Once in a while I’ll get an email or read a review from someone who is skeptical about tracking hours because they are concerned that time alone isn’t a good measure of contribution. They are right. Just because you put time towards something doesn’t mean the time is productive.
Many people want to reward productivity or “value creation.” This would be great but, it’s way too subjective and nearly impossible to track. First you will have to define what it means to be productive or create value. Then you will have to deconstruct your activities to determine which activities were productive or created value.
This kind of thing doesn’t happen in the real world of non startups. In the real world you are paid a salary and your job is to create value regardless of how much you are paid. If you create a lot of value you get raises, if you create no value you get fired.
In the real world you might get a bonus for meeting a milestone, but rarely will your employer simply not pay you when you miss a milestone. Can you imagine having that discussion with someone? “So, John, your worked last week sucked so I’m deducting $4,000 from your next paycheck.”
What if you spend an hour creating a landing page that increases conversions by 100%, but the checkout page has a bug so no money is collected. Did you create value? What if you spend 100 hours fixing the bug? Did you create value? Or, did you destroy value by breaking the page in the first place? Is there a net value which is Page Creation Value – Bug Creation Value + or – Bug Fix Value? How, on earth, would you determine the value of any of this? This, by the way, is an e-commerce example which is more measurable than most, but the problem is still impractical.
If you second-guess every move your employees make and adjust compensation all the time you won’t keep employees very long!
Slicing Pie simply measures what is at risk. It is not intended to introduce a new way of compensating someone.
Count What You Can Count
In a dynamic equity split you have to count what you can count. If it can’t be counted then it’s left out of the model. Not because it’s not important, but because trying to measure things that can’t be consistently measured will lead to arguments and renegotiation that will cause too much damage to the company. You have to create a proxy for what you are trying to measure.
Time is extremely easy to measure and track. To mitigate the risk that the time is unproductive we use the Grunt Hourly Resource Rate (GHRR!) which provides a proxy for productivity and value creation. The best predictor of future behavior is past behavior. People with lots of experience are likely to apply that experience in the future. These people, therefore, would have a higher GHRR! than someone with less experience.
You do run the risk that time will not be productive. However, most time tracking programs give you the ability to track time to specific projects and capture notes about that time. This is one of the most powerful tools available to a start-up company. If you ever suspect that a person’s time is not productive you can simply review the time logs to see what they have been up to.
In the real world what do you do when you have an unproductive employee? You don’t change their compensation on the fly. You tell them how to get back on track and you fire them if they don’t!
Not long ago I was working with a Grunt Funded company that was concerned about the lack of sales and sign-ups on their site. We reviewed their time logs and found that nearly all of their time was being spent on development projects. So, they wrapped up their projects and turned their attention to sales. I’ll bet you can guess what happened…
This concern is usually raised by more experienced entrepreneurs. I think it’s because they are afraid their contribution won’t be properly valued. I recently introduced a start-up to a person who can distribute their product on a national basis. It took about five minutes, but the value is huge. Clearly my GHRR! is not a good reflection of my productivity in this particular case. However, the Grunt Fund will accommodate this type of value creation through the use of finder’s fees and commission calculations.
So, I haven’t come up with a better proxy for productive time than the GHRR! (but I’m open to suggestions). At the end of the day, a Grunt Fund is based on rules that the herd can easily agree to. If you want to create a scheme for measuring value creation go for it. And, please let me know how it works!
Awesome Due Diligence
One more (often overlooked) benefit of Slicing Pie is that it makes investor due diligence easy as pie! Time tracking is a core benefit of the program. Imagine you have interest from some Series A investors. When it comes time for them to dig into the details you can simply give them the reports you used to track Slicing Pie. These reports will show who did what, how long it took, what money was spent on what programs, how long things took…everything. You’ll have a complete diary of how your company became what it is!