In many ways, the early steps of a startup are crucial. Unpreparedness for change, greed of some, naivety of others: the pitfalls that await founders as their company is just starting out are legion. By falling into these traps, partners simply risk jeopardizing their creation. However, as Mike Moyer asserts, these often deadly obstacles are easily avoidable for some. Moyer, an American serial entrepreneur and university professor, is the author of, among others, the book "Slicing Pie." In it, he provides the keys to distribute the ownership of the company as fairly as possible among the founders at the time of its inception, even before it becomes profitable. The dynamic formula that Mike Moyer proposes does not set in stone this distribution rule, anticipates change, and circumvents conflicts that would inevitably arise without it.
"To name things incorrectly is to add to the world's unhappiness," asserted Albert Camus. Similarly, improperly allocating the equity of the founders of a nascent company adds to its unhappiness. The division of the small cake of startups is quite an art. Failing to objectively determine the ownership distribution of a company upfront can lead to disaster and prove unnecessarily costly in terms of money, energy, or reputation.
The fixed distribution of the cake shares, a false good idea
Often, when a startup is born, its founders believe that fixing each person's share in advance combines two advantages: balance and simplicity. However, reality can be quite cruel for those who make this choice. Indeed, a fixed distribution means that shares of equity are distributed to participants in the venture based on predetermined amounts in anticipation of the company creating value.
Are our startup founders too optimistic? Probably, because predicting the future with precision is a daunting task for most of us. Add to that the impossible task of measuring added value, and you get the recipe for failure. Fixed equity sharing often leads to fierce negotiations, resulting in latent conflicts between partners or even lengthy and costly disputes that all parties endure.
Just ask Facebook's founder, Mark Zuckerberg, what he thinks about it. He offered his friend, Eduardo Saverin, 30% of the social network when it launched in 2004 in exchange for a $15,000 investment and his financial expertise. The initial capital division turned sour as the company evolved and Saverin lost interest in the company's affairs.
When Zuckerberg decided to reclaim Saverin's shares from 2005 onwards, he ended up in court and, in 2012, agreed to settle for a sum approaching several billion dollars. Saverin made a fortune without investing much money or effort in Facebook thanks to an initial agreement that was immensely advantageous to him given the startup's evolution.
An evolving and fair share of the cake
The raison d'être of the Slicing Pie concept is precisely to combat the inequity presented by such situations. In the context of a startup, the more a partner contributes to its success, the more risks they take. Indeed, before reaching profitability, the startup incurs expenses without generating significant revenue. Any contribution from the founders will only be financially compensated if the company becomes profitable.
Drawing on his experiences in startups and in the corporate world, Mike Moyer has developed a dynamic and fair capital sharing system that integrates risk, a fundamental element for a startup, around which his business model is built. Each participant receives according to what they bring to the continuous development of the company: according to Moyer's formula, the share of the cake that each person receives is equal to the ratio of their contribution to the startup's valuation and the theoretical total value of the startup.
So, one slice of the cake represents a fictional unit of measurement reflecting the unrewarded risks that the partners take to develop the startup. Each contribution corresponds to a certain degree of investment in funds, time spent, ideas contributed, equipment purchased, or contacts provided. The total of this investment corresponds to the theoretical value of the startup.
Knowing how to value risk
But how to quantify the risk taken by each contributor? Mike Moyer proposes to value the "individual contribution at risk" based on its fair market value. Such service provided to the startup (developing software, introducing a business angel, renting an office, etc.) is certainly not financially compensated by the startup but nevertheless has a value on the market. Thus, the price of each investment item is estimated based on its theoretical market value – for example, the hourly wage of a developer, the amount of a service, the price of an office supply purchase, etc.
Then, each type of individual contribution is adjusted through the application of multipliers. In the model described by Moyer, the multiplier is higher for money invested than for time spent. However, it is up to each individual to adjust their formula according to the course of discussions between partners, their desires, and their principles. Moyer's system is primarily flexible, and therein lies one of its main strengths.
Let's take the assumption that Jean, a developer, has an idea for a sports application. Jade, a marketing specialist, loves the concept and agrees to sell it to her contacts who might be interested when the idea is ready. They divide the equity initially with 60% for Jean and 40% for Jade. The distribution is fixed from the start.
Jean quits his job and works full time for a year to prepare the application for sale. Jade has moved on and does not want to sell the application, but still wants to retain her 40% because she has invested €5,000. This situation inevitably leads to conflicts between the two founders. Slicing Pie would not allow Jade to behave in this way. However, Moyer's formula would still treat her fairly.
Indeed, by deciding to implement the adaptive and balanced distribution of Slicing Pie, besides her initial investment, Jade would have indicated initially that she did not intend to give up her job but would help as much as she could with the time she had available, the sale of the application, and especially by opening her contact list. Jean, given his investment, would initially hold 60 shares and Jade 40.
Jade's contribution is thus calculated based on her mainly financial investment, supplemented by some marketing studies and the provision of her contact list. A year later, it is clear that her adjusted individual contribution, reflected in the theoretical value of the startup, would no longer be the same: Jean, who devotes all his time to the startup, now holds 90 shares of the cake while Jade holds only 10.
It goes without saying that this system applies as long as the startup has not reached its profitability threshold, i.e., before it generates enough money to reward each of the shareholders. Indeed, if partners were paid for their time spent or reimbursed for expenses incurred on behalf of the company, the risk would no longer exist.
An equitable distribution of shares in the event of a founder's departure
The elegance of the Slicing Pie concept also lies in the fact that it applies to two critical stages of the company's development. It applies to the distribution of the theoretical value of the company between partners not only before the profitability threshold is reached but also in the event of a partner's departure.
When one of the founders of the startup leaves, the cards are reshuffled among the remaining partners. Since Moyer's formula is dynamic, this evolution is naturally taken into account. As for the one leaving the ship, the amount of compensation for the risk taken varies depending on whether it is a dismissal with or without cause, or a justified or unjustified resignation.
Imagine that Jade has opened her contact list and even quit her job. The application developed by Jean has thus been sold and is profitable a year later. Jade is now the marketing director of the startup, of which Jean is the CEO. According to the Slicing Pie model to which Jean and Jade initially decided to adhere, Jean still owns 60 shares, and Jade owns another 40.
However, Jean wants to change the marketing director, believing that the company needs to take a step forward to grow and that Jade's contact list is no longer sufficient. He decides to dismiss Jade. Slicing Pie provides that in this case, Jade, having committed no fault, is free to retain her unrewarded cake shares or to accept their redemption at their theoretical market value.
Undoubtedly, if Zuckerberg had drawn up a contract with Saverin implementing Moyer's formula, his former friend would have received a much smaller sum in 2005 than the one Zuckerberg ultimately agreed to in 2012…
A fantastic model for launching a new generation company
Slicing Pie is therefore a fantastic tool at the disposal of all startups wishing to avoid the troubles that will inevitably arise but that they cannot predict when they launch their small business. The model developed by Mike Moyer does not make plans in the stars. On the contrary, it is based on tangible and measurable elements allowing to estimate risk and calculate the value of a startup. Its creator assures that his concept is universal, valid in any economic system, and compatible with any legal framework: Slicing Pie is even applied in Iran!
A true moral pact between partners leaning over the cradle of their newborn, Slicing Pie prevents the most greedy from gaining an advantage over others. Seeking equity from the start for success in the end, while avoiding futile costs and unnecessary blows… An ethical tool par excellence, the model developed by Mike Moyer establishes a relationship of trust between partners, rewards each person's efforts, and motivates founders to succeed together.
The widespread tendency of startups to fix the distribution of their equity between founders even before they have started to produce results, however, demonstrates that many do not hesitate to put the cart before the horse. It is better to remain pragmatic, warns Mike Moyer, take the time for equity, and prefer a formula that adapts to changes to stick as closely as possible to reality.
However, faced with the speed of market changes, reality requires companies to be responsive, flexible, and adaptable to constantly changing environments… all of which the fixed distribution system of a startup's founders' shares does not allow. In contrast, Slicing Pie presents itself as a dynamic concept for distributing startup capital shares, an organic, living formula, a system adapted to the rapid transformations of their environment and the vagaries of group life. A tailored model for the companies of the new generation, in short.
