I am 99% going to go down the Slicing Pie road for my next startup. For those who haven't read Mike Moyer's great concept I would highly recommend it. This question is for those who have experience of or are familiar with this concept, and I'd be greatful for any thoughts with this situation which is niggling at me...
...so I totally get the idea of assigning an hourly rate to each person based on what their value would be in the real world (or if I could afford to just pay them their going rate). So a java developer is maybe worth £30 per hour, an experienced sysadmin £50/hr, a telemarketer, £20/hr, etc. All these numbers are acceptable and within a normal range and most "grunts" would accept that each person has these reasonably different values.
But then suddenly I need a lawyer, and here in London it is not uncommon to find one who charges £250 per hour (top ones would be even more). I am not talking about needing one as just an occasional advisor, but one who will sit down and grunt (to use Slicing Pie terminology) for weeks of work to produce lots of legal documents, contracts, etc that my business will require. And probably ongoing work too meaning I don't want to just pay a one-off consultancy fee but would rather have one "on board". In previous businesses I have taken template contract docs and written them myself, but in this case I want a professional alongside me.
So the issue is, how you can tell the telemarketer grunt that the lawyer is going to be earning the rights to equity at over 16 times per hour as they are. The disparity just seems too much to grasp. I am 49, very experience in business and startups and so perhaps I should also command such a sky-high rate - but again, I feel this would be unfair against most of the people I'm looking to bring in.
Have others gone through this process of trying to value everyone in a Slicing Pie model?
Thanks for asking this question about Slicing Pie, I hope I can increase your confidence an extra 1% because the problem you're describing is exactly the kind of problem Slicing Pie is designed to fix. Trying to solve the problem using traditional equity models will most certainly backfire as you struggle to predict what will happen in the future and how to balance the needs of company with the feelings of employees.
First, Slicing Pie allows you to operate from the perspective of an established company. This means you can always make good financial decisions based on the facts.
The facts are that a telemarketer commands a salary of £20 ( £40,000/year) and an attorney can charge much more. Ask yourself this: If you had the cash, would you acquire these resources? You will make this decision in the context of the needs of the business and potential ROI. If the answer is, "yes" you should move boldly forward and accept the costs. If you can pay cash, pay cash. If you can't pay cash, use slices instead (aka theoretical value).
What may be bothering you is the overall cost of acquiring the legal support and if it's the right choice for your company at this point. Going without the legal support may put the company at risk, but startups are risky. I'm not sure what stage you are at, but I usually invest my early time and money in acquiring customers and minimize my legal expenses as much as possible.
If you have made the right business decision, don't worry about the telemarketer. He or she is being treated fairly.
By the way, you, too, should be taking your own fair market salary into account keeping in mind the requirements of your current role as a startup CEO vs. another job you could get with more responsibility (the startup CEO role probably isn't worth as much).
The next thing to consider is the role of the lawyer. If she is going to participate as a member of the team, she will be subject to the same rules as everyone else and should charge a rate that reflects the fair market salary of an in-house council for a very small company. £250 an hour is £500,000 per year. It would be difficult to justify such a high salary. If she is "on board" as you say, she should price herself the same way other team members have: with a logical annual salary and not a short-term consulting rate.
If, the lawyer is not part of the team she is acting as a consultant and the consultant rules of Slicing Pie apply. Consulting rates are higher than salary rates. In exchange for charging a higher rate, the company has the right to force a buyout within one year using a sliding scale which increases the buyout price each month until the year is over:
After 12 months, the consultant would be able to keep her slices like any other Grunt, subject to the same rule. The consultant rules give the core team the ability to reclaim slices in a fair way. If the telemarketer wants a larger slice of the Pie he or she should work hard to generate enough revenue to cover the legal expenses. Everybody should work hard to get to breakeven, the faster you get to breakeven, the faster you can secure your share.
Another alternative to including the lawyer in the Pie is to treat her unpaid invoices as a convertible note. This is a good option if you are planning on raising Series A financing. The note would convert according to the terms of the Series A investor and would not be included in the Pie at all. If you're not planning on outside funding, this may not be a great option for you.
I prefer to find a lawyer who is willing to be part of the team. I don't mind paying consulting rates, but I use consultants sparingly and maintain a buyout option.
I hope that helps!
If you want to set up a call with me you can do so here: https://clarity.fm/mikemoyer
Also, there is a law firm in London that specializes in working with Slicing Pie companies. It's called Fair Square, LLP: https://www.fairsquarellp.com/
hey Mike, wow fantastic of you to take the time to answer, and in some great detail! I will admit I am only two 3rds way through the book but hope to finish in the coming days - am trying to read it on top of my other business which seems to take 25hrs/day of my time at the moment ;-(
So please allow me to finish the book and then tie in your response so that I can come back to you fully informed in order to discuss further. But so far I am more than convinced Slicing Pie is the model for this new biz.
But to give you an idea of my thinking ... I just need to get my head around the disparities of very different salaries. I think my next question will be around the idea of "why can't every person be assigned the same nominal salary". After all, a junior telemarketer who is on minimum-wage in his day job is, by giving up say 10 hrs/week to grunt, actually taking more of a risk than a experienced lawyer who has done well for himself and got a healthy bank account to support him through the next year whilst he risks some time on my new idea. So I wonder if everyone should just be seen as equal (in terms of the time they contribute).
1) Are you sure that your lawyer *can* take equity? All of the lawyers I've ever dealt with require cash up front. They will insist that before they lift a finger that you put cash into a trust fund
2) There's really nothing to explain. I need X, I can't find anyone that will do the work for less than Y, if I want X done, I have to pay Y. At that point you can get into deep and philosophical discussions about the unfairness of the capitalist system, or you can choose to pay up or not pay up.
3) Do you really *need* a lawyer, and if you have a lawyer what do you need them for? In my interactions with lawyers, I try to do as much of the "grunt work" as I can, and have use them as a mentor or for legal advice on strategy. Legal fees are far too expensive for them to do routine "grunt work" and this is the market telling you that they shouldn't be doing that.
Right, I am ready to start putting a Slicing Pie plan together - the whole concept is very exciting!
I totally get the idea of how to value "cash" and other contributions. But I still wonder about the idea of everyone having the same "hourly rate" in terms of work effort they put in. Surely in a pre-funding startup, everybody from the toilet cleaner up to the experienced lawyer are all worth the same in terms of getting this worthless pie off the ground and to become worth something!?