Perfect equity splits for startups You and a partner go in “50/50” on a new business. You do all the work, he owns half the company. Now what? Traditional equity splits are never fair. Someone always has more than they deserve at the expense of others. Contrary to conventional wisdom, there is a simple method for dividing equity in an early stage company that tells you exactly the right number of shares for each participant. Attendees will learn how to implement a practical dynamic equity split using an allocation framework that tells you how many shares each person gets, and a recovery framework that tells you the fair buyout price (if any) in the event that someone leaves.

2. EUREKA!
Download the Slides: www.SlicingPie.com/feedback
Slicing Pie
mike@slicingpie.com
@GruntFunds

3. Why?

4. Fun along the way
BIG
PAYOUT
HARD
WORK

5. Fun along the way
?HARD
WORK

6. Success Criteria
1. Lots of money
2. I get my fair share

7. Fair
=
Fun

8. Your Share % =
The Value of Your Contribution
The Total Value
Perfectly Fair Equity Calculation:

9. Fixed
Equity
Split
67% split equity at the outset of the venture
* Wasserman/Hellman

10. “50/50”
“33.3/33.3/33.3”
“25/25/25/25”
90%+ of startups do equal splits

11. “60/40”
“51/49”
“25/30/45”

12. 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?

13. Your Share % >
The Value of Your Contribution
The Total Value
Your Share % <
The Value of Your Contribution
The Total Value

14. Alligator Pit

15. Crocodile Pit

16. Not Fair
=
Not Fun

17. What We Need
• Perfectly fair
• Rewards contributions
• Provides motivation
• Accommodates team changes
• Flexible in the face of rapid change
• Gets rid of the gators!

18. What We Need
• Perfectly fair
• Rewards contributions
• Provides motivation
• Accommodates team changes
• Flexible in the face of rapid change
• Gets rid of the gators crocs!

19. Dynamic
Equity
Split

20. 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

21. Fair
=
Fun

22. The Grunt Fund
1.Allocation Framework
2.Recovery Framework

23. Allocation Framework
1. Convert contributions to Slices
2.
3. Allow it to self adjust over time (dynamic)
Your Share % =
Your Slices
Total Slices

24. Risk vs. Return
aka Making Bets

25. Convert to Slices
Non Cash Cash

26. Fair
Market
Value

27. Convert to Slices
Non Cash Cash
FAIR
MARKET
VALUE
FAIR
MARKET
VALUE

28. Convert to Slices
Non Cash Cash
FAIR
MARKET
VALUE
x2
FAIR
MARKET
VALUE
x4

29. Time
Fair Market Salary
-
Cash Compensation
X
2
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)

30. Time
$100,000
-
$25,000 ($75,000 at risk)
X
Two ($150,000)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
75 slices/hr

31. Small Money
Cash Amount
X
4
(Investments Convert When Spent)

32. 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)

33. Everything Can Convert
• Unpaid Commission x 2
• Unpaid Royalty x 2
• Unreimbursed Expense x 4

34. Grunt Funds in Action

35. Grunts Contribute Different Things
Grunt 2Grunt 1
Grunt 3
Jr. Developer Founder Rich Uncle

36. Convert to Slices
Grunt 2Grunt 1
Grunt 3
Jr. Developer Founder Rich Uncle

37. Add ‘Em Up!

38. Grunt 1’s Share
÷

39. Grunt 2’s Share
÷

40. Grunt 3’s Share
÷

42. Sales Guy
Grunt 4

43. Sales Guy
Grunt 4

46. Grunt 1’s Share*
÷
*If the Grunt Does Nothing Else

47. Grunt 2’s Share*
÷
*If the Grunt Does Nothing Else

48. Grunt 3’s Share*
÷
*If the Grunt Does Nothing Else

49. Grunt 4’s Share
÷

51. Recovery Framework

52. Recovery Framework

53. Recovery
• No pie for non-cash
• No multiplier for cash or
tangible property
• Buy back (if possible) at
1x cash contributions
• Non-compete
• Loyal employee
protection

54. Removing a Grunt
• Keeps pie
• Buyback at Slices x $
• No non-compete

55. Grunt 4
Convert to Slices
Grunt 2Grunt 1
Grunt 3
Jr. Developer Founder Rich Uncle

56. Grunt 4
Convert to Slices
Grunt 2Grunt 1
Grunt 3
Jr. Developer Founder Rich Uncle

57. Removing Contributions

58. Grunt 2’s Share
÷

59. Grunt 3’s Share
÷

60. Grunt 4’s Share
÷

62. Freezing the Pie

63. Freezing the Pie

64. Freezing the Pie
• When you can just pay people!
– Revenues
– Series A investment

65. Time
$100,000
-
$0 ($100,000 at risk)
X
Two ($200,000)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
100 slices/hr

66. Time
$100,000
-
$25,000 ($75,000 at risk)
X
Two ($150,000)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
75 slices/hr

67. Time
$100,000
-
$50,000 ($50,000 at risk)
X
Two ($100,000)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
50 slices/hr

68. Time
$100,000
-
$75,000 ($25,000 at risk)
X
Two ($50,000)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
25 slices/hr

69. Time
$100,000
-
$100,000 ($0 at risk)
X
Two ($0)
÷
2,000
=
Grunt Hourly Resource Rate (GHRR!)
0 slices/hr

70. Freezing the Pie

71. Freezing the Pie
Profits or
Proceeds

72. Series A Investor
Negotiate $900,000 Pre Money
Raise $1,000,000

73. Series A Investor
$1,000,000 + $900,000 = $1,900,000

74. Series A Investor
$1,900,000 Post-Money

75. Freezing the Pie- Series A
Profits or
Proceeds

76. What We Got
• Perfectly fair
• Rewards contributions
• Provides motivation
• Accommodates team changes
• Flexible in the face of rapid change
• Gets rid of the gators!

77. Cheat Sheet

78. Resources

81. A La Mode at SlicingPie.com
• Lawyers
• Agreement templates
• Videos
• Articles

82. EUREKA!
Download the Slides: www.SlicingPie.com/feedback
Slicing Pie
mike@slicingpie.com
@GruntFunds