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.
Looking back at David Bowie’s career I’m struck by his astonishing ability to be constantly and consistently ahead of trends. It isn’t always clear if he was the cause of certain trends or just an early adopter thereof, but what we do know is he made genres of music, used technologies and wore fashions before others did.
To many his outlandish characters from the early 1970s with their ambiguous gender and flamboyant fashion symbolise these gifts he had as an innovator. Yet there is much more to it than Ziggy Stardust – just watch Bowie performing Young Americans in 1974 and he looks like a ‘80s New Romantic ten years before his time. He evolved again in 1976, bringing the sound of synthesisers and electronic music to his fans years before this became mainstream. No one better personifies innovation than Bowie as a technical pioneer, musical experimenter and visionary.
In business we seek innovation to drive value and growth so is Bowie a role model to emulate? There are similarly business heroes who have earned the title “visionary” for their innovative genius – Steve Jobs, Bill Gates, Mark Zuckerberg to name a few – all whom have invented a product we had no idea we needed and now we can’t live without. But for every successful trend-setting invention there are zillions of wannabes: entrepreneurs and manufacturers creating gizmos that fail, retailers gambling on and losing out to fashions, developers designing tech that never gets adopted. Crudely, finding life on Mars might be simpler than it is to actually create a product or business innovation that changes the world.
As an example of how easy it is to not get it quite right, in the mid 1990s Motorola visited my Business School and conducted focus groups seeking views on their prototype for an integrated mobile phone, pager and electronic organiser. Looking back, they were innovating in the right place, the pager became text messaging and our phones now seamlessly integrate with diaries and address books. But we now know it was styling as well as functionality that truly would revolutionise the mobile phone industry. The prototype we saw looked very similar to the black plastic phones of the day. To be truly trend-setting Motorola needed to think more radically which, of course, is was what Apple were doing. Additionally a focus group with Business School graduates was probably a mistake as, I am embarrassed to say now, we didn’t get the concept and were very dismissive of it, which shows just how tricky it is to product test when your idea is ahead of your consumers.
If the risks of getting innovation wrong are so high what does this mean strategically for businesses? Well, continuing the Bowie analogy there were many bands and singers who became successful by picking up on Bowie’s ideas, copying them and then varying and improving upon them. Luckily, in this information age, gaining understanding and knowledge of the trends impacting your business has never been easier. Setting time aside for some business reading is a quick win. A little more effort is required to grow a work culture that cleverly uses business data and data analytics to make good decisions. Start by first asking the right questions to identify customers, markets and influencers; then regularly and systematically collect these data, analyse them and look for trends. Combine this with regular reviews of competitors and a sprinkling of innovative thinking and you’ve a good recipe for success.
One final point is, of course, that it’s very blinkered to give all the credit for his success to Bowie’s visionary genius. He recognised the need to work with other people and he sought out and collaborated with those who had expertise in specific musical genres and technology. In the same way, businesses who seek the expertise of sector gurus and who hire talented individuals to expand the company’s knowledge capital do so to their advantage.
It’s true that constant reinvention and innovation in a Bowie-esque way could deliver stratospheric returns (indeed you could be saying hello to Major Tom) but it’s a hugely high-risk. A different strategy, especially for small to mid-sized businesses – those who might not want to bet the ranch – is to be just one-step behind the pioneer and learn from them. As Bowie said, “I believe that I often bring out the best in somebody’s talents”.