Equity allocations. How do you keep it fair?

The allocation of equity in start-ups and scale-ups is fraught with issues and so I was interested to read Mike Moyer’s book ‘Slicing Pie’ to find out his take on this thorny problem.  Mike’s philosophy that is “a person’s % share of the rewards should always equal that person’s % share of what’s put at risk to achieve those rewards” and the book puts forward a ‘formula’ to calculate this.

My first objection to Slicing Pie, when I encountered the concept a year or so ago, was that I couldn’t see how it would work in the UK’s legal and tax system but Mike put me in touch with lawyers Maxine Chow and Deborah Griffiths and, hooray, they have cracked this problem (see http://www.fairsquarellp.com/about/).

So, given dynamic equity splits can work legally and be tax efficient, what is my view on Slicing Pie?

Well, firstly, in a world where entrepreneurs probably have never heard of other ways of allocating equity aside from fixed initial allocations, ‘buying’ in and share options, Slicing Pie offers a thought-provoking alternative.   Entrepreneurs, both those inexperienced and experienced, will benefit from simply reading the introduction to this book.  At the very least this will make you more thoughtful about dividing up equity.  Entrepreneurs and advisors who have ‘been around the track’ will all cite situations where the equity didn’t reward the right people; where those who deserved to make a pile of money lost out to those who undeservedly had been able to hang onto equity from earlier allocations where the company looked markedly different.

So I really like the concept of ‘dynamic’ equity where allocations change over time and hangers-on don’t take a disproportionate share of the spoils and Slicing Pie provides a solution to the problem.  To me, the scenarios where it must work well are those with strong teams, all of whom are doing their fair share of the ‘sweat equity’ thing.  For example, I know a duo who have a baking company where they would have benefitted from the Slicing Pie approach as they both care 110% about the business and are of a similar experience level, but they have different strengths and can put in differing amounts of time into business.  Where I think where it starts to break down is when the people are not all in the same mindset or there are big capability and experience gaps in the team.   A single entrepreneur who ‘employs’ her team, albeit with lower wages than they’d get in a corporate, has less reason to do Slicing Pie in my mind and would be best using share option packages as equity incentives.

The real value in the Slicing Pie book is the ‘formula’ that Mike has developed for actually calculating the share split, but this is where it ends up reading a little like a manual to set up a spreadsheet, which will suit some people down to the ground but irritate others.    Generously, Mike is at pains to point out you don’t have to use his formula, but once I’d read the whole book, trying a DIY version felt insurmountable to me but I do know some entrepreneurs who would joyously do this and create some type of Slicing Pie hybrid.  On his website, http://slicingpie.com, he has downloadable software and I’d advise this to be the place from which to start.

I work with a wide range of companies at different stages of growth, so I’m not often in the thick of the ‘sweat equity’ moment which is where this book fits.  I’d personally find it very interesting to see the reactions to the book and its philosophy from start-ups in  UK incubator or accelerator programs as I am left wondering whether the scenarios he describes of people working as “grunts” for free are much more prevalent in America.  The book is very Amercian, but business is business and you can get over the terminology.

I’d wager dynamic equity splits will increase in popularity as there is an inherent sense to them, so entrepreneurs, it is worth reading this book, especially in the absence of anything with a more British slant, although if there are home-grown versions of the idea I’d love to hear about them.

 

 

 

 

 

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