perfect equity splits for startup companies
DESCRIPTION
Learn how to create a perfect equity splits for early stage companies. Contrary to popular belief, there is a way to determine exactly how much equity each person in your company deserves. Based on the book, Slicing Pie (SlicingPie.com), by Mike Moyer (mikemoyer.com)TRANSCRIPT
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EUREKA!
@GruntFunds
www.SlicingPie.com/feedback
Slicing Pie
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Why?
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Fun along the way BIG
PAYOUT HARD WORK
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Fun along the way ? HARD WORK
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Success Criteria 1. Lots of money 2. I get my fair share
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Fair = Fun
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Your Share % =
The Value of Your Contribution The Total Value
Perfectly Fair Equity Calculation:
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Fixed Equity Split
67% split equity at the outset of the venture
* Wasserman/Hellman
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“50/50” “33.3/33.3/33.3” “25/25/25/25”
90%+ of startups do equal splits
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“60/40” “51/49”
“25/30/45”
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You do all the work?
You bring in another guy?
Your partner wants to quit?
1,000,000 other things?
But, what if…
You want to quit?
Your CTO gets hit by a bus?
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Your Share % >
The Value of Your Contribution The Total Value
Your Share % <
The Value of Your Contribution The Total Value
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Alligator Pit
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Not Fair =
Not Fun
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What We Need
• Perfectly fair
• Rewards contributions
• Provides motivation
• Accommodates team changes
• Flexible in the face of rapid change
• Gets rid of the gators!
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Dynamic Equity Split
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You Contribute 50% = You Get 50% You Contribute 10% = You Get 10%
You Contribute 23.2% = You Get 23.2%
No more and no less
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Fair = Fun
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The Grunt Fund
1.Allocation Framework 2.Recovery Framework
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Allocation Framework
1. Convert contributions to Slices
2.
3. Allow it to self adjust over time (dynamic)
Your Share % =
Your Slices
Total Slices
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Risk vs. Return aka Making Bets
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Convert to Slices
Non Cash Cash
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Fair Market Value
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Convert to Slices
Non Cash Cash
FAIR MARKET VALUE
FAIR MARKET VALUE
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Convert to Slices
Non Cash Cash
FAIR MARKET VALUE
x2
FAIR MARKET VALUE
x4
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Time
Fair Market Salary -
Cash Compensation X 2 ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!)
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Time
$100,000 -
$25,000 ($75,000 at risk) X
Two ($150,000) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 75 slices/hr
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Small Money
Cash Amount
X
4
(Investments Convert When Spent)
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Equipment
• New = Purchase price x 4 (cash)
• Less than a year old = Purchase price x 2 (non-cash)
• Older than a year = Book value x 2 (non-cash)
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Everything Can Convert
• Unpaid Commission x 2
• Unpaid Royalty x 2
• Unreimbursed Expense x 4
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Grunt Funds in Action
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Grunts Contribute Different Things
Grunt 2 Grunt 1 Grunt 3
Jr. Developer Founder Rich Uncle
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Convert to Slices
Grunt 2 Grunt 1 Grunt 3
Jr. Developer Founder Rich Uncle
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Add ‘Em Up!
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Grunt 1’s Share
÷
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Grunt 2’s Share
÷
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Grunt 3’s Share
÷
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Sales Guy
Grunt 4
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Sales Guy
Grunt 4
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Grunt 1’s Share*
÷
*If the Grunt Does Nothing Else
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Grunt 2’s Share*
÷
*If the Grunt Does Nothing Else
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Grunt 3’s Share*
÷
*If the Grunt Does Nothing Else
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Grunt 4’s Share
÷
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Recovery Framework
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Recovery Framework
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Recovery
• No pie for non-cash
• No multiplier for cash or tangible property
• Buy back if possible
• Non-compete
• Loyal employee protection
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Removing a Grunt
• Keeps pie
• Buyback at proxy value = $
• No non-compete
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Grunt 4
Convert to Slices
Grunt 2 Grunt 1 Grunt 3
Jr. Developer Founder Rich Uncle
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Grunt 4
Convert to Slices
Grunt 2 Grunt 1 Grunt 3
Jr. Developer Founder Rich Uncle
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Removing Contributions
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Grunt 2’s Share
÷
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Grunt 3’s Share
÷
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Grunt 4’s Share
÷
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Freezing the Pie
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Freezing the Pie
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Freezing the Pie
• When you can just pay people!
– Revenues
– Series A investment
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Time
$100,000 -
$0 ($100,000 at risk) X
Two ($200,000) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 100 slices/hr
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Time
$100,000 -
$25,000 ($75,000 at risk) X
Two ($150,000) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 75 slices/hr
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Time
$100,000 -
$50,000 ($50,000 at risk) X
Two ($100,000) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 50 slices/hr
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Time
$100,000 -
$75,000 ($25,000 at risk) X
Two ($50,000) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 25 slices/hr
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Time
$100,000 -
$100,000 ($0 at risk) X
Two ($0) ÷
2,000 =
Grunt Hourly Resource Rate (GHRR!) 0 slices/hr
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Freezing the Pie
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Freezing the Pie
Profits or Proceeds
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Series A Investor
Negotiate $900,000 Pre Money
Raise $1,000,000
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Series A Investor
$1,000,000 + $900,000 = $1,900,000
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Series A Investor
$1,900,000 Post-Money
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Freezing the Pie- Series A
Profits or Proceeds
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What We Got
• Perfectly fair
• Rewards contributions
• Provides motivation
• Accommodates team changes
• Flexible in the face of rapid change
• Gets rid of the gators!
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Cheat Sheet
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Resources
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A La Mode at SlicingPie.com
• Lawyers
• Agreement templates
• Videos
• Articles
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Other Books by Mike