SLICING THE PIE
EQUITY EQUALITY?
When it comes to your start-up, you want to ensure complete equality of equity. Finances are of the utmost importance, but also the time put in and the competence of each co-founder has value, and it’s essential you find a way of fairly and impartially determining the stakes in your business. This is where the concept of slicing the pie comes in, to give guidance and do exactly that – ensuring happy stakeholders, and a vibrant, growing business.
WHAT DOES 'SLICING THE PIE' MEAN?
Slicing the pie is a simple concept. Think of your business as the pie. When you slice a pie, you want everyone to have a fair share of it – which doesn’t mean getting an equal-sized slice but a slice the represents the overall investment put in by each shareholder. A simple thought is to divide your overall business stakes by the number of stakeholders – but that is almost never “fair”: if the amount of money put in the new venture could easily be divided in equal proportion, work never is. And any mismatch between (sweat) equity put in and shares obtained by each co-founder can actually harm the balance of the company and create a good amount of turmoil later on.
HOW DO YOU DETERMINE WHAT MAKES A "FAIR" SLICE OF THE PIE?
In business terms, fairness involves the size of the stake being relative to the stakeholder’s input in the business. If a stakeholder who has minimum input in the business has the same sized slice of the pie as one who has put considerable capital investment forward, that may be equality but it’s not actually fair. To fairly slice the pie, you need to focus on stakeholder input.
Input can come in a number of forms. Whether it’s in the form of direct cash input, such as monetary investment, or in non-direct forms such as time or even goods, furniture and other such miscellanies.
HOW CAN YOU CALCULATE A FAIR BUSINESS SHARE?
The simplest consideration is related to each shareholder’s cash contributions, and this should be pretty obvious to all parties involved. But leaving monetary contributions aside, how can we take into consideration time and effort? This is where your group needs to lay out some basic rules (and there are no right or wrong ones, just those that fit your needs better). The goal is to transform vague contributions into a tangible number that will become a very well defined percentage in the shareholding structure.
The main two ways of addressing this issue are by the time spent on the project or by result. Let’s make an example: if one of the founders is a lawyer, their contributions to the company can be calculated on the basis of the time spent drafting contracts and other agreements for the new venture. But how much money should the co-founder put down? The hourly rate that they normally invoice their clients or a nominal hourly fee that is the same for every co-founder?
Conversely, if you chose to have a system that takes into account only the results obtained, it will be easy to say that the drafting of a particular agreement is worth a specific amount on the market, but what about the hours spent by the COO organising the daily life of the organisation?
These are questions with somewhat philosophical answers that should reflect the values of the new company and its vibe… And it’s worth agreeing on these answers as early as possible, as this will provide you with the framework to calculate appropriate shares as your business grows and the status/number of your stakeholders’ changes. Happy stakeholders make for a thriving business.
WHAT ABOUT INVESTORS?
Well, investors comes with many considerations to ponder, and they tend to bring a whole suite of expertise and network together with their monies… but at least their shares are easier to calculate: they are proportional to the investments they bring!
But you still need to consider how you will get diluted in subsequent rounds! That’s why we have prepared our Cap Table and Shareholders’ Dilution Model. You can freely download it from our website and use it to forecast what will happen to your shares in the next round and during the next ones.
Check all our Templates and don’t hesitate to get in contact with us if you need a hand in filling them out!
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