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Slicing Pie: The concept of grunt funds

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Many startups rely on bootstrapping and sweat equity because cash is often sparse at the beginning of the business venture. A unique solution to this common problem is found in the concept of Grunt Funds.

Mike Moyer is an author, adjunct American professor of entrepreneurship at Northwestern University, adjunct professor at the University of Chicago Booth School of Business, and founder of venture capital firm Lake Shark Ventures. He has written eight books in support of achieving success in advanced education and business.

In his book, Slicing Pie (2012), Moyer explains the concept of grunt funds as an equity model for dividing equity in early stage companies . The problem with most equity splits is they rely heavily on predictions of future events. Who is going to put the money up? Who is going to do the work? Whose ideas are more valuable than others?

Moyer compares the grunt fund to a pie. A person’s percentage share is calculated by dividing their share by all slices. This makes it a universal, one-size fits all model. Everyone feels respected and taken care of, not taken advantage of. Slicing Pie is a tool that helps to create shares equally as the pie builds.

Slicing Pie is a decision making model and works from inception of the business through break even or series A (issuance of shares). Once a company has enough cash to pay people they can pay people instead of using slices. The model allows for a different kind of financing such as a Slicing Pie Loan. This is when money is loaned and payments are made. If a payment is skipped that goes into the pie in slices. If payments continue to be made then it is just paid off when break even is reached.

“Equity doesn’t create motivation. It reflects motivation. If someone is given equity in a company they are not motivated to work harder. If someone buys equity then they believe in the company. There is a lot of pressure to give away equity or buy people in but you don’t have to if you are profitable.” (Mike Moyer)

Equity is a kind of misunderstood friend in this world…Slicing pie isn’t my idea in the sense I invented the concept of fairness. I just distilled the concept of fairness to a point where you can understand it.

People say, what’s the value of my idea? Well, try to sell your idea. If you can sell it you know the value. If you can’t sell it it’s either worthless or it’s priceless.

Mike Moyer

Moyer says he has never head of Slicing Pie backfiring in terms of back taxes or corporate structure.

Monetary value is assigned to the contributions made by individuals to the startup. The contributions can be tangible like cash or time, or intangible like intellectual property or relationships. The founder tracks the individual’s hours in order to accumulate equity (share of the pie) in the Grunt Fund. The equity is determined by a formula that assigns a weight to each investment contribution by the individual.

Using Grunt Funds  means:

  • Always 100% fair
  • Keeping Track is Easy
  • Legal and Tax Friendly

The formula implies fair energy exchange and agreement of the value assessed for various types of contributions. And use of the Grunt Fund assumes that people trust one another. However, whether the Grunt Fund, an alternate system or a combination of the two are used, unexpected circumstances could give rise to unplanned new splits.

The Slicing Pie model is based on observable events and self-adjusts over time to stay fair no matter what changes over time. It is the collection system that differs. It requires that you track your inputs and any expenses not being reimbursed. Most companies track these things in the form of payroll and expenses, but startups often do not because they are not spending any money. By tracking all you are not spending it gives you a clear insight into what your business costs are or would be if you had the money. The system is dynamic and flexible. You determine how often you want to track the inputs: hourly, weekly or monthly.

When people walk away from their company there is often unfair payouts. People who quit early on are often the only people who make any money. With the Slicing Pie model, if you walk away for being fired or terminated for no good reason you forfeit your pie slices

Slicing Pie: How To Split Equity In Startups Fairly | Mike Moyer and Alaric Moses Ong

Just because we agree to something doesn’t make it fair. Just because it’s legal doesn’t make it fair. In most areas of life things are not fair because we can’t quantify them. But in business we can quantify everything.

Mike Moyer

Links:

Also check out this Quora Discussion about Grunt Funds

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