A majority of start-up companies begin building the business with very little capital(cash) or resources. Due to the almost non-existent resources available during the start-up phase, most of the individuals involved in these early stage enterprises choose to take an equity stake in the company rather than actual money for their time and services. Most of these start-up enterprises will use some form of a fixed-split equity allocation that will be performed either before any profit or outside investment is made or after revenue starts coming in. This fixed-split equity method almost always ends up creating some disparity between the founding members due to differences in opinion on individual value contributed to the start-up company.
Long time entrepreneur, Mike Moyer, has come up with an excellent method that is a very fair and equitable way to allocate equity during the start-up phase of an enterprise. Rather than a fixed-split method that is implemented either before or after a company becomes profitable, Mike Moyer's Slicing Pie Model uses a dynamic equity split method that starts calculating a fair equity for each contributing member right from the start. Due to the nature of a dynamic equity split, each persons “Slice of the Equity Pie” will continually change based on their individual contributions to the company, organization, or project they are a part of.
Due to the fact that the project aspect of MakerCreations was going to become one of the main components of this Makerspace portal, I wanted to find the best method possible for ensuring all project team member's contributions were properly calculated from the start. I knew that many of the projects undertaken at MakerCreations had the potential to become viable businesses, and inline with what we are trying to accomplish at MakerCreations, I wanted to ensure that everyone involved was compensated fairly when either investment funds or actual business revenues started coming in. After a lot of research on the subjects of business compensation and equity sharing, I found the Slicing Pie Method to be the best way to achieve MakerCreations' goals of ensuring everyone be treated with the same level of respect, and to be compensated fairly whenever potential for profit was available.
The following short summary will lay out the main terms and concepts for the Slicing Pie Model, but for those interested in more in-depth details, I highly recommend you read Mike Moyer's book “Slicing Pie: Fund Your Company Without Funds”. Using the analogy of baking a pie, Moyer talks about the various ingredients needed “to bake a pie”. These ingredients include:
Money, in the form of cash or cash equivalents
Supplies and equipment that enable the businesses
- Facilities for conducting business
Along with talking about the various ingredients for building a successful business, Moyer continually emphasizes that all ingredient contributions only represent theoretical values until there is either some steady revenue coming in or an investor makes a large cash investment in the company.
In the Slicing Pie Method, individual participants are given an equity percentage of the overall fund amount in proportion to each team member's contribution to the overall theoretical value of the PIE or Promise to Issue Equity. Moyer gives some base line values for the various ingredients, and these are the same values MakerCreations will use unless project teams vote to change them. Due to the inherent risks involved in working for a start-up, these theoretical values will usually always be more than what would normally be paid in cash. Cash Multiplier is normally 4x, and Non Cash Multiplier is normally 2x.
Time: ((Fair Market Salary / 2000) x Hours) x Non Cash Multiplier
Time Consultant: Hourly rate x 2 (reserve the right to buy back)
Money: Amount of money x 4 (2x if money is crowd-funded)
- Expenses: (Amount - Reimbursed) x Cash Multiplier
Supplies[New]: (Amount Paid - Reimbursed) x Cash Multiplier
Supplies[Less than 1yr old]: (Amount Paid - Reimbursed) x Non Cash Multiplier
- Supplies[Older than 1yr]: (Fair Market Value - Reimbursed) x Non Cash Multiplie
- Equipment[New]: (Amount Paid - Reimbursed) x Cash Multiplier
- Equipment[Less than 1yr old]: (Amount Paid - Reimbursed) x Non Cash Multiplier
- Equipment[Older than 1yr]: (Fair Market Value - Reimbursed) x Non Cash Multiplier
- Sales: ((Sale Amount x Royalty) - Cash Payment x Non Cash Multiplier
Relationships: Unpaid commission x2 or finders fee for investment money
Ideas and Intellectual property: Development time at ((Fair Market Salary / 2000) x Hours) x Non Cash Multiplier, plus cost for developing ideas at specified rates shown above. Unpaid royalty x2 for intellectual property (just coming up with an idea without sufficient ground work involved will not count towards any equity)
- Facilities: (Fair Market Value - Cash Payment) x Non Cash Multiplier
- Other: Amount x Cash Multiplier OR Non Cash Multiplier (depending on choice)
Moyer goes on to list other possible ingredients and their theoretical values, and those will be addressed as needed. For those interested in all the details, check out the book.
As time goes on in the start-up phase and a larger company value potential is expected, early founding members may want to “harvest” or “partition” off some of the value created by re-calibrating the theoretical overall value to a higher number. Care should be taken to ensure this new value represents a fairly accurate estimate, so future team members are not short changed.
When team members resign without cause or are terminated with cause, they should not expect to receive a share of the “pie” at the theoretical value of their earlier contributions. At best, they should be entitled to a share based on an adjusted value that all team members agree to. When someone resigns with good cause or is terminated without cause, becomes disabled, or dies, that individual or their family should expect to keep their slice of the pie at the theoretical value less any severance payments.
In a nutshell, this Slicing Pie Method was developed to provide a way to treat all team members fairly in regards to any profit that may come out of a venture. Any new venture also has the possibility of failure, so that is why all contributions are treated as theoretical values until there is actually revenue generated or investment capital input into the business. Some people may have an issue with putting time and resources into something that may not bring a return, and for those individuals, it is recommended that they try to find a job instead.
In regards to MakerCreations projects, Mike Moyer's Slicing Pie application will be used on all projects to help keep track of individual contributions to any project. This valuable app allows all project team members the ability to track their individual share values against the overall theoretical value of each project that has the potential to create a future profit. For those projects that are more non-profit related, the Slicing Pie app will still help in determining contribution percentages for all team members involved.