I recently had the pleasure of reading Mike Moyer’s Slicing Pie book. This subject has been on my mind a lot as I try to conceptualize what it means to go into a startup with others. From the other books I’ve read on this, equity isn’t really discussed (pessimistically, I wonder if it’s because the goal is for the ants to focus on being ants while VC and angel investors take the lion share of their effort - practically, I wonder if it’s because the subject area gets very challenging with subjectivity everywhere).

For me, I have been designing a system of sweat equity where you would designate contribution based on role and hours. However, after reading Slicing Pie, I realized I forgot an incredibly important part of startups: cash and the importance of who gives cash and business-enabling expenses. It seems incredibly obvious, but by avoiding money in my design, it neglects that biggest challenge bootstrapped businesses face.

So, effectively, the theory of Slicing Pie is that you create a contract that you, as the owner, are willing to abide by that appropriately distributes the “pie” i.e. equity of a startup by relative contribution of each member. This is formalizing labor and time as the most important factor for success. This opposes what most companies do which is to slice the pie “before the pie is cooked” i.e. deciding equity percentages at the outset. Doling percentages without a commensurate amount of effort is a great way to misappropriate where value ought to be doing. But slicing “after the pie is cooked” appears to be a fantastic way of destroying good will as some folks are practically guaranteed to feel like their contribution was not appropriately accounted for. Here’s a brief table describing the options:

Option Positive Negative
Before Easiest, traditional Misappropriates value from labor, difficult to change course, reduces incentive for people to do more
After Takes zero effort until the moment equity is worth something Guaranteed method to making people feel undervalued or having been taken advantage of
During Fairest method, most accurate if the founders are willing to sacrifice some equity Takes more effort to track time, trust and ethical behavior is required to successfully function

Cash, (some) ideas, expenses (i.e. cash already paid), loans & securing loans, etc. are all accounted for according to a fairly simple algorithm. The challenge, in my mind, is that you have to operate the company as if you were a real company i.e. track time, negotiate pay rates, consider the necessity of an expense, challenge waste, etc. Perhaps that’s a good thing long term especially if you are angling toward acquisition, IPO, or even more mundanely, real loans, but when you are doing work for zero, it could be off-putting to folks to have your startup be so formal.

In my mind, the truly key benefit is that you can bring on people and pay them an appropriate amount of equity commensurate with their output in such a way that allows you to grow the number of people without figuring out how to cut percents of percents. There were some extra steps Moyer suggests including recalibrating the equity pool at certain stages to allow longer term employees to have a larger piece of the pie or when to abandon the “Grunt Fund” once real equity exceeds an arbitrary threshold where more formal and common practices would be superior (think options and vesting schedules).

I think there was only one big thing that I disagreed with and that’s what to do with the contribution from folks who have needed to leave for some reason that is not “good cause”. In the book, Moyer says that their historical labor contribution should go to zero and that the only thing that can persist in equity allocation is cash-equivalents. I can see why you want to eliminate absentee owners, but why not have a system where you simply decrease their labor contribution by, for example, 1%-2% of that final labor contribution every week? At least they could feel that their effort was not in vain. I could not imagine working at a startup for a year and needing to change jobs to one that paid in cash because a family member needed assistance only for the company to IPO a month later only for you to find out that your grand allocated amount in that equity distribution is a big ol’ goose egg.

Aside from that one hiccup, the strategy presented is exactly the type of early stage startup that is worth working at. No matter what the end goal of the startup is whether it’s acquisition, IPO, or remain permanently private but valued at some non-zero value, this seems very fair and reasonable.