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Perfect Equity Splits for Startup Companies

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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)

Perfect Equity Splits for Startup Companies

  1. EUREKA! @GruntFunds www.SlicingPie.com/feedback Slicing Pie
  2. Why?
  3. Fun along the way BIG PAYOUT HARD WORK
  4. Fun along the way ?HARD WORK
  5. Success Criteria 1. Lots of money 2. I get my fair share
  6. Fair = Fun
  7. Your Share % = The Value of Your Contribution The Total Value Perfectly Fair Equity Calculation:
  8. Fixed Equity Split 67% split equity at the outset of the venture * Wasserman/Hellman
  9. “50/50” “33.3/33.3/33.3” “25/25/25/25” 90%+ of startups do equal splits
  10. “60/40” “51/49” “25/30/45”
  11. 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?
  12. Your Share % > The Value of Your Contribution The Total Value Your Share % < The Value of Your Contribution The Total Value
  13. Alligator Pit
  14. Not Fair = Not Fun
  15. What We Need • Perfectly fair • Rewards contributions • Provides motivation • Accommodates team changes • Flexible in the face of rapid change • Gets rid of the gators!
  16. Dynamic Equity Split
  17. 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
  18. Fair = Fun
  19. The Grunt Fund 1.Allocation Framework 2.Recovery Framework
  20. Allocation Framework 1. Convert contributions to Slices 2. 3. Allow it to self adjust over time (dynamic) Your Share % = Your Slices Total Slices
  21. Risk vs. Return aka Making Bets
  22. Convert to Slices Non Cash Cash
  23. Fair Market Value
  24. Convert to Slices Non Cash Cash FAIR MARKET VALUE FAIR MARKET VALUE
  25. Convert to Slices Non Cash Cash FAIR MARKET VALUE x2 FAIR MARKET VALUE x4
  26. Time Fair Market Salary - Cash Compensation X 2 ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!)
  27. Time $100,000 - $25,000 ($75,000 at risk) X Two ($150,000) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 75 slices/hr
  28. Small Money Cash Amount X 4 (Investments Convert When Spent)
  29. 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)
  30. Everything Can Convert • Unpaid Commission x 2 • Unpaid Royalty x 2 • Unreimbursed Expense x 4
  31. Grunt Funds in Action
  32. Grunts Contribute Different Things Grunt 2Grunt 1 Grunt 3 Jr. Developer Founder Rich Uncle
  33. Convert to Slices Grunt 2Grunt 1 Grunt 3 Jr. Developer Founder Rich Uncle
  34. Add ‘Em Up!
  35. Grunt 1’s Share ÷
  36. Grunt 2’s Share ÷
  37. Grunt 3’s Share ÷
  38. Sales Guy Grunt 4
  39. Sales Guy Grunt 4
  40. Grunt 1’s Share* ÷ *If the Grunt Does Nothing Else
  41. Grunt 2’s Share* ÷ *If the Grunt Does Nothing Else
  42. Grunt 3’s Share* ÷ *If the Grunt Does Nothing Else
  43. Grunt 4’s Share ÷
  44. Recovery Framework
  45. Recovery Framework
  46. Recovery • No pie for non-cash • No multiplier for cash or tangible property • Buy back if possible • Non-compete • Loyal employee protection
  47. Removing a Grunt • Keeps pie • Buyback at proxy value = $ • No non-compete
  48. Grunt 4 Convert to Slices Grunt 2Grunt 1 Grunt 3 Jr. Developer Founder Rich Uncle
  49. Grunt 4 Convert to Slices Grunt 2Grunt 1 Grunt 3 Jr. Developer Founder Rich Uncle
  50. Removing Contributions
  51. Grunt 2’s Share ÷
  52. Grunt 3’s Share ÷
  53. Grunt 4’s Share ÷
  54. Freezing the Pie
  55. Freezing the Pie
  56. Freezing the Pie • When you can just pay people! – Revenues – Series A investment
  57. Time $100,000 - $0 ($100,000 at risk) X Two ($200,000) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 100 slices/hr
  58. Time $100,000 - $25,000 ($75,000 at risk) X Two ($150,000) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 75 slices/hr
  59. Time $100,000 - $50,000 ($50,000 at risk) X Two ($100,000) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 50 slices/hr
  60. Time $100,000 - $75,000 ($25,000 at risk) X Two ($50,000) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 25 slices/hr
  61. Time $100,000 - $100,000 ($0 at risk) X Two ($0) ÷ 2,000 = Grunt Hourly Resource Rate (GHRR!) 0 slices/hr
  62. Freezing the Pie
  63. Freezing the Pie Profits or Proceeds
  64. Series A Investor Negotiate $900,000 Pre Money Raise $1,000,000
  65. Series A Investor $1,000,000 + $900,000 = $1,900,000
  66. Series A Investor $1,900,000 Post-Money
  67. Freezing the Pie- Series A Profits or Proceeds
  68. What We Got • Perfectly fair • Rewards contributions • Provides motivation • Accommodates team changes • Flexible in the face of rapid change • Gets rid of the gators!
  69. Cheat Sheet
  70. Resources
  71. A La Mode at SlicingPie.com • Lawyers • Agreement templates • Videos • Articles
  72. Other Books by Mike
  73. EUREKA! Download the Slides: www.SlicingPie.com/feedback Slicing Pie mike@slicingpie.com

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