only Option

I recently spoke to a lawyer who told me that he considered Slicing Pie an “option” for early-stage companies. This statement is a failure on my part to clearly articulate the core benefit of Slicing Pie: which is that it’s fair. The only “option” to Slicing Pie, therefore, is an unfair split.

This means that lawyer is offering clients the option of screwing their cofounders with his help.

It happened to me once. I signed an equity agreement that gave me accelerated vesting if my job was materially changed. When it was changed, I left, and the vesting clause triggered giving me my entire allotment of shares in the company. But wait, the third amendment to the operating agreement contained one line that allowed my partner to buy back my shares at market value which, at the time, was barely anything. So, ten years later when the company had a sale pending, he bought back my shares at the set price and immediately sold them for a hefty profit. I suspect he made millions.

This won’t happen to me again.

It’s Legal to be a Dick

His actions were perfectly legal. A lawyer drafted the Operating Agreement and I read it and signed it. I’m an educated person with many years of experience, but at the time I was naive and inexperienced. I didn’t fully understand the implications of what I was signing, and I trusted my partner who was more experienced than I was. I was wrong to trust that man. He and his lawyer wrote an agreement that gave him a legal right to be a dick.

In the aftermath of my dealings with him I learned that many of his previous partners had similar stories. Lots of founders have similar stories. You may have one too.

Agreeing to Something Does Not Mean it is Fair

One of the most important things I have learned in my career is that signing a legal agreement does not mean that it is a fair agreement. This is not a criticism of lawyers. A lawyers job is to look after their client’s best interests. My partner’s lawyer did just that. My best interests weren’t part of the job. (Which, by the way, was one of my mistakes. We should have used an attorney that was representing the company and not my partner’s personal attorney…)

Slicing Pie is Fair

If you dissect the Slicing Pie to its core elements, you’ll see three things:

  1. It’s based on the logic of fairness.
  2. It doesn’t favor one person or party over another.
  3. It changes as the company changes to stay fair.

The Logic of Fairness

The logic of fairness implies that every gets what they deserve to get. No more and no less. In business, unlike most areas of life, what is fair is quantifiable and observable. This is because all inputs and outcomes in business can be reduced to a dollar amount. In Slicing Pie, a person’s share of the outcomes is based on that person’s share of the inputs. I like to describe the process in terms of betting. Startups are a gamble with winners and losers. Each person’s share of the winnings is based on each person’s share of the bets. If you lose, who cares?

Everyone is Treated the Same

In the Slicing Pie model your share is determined based on your inputs, or bets. A bet is exactly equal to the unpaid portion of a person’s fair market value or out-of-pocket expenses. Every dollar in fair market value flowing into the business is treated the same as every other dollar. Nobody can say, for example, that one person is subject to a buyback condition that all other participants aren’t subject to.

A Dynamic Model

Every day more bets are placed in the form of unpaid compensation or unreimbursed expenses. The Slicing Pie model changes too to keep things fair no matter how events unfold. This avoids the pain of constant renegotiations with cofounders.

Baking the Pie

When the company has enough cash to pay salaries and reimburse expenses on a go-forward basis the betting stops. At this point the shares are allocated according to the formula. All shareholders are subject to the same terms and conditions of subsequent funding rounds (if any).

The Option

The option to Slicing Pie is guessing what each person deserves usually prior to any work being done making the guess inevitably unfair. Whenever your split is expressed as a percentage (50%, 90%, etc.) you are dealing with a “fixed” or “static” equity split which is always unfair.

If you signed the deal, you have not done anything to ensure fairness you have simply given someone a legal right to be a dick, just like my partner had—a right that he took advantage of!

If you are in an equity contract that is based on guessing, has terms that don’t equally apply to all participants or is expressed as percentages you have given someone a right to be a dick, but most people aren’t bad people. Most people want to do what is right. You can apply the logic of the Slicing Pie model to correct the mistake and, in my experience, most people are willing to adjust their holdings and even enter into a new contract that applies the Slicing Pie formula. People may not like it, but they will see the moral value in doing what is right.

There are lawyers all over the world who can help you straighten out a crooked deal using the Slicing Pie model!