There are a range of different ways of sharing equity with your employees. One philosophy is known as Slicing Pie, which is based on a 2012 book of the same name.
Some UK founders that we speak with have already read Slicing Pie, and are looking for help in making it happen.
In this article we will explore the Slicing Pie method to understand what it is and what its benefits are, before looking at the best ways of implementing it in a fair and tax advantageous way in the UK.
What is Slicing Pie?
Slicing Pie is a method of allocating and recovering equity in a business. It was created in 2012 by American entrepreneur, academic, and author Mike Moyer.
The Slicing Pie method provides a formula to help businesses calculate the percentage of their equity that should be shared with each stakeholder based on their contributions. Ultimately, the formula rewards teams in a way that is proportionate to their contribution to the business.
In the Slicing Pie method, a stakeholder’s contribution is referred to as an ‘at-risk contribution’. At-risk contributions can include: money, time, ideas, relationships, supplies, facilities, equipment, or anything else that they forego payment at market rates for in pursuit of a business’ success.
Slicing Pie separates at-risk contributions into two categories: cash contributions (that consume, you guessed it, cash) and non-cash contributions (or those that do not consume cash).
Slicing Pie standardises at-risk contributions by converting into a unit known as a slice. Stakeholders are rewarded with a share of equity that corresponds to their number of slices.
For example, an individual who has contributed significantly in terms of time, relationships, and equipment, may be rewarded equally as someone who has made a financial investment in the company. The goal of this process is to make sure that equity is allocated fairly.
The formula for the Slicing Pie method is actually very simple:
Therefore, Slicing Pie is an effective way of establishing a fair and transparent distribution of a company’s equity between contributors.
An important distinction to make is that agreeing the distribution of your company’s equity and actually distributing it are two very different things. But we’ll get to this later on.
What are the pros and cons of Slicing Pie?
So, what are the benefits and drawbacks of this method? Let’s explore some of the pros and cons associated with the Slicing Pie method.
1. Fairness and accountability
The Slicing Pie method is completely fair and transparent for people to use. Everyone knows where they stand from the outset and are held accountable for what they promise to deliver, in return for their share of a company’s equity.
2. Dynamic distribution of equity
The Slicing Pie framework is by no means a static equation. At-risk contributions are frequently being made to organisations, and each time this is the case, more slices are added and the equation shifts to achieve a new equilibrium.
3. Perceived objectivity
By standardising contributions into slices, Slicing Pie brings an element of objectivity to discussions surrounding equity sharing. For example, somebody who has made an investment of time and relationships may have the same number of slices, and therefore be rewarded equally, as those who have invested cash.
4. Addressing issues surrounding co-founder exits/resignations
When founders resign or decide to exit the business, things can get messy. Thankfully, the Slicing Pie framework addresses this. By following the framework, when a founder leaves, you can easily recover equity and re-allocate it.
1. Can minimise the perceived value of ideas
Under the principles of Slicing Pie, each contribution gets a weighting, and in these cases it can be common that the value of ideas is perhaps underplayed in favour of more tangible contributions such as time and money. While an idea or vision is worth nothing until it is executed upon, you need strong ideas in order to execute effectively.
2. Difficult to measure at-risk contributions that aren’t a factor of time or money
While this framework does bring an element of objectivity, the measurement of contributions is still done by somewhat subjective means. Therefore, objective discussions are still framed in terms of somewhat subjective inputs.
3. Time isn’t always a good indicator of value
Time can be a poor measure of contribution. In the case of time, it is important to factor productivity into the mix, as one founder may spend days what takes another hours to achieve.
This isn’t black and white. There are plenty of counterarguments for each of the points above. However, these are the common cases that are made for and against the Slicing Pie method.
Let’s now consider how the Slicing Pie method can be applied to the world of UK startups and SMEs.
Agile Partnerships™ and Slicing Pie
Slicing Pie is a great way to sketch out the initial ownership structure of your business. But, as with most sketches, this is very much written in pencil. Agreements are only meaningful once they’re written in ink.
Therefore, once a business has decided how to allocate equity between founders and contributors, the next step is to formalise it. In the past, the best way of doing this was to pay lawyers a relatively large sum to draft founders agreements. Thankfully this has changed.
Agile Partnerships™ is Vestd’s proprietary framework for providing equity rewards in a way that is fair for all shareholders.
Using the Vestd app, founders can file agreements with Companies House, create articles of association, and manage their equity in an easy and compliant way.
This framework helps organisations to reward those who help build a business fairly, whether they are employees, advisors, consultants, or investors.
It is also agnostic in terms of the method or framework you use to sketch out ownership in the early days of your business, meaning that it works with more than just the Slicing Pie method.
Think of it as the tools to deliver once you have decided how your pie will be sliced.
How does Agile Partnerships™ work with Slicing Pie?
Businesses are dynamic organisms that are prone to change. We have seen nearly every situation in the book when it comes to equity agreements. And disagreements.
Therefore, one thing that is vital is flexibility. This is one of the governing tenets of the Agile Partnerships framework: to give greater fluidity to businesses when sharing equity.
Our platform allows founders to allocate and recover equity painlessly, so long as the scheme has been designed with that in mind from the outset.
There are a host of different distribution methods to choose from, including EMI Options, Growth Shares, Unapproved Options, and Ordinary Shares. It is crucial that you choose the best one for your specific needs.
In the past, Ordinary Shares were the ‘done thing’ because many of these other methods didn’t exist. But once you reward people with Ordinary Shares, they own their piece of the action. Where’s the incentive for them to deliver on what they’ve promised or to keep them around?
Conditional options and shares, such as those awarded through EMI Schemes or as Growth Shares, mean that contributors must reach certain milestones before their shares are awarded. If they fall short on their promises, some or all of their shares will become ‘Deferred’, leaving them with a smaller piece of the action.
Once you’ve figured out how to allocate your equity using a method such as Slicing Pie you can set up one or more Agile Partnerships to ensure that contributors deliver on their promises.
Agile Partnerships: Supporting the lifecycle of a business
The Slicing Pie method works because it is dynamic. As businesses grow, meld, and change, the Slicing Pie formula adjusts equity allocation so that it remains accurate and fair. Agile Partnerships support this.
We recognise that as a business evolves, so too must its ownership structure. For this reason, Agile Partnerships help with the entire lifecycle of a business, including:
Founders incentivise co-founders and key hires with equity. Agile Partnerships prevent people from walking away with a slice of the business before contributing what they promised.
Agile Partnerships allow you to get everybody aligned. Even the best planned businesses will sometimes need to change direction. And occasionally a bigger shakeup is required: new goals, new people, new terms.
When shareholders move on from a business Agile Partnerships can be used to gradually release equity to the newcomers. They can also be used as the basis for a company sale, to govern earn-outs over an agreed timescale.
Slicing Pie: Powerful when combined with the right tools
Slicing Pie is a powerful concept. Deciding to reward your team with equity is a big first step, and Slicing Pie is an effective way of starting the process of allocating your equity fairly and transparently.
However, talk is cheap, and while initial agreements may be symbolic, they are only meaningful when written into formal agreements. To do this, make sure that you select the right tools for the job… tools that give you the flexibility to respond as your business evolves.
If all of this is music to your ears then schedule a free discovery call with one of our equity experts.