Founder equity · Equity

Slicing Pie - Two Grunt Leaders?

Randar Puust Technical co-founder looking for a great idea to build

March 20th, 2016

I'm in very early stages with a potential co-founder.  We are very much in the dating phase, but we seem to be connecting quickly.  Although I feel I can trust him, we have really just met and I don't know anybody who can vet him.

I proposed using Slicing Pie to divide up the equity, because I think a dynamic equity split really makes sense for us.  He seems to think it has potential.  One of the key concepts in Slicing Pie is that there is a Grunt Leader who holds all the equity and then divides it up based on effort, cash, resources, etc.  I feel like we're both equal partners, so this makes me uncomfortable, even if we have an Operating Agreement.

But is there a way we can have two Grunt Leaders?  

Mike Moyer

March 20th, 2016

The role of the Grunt Leader is really just to keep track of all the inputs on the spreadsheets or Pie Slicer software

There are some issues with one person holding all the equity that I wasn't aware of when I wrote Slicing Pie (I'm planning on fixing that in future updates).

Here is how you can handle your Grunt Fund and address issues of control, which I think is one of your concerns. Of course, you'll have to speak to your lawyer/accountant for professional advice, but here is a basic structure:

First, keep in mind that there are no financial benefits to equity ownership unless the company pays dividends or gets sold.

So, issue 10,000 restricted shares or membership interests to every person who joins your company. In this case, it will be you and your partner. In a C-Corp each person can file and 83(b) election. The restricted shares won't have voting rights, so the number of shares and the fact that each person has the same amount doesn't really matter.

You and your partner can vest one share each giving you both one "vote" for major decisions.

In your stock agreement  you will want to include a "re-calibration" clause that will trigger in the event of Series A investment or cash-flow break even.

When the re-calibration is triggered, each person will vest in the number of shares that brings them into alignment with the Slicing Pie split. All non-vested shares would be forfeited. 

This way you and your partners have maintained joint control of the company, properly managed taxes, and ensured that each participant has the right % of the company when the Slicing Pie model ends.

Remember, the Slicing Pie model addresses all possible scenarios. The allocation rules and the termination rules combine always leads to a perfect split!

Peter Pudaite Technology Strategist and Tinkerer

March 20th, 2016

Here're a couple of ideas:

  1. Split the equity 50:50 between each of you as two Grunt Leaders and reallocate the equity collaboratively on an equal basis.
  2. Have 98% of the shares set aside for stock options. Grant of options requires both your signature/agreement as Grunt Leaders.
These are untested ideas so, the practicalities are as yet unexplored.

Doug Calahan Founder, CEO at Local Roots

May 16th, 2017

Mike, the one area of concern I have for this is tax treatment. My i-banker who sold my first company for me was very concerned about this. First, he said that VCs may be confused by the model. Second, he was concerned about creating shares that may later be taxed at ordinary income and/or require hiring firms to continually do valuations. I was wondering if you have had some companies take this through the point of conversion from LLC to a C-corp and may have some experience with this.


BTW - I love the concept - I created a similar model for my new company, but like yours better.

Mike Moyer

May 31st, 2016

Hi Stan,

Slicing Pie is very simple!

You can find lawyers and agreements here: http://slicingpie.com/silcing-pie-friendly-lawyers/

-Mike

Mike Moyer

May 16th, 2017

Doug, Slicing Pie faces exactly the same tax issues as any other structure and is easily managed. In a C-Corp Slicing Pie replaces a typical time-based vesting schedule and in an LLC you can use periodic capital calls to adjust ownership. Some people have a knee-jerk fear of the tax implications, but I assure you there are none. Since launching the model in 2010 I have heard of 0 founder conflicts, 0 tax issues and 0 deals that have been passed over by VCs because a company used Slicing Pie.


VCs want a clean, conflict-free cap table. They don't care how you got there and your use of Slicing Pie is more or less irrelevant because Slicing Pie terminates at Series A or breakeven.


Most VCs will understand Slicing Pie if given the chance.


The best way to describe Slicing Pie is to use a betting analogy. A person's share of the equity should be based on that person's share of the bets placed and not on predictions of future winnings. When someone contributes time, money, ideas, etc to a startup and is not paid, he or she is betting the fair market value of the contribution. Slicing Pie companies just keep track of the bets and apply a basic formula.


Old-fashioned fixed equity models are more prone to tax issues because people tend to set valuations too early in the process or don't anticipate changes as people come and go. All equity splits are adjusted over time, Slicing Pie provides a basic, logical model for making the changes whereas other models force people to fight about it!

David Austin Relentless problem solver and innovator.

May 17th, 2017

Mike says "Most VCs will understand Slicing Pie if given the chance. "


Mike, you hit the nail on the head again. If you could have a primer just for Angels and VCs to put their minds at ease ... maybe a quick video (or a few), make it easy for visual learners (and lets be frank, VCs above all else want simplicity) I'm sure nobody is more familiar with their concerns as you. I think it would go a long way to put slicing pie ahead of the pack in terms of preferred vesting models.

Mike Moyer

May 17th, 2017

David, good idea, I'll work on something for VCs. However, the best approach may be to not make it part of the conversation at all. There isn't a huge benefit to getting into the details with cash investors. For angels, use convertible notes, for VCs, negotiate a price and terms. Once you raise Series A funding, the Grunt Fund terminates so it won't affect the deal going forward.

Greg Welch

March 20th, 2016

Peter is right, have this as options that vest over time based on performance. The last thing you want would be for him to walk away without having done his part, contributed his grunt effort.  If that would happen with options, you aren't out the full equity and needing to find another co-founder to do the work. 

Chris Rider (Founder) Director, R&D/Tech at DirtGlue Enterprises, www.dirtglue.com

March 21st, 2016

Put the equity (shares or whatever) in a trust and have a neutral attorney act as the trusttee.  The percentages are then doled out from the trust in an ongoing basis that is based on performance.

Stan Zhekov CEO, Reverd.com

May 30th, 2016

Hi Thomas,
I agree with you. Things must be kept simple at the beginning.
I want to go this way too.
Could you provide a template for a contract based on the Pie Slicing agreement? or a link where can I find one

Thanks