One initial concern that I get about Slicing Pie is the fear that founders won’t get enough of the pie even though they were there during the beginning. Most people assume that the earlier you join a start-up the more risk you are taking and the more reward you should receive. Therefore, early participants should receive a higher proportion of the pie than later participants. This may not always be true, sometimes early risk is quite low because nobody has invested anything but spare time which isn’t the same thing and leaving your job a working full time, but I digress.
This concern often stems from founders who think their idea is actually worth more than it is. If you have read the book you will know that a Grunt Fund places little or no value on ideas alone. Rather, it rewards action and inputs that turn ideas into businesses that create value.
That being said, Grunt Funds have a number of mechanisms to reward early participants in the company. Most importantly, early hours earn higher percentages of pie than later hours. For instance, on day one if you are working with a partner at the same [tooltip text=”Grunt Hourly Resource Rate”]GHRR[/tooltip] of $100 and you each work five hours the total value will be $1,000 you have each earned 50% of the available pie. In six months, when the pie has grown to a [tooltip text=”Theoretical Base Value”]TBV[/tooltip] of $100,000 your five hours will only earn you less than ½ of 1% of the pie. Clearly, getting in early has benefits. The sooner you can start generating revenue the sooner you can start paying people instead of giving them pie and the more you will own.
This applies to other inputs as well. The Grunt Fund provides incentives to invest cash, equipment and supplies early on in the process. $1,000 cash investment on day one of the above scenario would entitle the founder to $4,000 in pie bringing the TBV up to $5,000 for the day. Your partner would own 10% and you would own 90%. The same investment against a TBV of $100,000 would receive less than 4% of the pie.
[box type=”warning”] WARNING
I’m not implying that you are selling equity or shares. Pie is not equity, it is a promise to grant equity when (and if) the time comes. Grunt Funds don’t track or manage real value, they are a tool for understanding the relative value of different inputs. Pie has no value. Start-up companies have no value until they actually create value.[/box]
Remember, however, that the pie grows and over time all hours are treated the same. Your first hour bought more because the pie was smaller. When the pie is bigger incremental hours are still valued the same, but they receive smaller pieces of the pie.
Another mechanism a founder can use to solidify a fixed interest in the company is to “partition” off a slice of the pie and only divide up the remainder. The early founders may take a 10% piece for themselves and slice the remaining 90% using a Grunt Fund. This is fair as long as you include all current participants in the partition.
If a founder wants to own a significant slice of their own pie they need to put in the most or find a way to pay people. If they start with no money they can’t expect to take the lions share just because they started the company. They should get pie according to a [tooltip text=”GHRR”[/tooltip] that properly reflects their experience, abilities and responsibilities. This is the only fair way to reward other participants.