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.
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!
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.
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.