Monthly Archives: May 2015

Need Startup Resources – Look into Dynamic Equity Allocation

Are you looking to take your startup to the next level?

The Start of the Problem

As for me, things have started simple enough – from being inspired by 200 years’ worth of improving the growth of plants using electricity, I started off thoroughly researching the topic, writing a book on it, put it up on Amazon, and then proceeded to turn this into something more.  Along the way I found that there has been a need to get more capital to get things going.  After getting a little media attention, people started coming out of the woodwork to offer some support.

I was open to it, but once I started meeting people and feeling things out, things started to get tricky… because in my mind, I want to be fair – giving people what they deserve, but at the same time, I started to get completely overwhelmed – how does one structure a company to best handle the taking-on of investors or just people who want to contribute “sweat equity”.  In earlier business dealings, I was involved in a 50-50 partnership with another company but came across the common problem of the other party not pulling their share of the weight.  It was extremely frustrating to put in all of your efforts into making something happen, but the other guy only put in a fraction.  Now had we agreed to a smaller percentage, that may have been fine, but then he wouldn’t be incentivized to work any harder because his share was fixed.  In the end, I ended up breaking the partnership up and we went our separate ways.

A Solution Emerges

Like I said before, this is an all-too-common occurrence in startup circles, and for the past few months I’ve been wracking my brain on this dilemma rather than spending my valuable creative energy on making progress.  Until one day I came across an answer posted in a forum answer on Quora (sorry – lost the original link)… The poster, Mike Moyer, posted a method that he was promoting in a book he wrote called “Slicing Pie“.

That said, I got a copy of his book and found it to be pure genius.  I believe he attributed the original idea to Harvard economist, Noam Wasserman, who I originally heard about while listening to one of my favorite podcasts, Stanford University’s ecorner or Entrepreneurial Thought Leader Series.  It turns out that he wrote a book on the topic, called “The Founders’ Dilemmas:  Anticipating the Pitfalls that Can Sink a Startup“.  When I first heard this back in 2012, it was the very early days of Electric Fertilizer, and while I was thinking that I could use this information someday – I just filed it in the back of my mind and forgot about it.  What a coincidence – it’s a great feeling to have something so valuable come back full circle, just when I needed it most!  So how does it work?

Slicing Pie – The Basics

In it’s essence, slicing pie, or dynamic equity allocation, is based on the idea of being ‘fair’  – how do you give away equity in a way that’s fair for everyone involved?  It turns out, that the best way may to do it in a dynamic manner – so it changes over time.  So if you end up with a person on your team who is a star performer, but life happens and they get married, have kids, and need real source of income, then this type of arrangement would allow them to build up company equity, and in their spare time, assuming that they still want to contribute, can continue to build it up.  The same thing goes the other way – if the employee wants to feel things out by going slowly.  As the company builds traction, they can increase their contribution and be compensated accordingly.

In it’s essence, it comes down to having everyone keep track of their hourly rate.  Everyone’s rate is multiplied by a common risk factor of 2x.  If there is a cash contribution, the investor gains equity at a rate of 4x the amount spent (not given) – which I think is great because it gives the founding team the ability to control the equity that is given away through frugal use of funds.  Lastly, there is the event where everything is locked in stone, where everything becomes official – and he outlines 3 scenarios where that event should occur.

Summary

I am sold on this concept and think that it’s a fantastic yet simple system that should be included in one’s investment or hiring considerations.  It is truly a flexible system in that it makes bringing on new people or investors formulaic.  Taking the emotions out of it makes a huge difference.

To those reading this… have you ever heard of this?  Ever tried it out?  I would love to hear your comments or stories!

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