This week is Global Entrepreneurship Week. The importance of Entrepreneurship to our society remains and getting started means choosing a fair equity split.
Building a successful business requires expertise in several different fields. Whilst start-ups know a lot about their product or service, they do not necessarily know about how to split the equity in their business. What often happens is that Founders try to ‘guess’ how to split equity when starting a business.
In our work with start-up businesses we have experienced that most start-up spend too long trying to guess what their founding equity allocation should be. The Slicing-Pie methodology developed by Mike Moyer is a superb system to fairly split the equity in a start-up between founders. It ensures that all the partners get their fair share of the equity. If you haven’t had a chance to read Slicing Pie yet, you can find out more by going to: https://slicingpie.com/
Traditional Models prescribe that you agree to a specific equity split at the very beginning of the business. Most start-ups are just an idea with little capital or assets to determine how equity should be divided up. Yet, many entrepreneurs will try to predict how the split will look once the shares are worth something – often with dire results.
A Dynamic Model works differently
The methodology calculates the fair market value of the various contributions made by equity participants. This includes the value of your idea as well as time, relationships, facilities, supplies and cash. This is the total contribution, (B). Each participants’ equity (share) in the total business is then a ratio of their personal contribution (A) divided by the total contributions of all participants ie A/B. This gives you an exact percentage. When someone leaves the company the formula recalculates the split depending on the nature of the separation. The model protects the company and the individual participants.
Once founders get the model, they have a hard time understanding how anyone could do it any other way!
The methodology is already being used in numerous countries across the globe. From an administrative perspective, the legal contracts are straightforward, and the tax consequences can be aligned to whatever jurisdiction applies. Of course, these should be understood, and we suggest these are documented appropriately by your accountant and lawyer.
Achieving an equitable equity split in a start-up business is almost impossible using the fix-now methodology. The Dynamic model will achieve a fair outcome for all equity participants. In addition, each participant will actively move to see the business reach break-even faster than under the traditional model.
Be sure to check out our website for further details on the concept and please join us for our webinar taking place on Tuesday 24th November at 4pm where will be interviewing the founder of Slicing Pie, Mr Mike Moyer.
You can listen to the podcast by clicking here