Slicing Pie: Fund Your Company Without Funds Read online

  Preface

  Introduction

  Slicing Pie

  The Grunt Fund

  Creating a Grunt Fund

  Summary Calculations

  Using a Grunt Fund

  Subtracting a Grunt

  The Magic Number

  Grunt Fund Recap

  Retrofitting a Grunt Fund

  Going Out of Business

  Legalize It!

  Making Grunt Funds Work

  Part II: Grunt Funds in Action

  John’s Bicycle Attic, LLC

  PhoneMatcherator.com, LLC

  PhoneMatcherator.com, LLC-Redux

  Lake Shark Ventures, LLC

  Getting Started

  About the Author

  Grunt Glossary

  Slicing Pie

  Funding Your Company Without Funds

  - Version 2.3 -

  Mike Moyer

  Praise for the Pie:

  “Thank you for writing this book! Seriously has changed my life for the better. Having worked with startups for a few years now I feel like a giant elephant just got off my back.”

  Alesha Bishop

  “Slicing Pie is brilliant! You’ve cracked the code on a big problem for startups. I read this just in time!”

  Dave Linhardt

  “This book was a pleasure to read. It didn’t waste any time and got straight to point. The Grunt Fund is a great way to build a team in the gap phase of a startup, allowing for flexibility, while being equitable to everyone contributing resources. This book is a must read for anyone in my position building a team to turn an idea into reality.”

  Barnabe Geis

  “I’m just beginning with my new startup, and this Grunt Fund method is just what I needed! I’ve quit another startup where I was collaborating because the method for slicing the pie was not fair. So I felt the need for this, and found your book. Perfect!”

  Rui Gil

  “The Grunt Fund is the cleanest, clearest way to get any project off the ground. It’s easily understandable and cuts through the legal haze that can plague startups.”

  Brian Krohn

  “You’re a genius.”

  Mike Wilson

  My Promise

  If, after reading this book, you don’t feel that it contains not just good advice, but the greatest advice on the subject that you have ever received, I will happily refund your money and apologize for wasting your time.

  [email protected]

  My Butt-Covering Disclaimer

  If anything in this book sounds like legal advice — it’s not. If anything in this book sounds like financial advice — it’s not. I’m not a lawyer and I’m not an accountant and I’m not a certified financial advisor.

  I’m a Grunt.

  For International Readers

  In this book I use the term “Grunt”. The word does not easily translate into other languages and cultures so I thought it might help to give you a little background before you start reading.

  In the United States the term Grunt is a slang term that was originated by the military to refer to people who do hard work and are often new to their post. The term “Grunt Work” is common in US startups and businesses.

  Release Notes: Version 2.3

  A list of major changes for version 2.3 can be found on page 197.

  One More Thing…

  In this book I present a set of rules that I believe constitute fair play when it comes to dividing up equity. If you disagree with my rules as outlined here, that’s fine. Make up your own rules. As long as they are fair and everyone agrees to them in advance, you should be fine.

  Preface

  I would like to start a business with you. I look forward to working with you to find and exploit opportunity in the market that our slow-moving competition has overlooked or is too arrogant to bother going after. I can’t wait to steal their market share by creating a product or service that lures their customers away en masse.

  I hope we can poach the best employees away from their day jobs or other startups. I’m sure their former employers will weep, but they’ll get over it.

  I’m sure our irreverent approach to marketing and advertising will ruffle a few feathers along the way, but that’s the idea. I want our videos to go viral so we can beat those fat-cat marketing budgets from the establishment.

  It’s going to be fun to watch our success and see the impact we have on the market. Our competition, unable to keep up with us, will wither and die. That’s okay. It’s not personal—it’s just business.

  Before we start, however, I want to get a few things straight:

  When it comes to the competition there are no holds barred. When it comes to our company and our team, however, we need to treat everyone fairly and honestly.

  In business, some people may get burned. It’s okay to burn the competition. It’s not okay to burn each other.

  Most startup books are about breaking the rules. This one is about making them. It outlines rules of conduct about how we will treat one another when it comes to the equity in our startup company.

  Equity in the business will ultimately reward us for our individual contributions to success, when we get there. So dividing the equity fairly is critical. We need a few rules. The reason we need these rules is simple:

  Fairness is More Fun.

  In spite of the setbacks, the struggles, the stress, the long hours, the hard work and even the occasional failure, startups are fun as long as everyone participating in the startup is treated fairly.

  When everyone feels that they are getting what they deserve, everyone can get along and move the business forward as a team.

  Backstabbing, greed and politicking, on the other hand, suck the fun out of a startup faster than your company’s rogue article gets deleted from Wikipedia.

  Ask an old entrepreneur to reminisce about the good times and she will tell you about the high-pressure, the late nights, the victories and the defeats. Each story is exciting and inspirational. The story is always different.

  Ask an old entrepreneur about the bad times and he will tell you how he was burned by a partner or an investor or a co-worker. The story is always the same.

  No matter what happens in the coming months and years, I want this to be one of the good times.

  So let’s agree on a few basic ground rules about how to treat each other fairly before the money and emotions get in the way. I want to treat you fairly and I want to be treated fairly. That’s my only agenda.

  Let’s begin…

  Introduction

  I’ve been an entrepreneur most of my career. I’ve been driven, for better or for worse, into new businesses or established businesses that want to change their old ways. And, while I am certainly interested in making enough money to buy God’s summer house on Long Island, I know deep down that even without the money, there is another important measure of success.

  All startups eventually cease being startups. They usually go out of business, but sometimes they turn into real companies or are bought by other companies and, thus, lose their “startup-ness”.

  If the team that started the business is ready and willing to jump right back in and do it again together regardless of the outcome, then I think you have success.

  Success means you do right by those who believed in you. Hopefully, at the end of your startup, you all will laugh so hard that $100 bills squirt out your nose. But even if $100 bills don’t squirt out your nose you can all get up, dust each other off, and do it again—this time older and wiser.

  Slicing Pie is a short book about doing right by those who believe in you.

  The Gap

  Somewhere bet
ween the inception of your earth-changing idea and the investor presentation to Sequoia Capital or Andreessen Horowitz there is a gap. During that gap you are expected to have actually built something that resembles a business enough that the gentle and kind venture capitalist will decide that you have your act together and write you a fat check. I call it “the Gap” because it’s during this time that you either fill the gap with behaviors that create a business or let it consume you and your wonderful idea. Most fledgling businesses experience the latter.

  The days of back-of-the-envelope deals are over. (In fact, they may never have actually existed.) Few investors are willing to provide capital to a company that is little more than a rough idea.

  Nowadays you need to have something worth investing in which often means a management team, a business plan, and, if you’re smart, a working prototype. For bonus points get a few beta customers who are actually paying you. Now you have something worth discussing.

  Putting those things together takes time and resources and, in many cases, time and resources cost money. And as you are probably aware, money is hard to come by. Sometimes the Gap is short, in other cases it is long. In all cases your idea will either show signs of becoming a business or it won’t.

  Lucky for you, you have a tool that is a great substitute for money when you’re in a pinch. It’s called equity and it can help you fill the Gap and create a business starting with nothing.

  Equity in a startup company has virtually no value. There is no real market for startup equity trading and you can’t buy food or clothing with it. In most cases individuals can’t sell it to other individuals and even if you find a willing buyer the government has all sorts of rules regulating who can and can’t invest (more later on the JOBS act).

  In spite all of these obvious shortcomings you can still use equity to acquire many of the things you need. Building a business using equity is a powerful and exciting option. It’s a beautiful thing.

  Equity in your startup company can be used to pay employees, hire consultants, buy supplies and even pay rent. However, because it has no real value you will have to (1) convince people that it will have a lot of value in the future and (2) provide a logical explanation of how you calculated the amount of equity you are giving them.

  When you use equity to compensate people you need to make sure you are fair and equitable. This can be like walking a tightrope. Doing it wrong could lead to a quick end to your business and your relationships with those involved. It can also cause irreparable damage to your professional credibility and wind up costing you real money. Do it right and the world is your oyster.

  Interestingly, little has been written about the process of using equity to build a business. It is a process that trips up even the savviest entrepreneurs. Ask a dozen people and you’ll get a dozen answers.

  There are a plethora of great books about starting companies and bootstrapping and raising money and marketing and all those great things that can help your business grow. But as far as I know there is only one book about how to use equity to get your startup off the ground and you’re holding it.

  That Little Awkward Conversation

  I’ve seen it before and I’ll see it again. A couple of people have a great idea for a new business. They get excited. They start hashing out the details. They build a prototype and speak with a few potential customers. The idea starts taking shape so they put together a business plan and a tidy little investor presentation. Then they start thinking about quitting their jobs and how they are going to spend all the oodles and oodles of cash that is going to start rolling in.

  Everything looks great and then, out of nowhere, the topic of equity comes up. It’s been on their minds, but they put off the discussions because they don’t know what to do. The conversation looks something like this:

  “We need to think about how we should split up the company, you know, the stock or shares or whatever,” says startup guy one.

  “Uh-huh,” replies startup guy two.

  “Well, we need to do it because I’m getting my lawyer-brother-in-law to set up the corporation for us. He’s doing it for free but we need to pay the filing fee,” says startup guy one.

  “Um, okay,” says startup guy two. “What do you want to do, I mean, how should we split it up?”

  “I’m not quite sure; I thought we could talk about it,” answers startup guy one.

  “Okay, yeah, that’s a good idea. Maybe we should split it 30/70,” suggests startup guy two.

  “Right, I think that’s fair, it was my idea so 70% seems about right for me,” startup guy one agrees.

  “Um, well, I thought I would take 70% and you would be the 30% because I’m the developer and I’m doing all the work right now,” says startup guy two.

  “Oh, err, you are doing a lot right now, but when the product is done I’ll be doing most of the work and it was my idea,” replies startup guy one with a little frustration.

  “Yeah, but there will still be a lot of upkeep on the program and we’re using my hosting account so I think it’s only fair that I should get more,” says startup guy two.

  “Dude! That’s not fair; you wouldn’t even be here if it weren’t for me. I should get more than you,” snaps startup guy one.

  “Dude! You couldn’t do this thing at all without me because you don’t know how to code. Besides, I added all the bells and whistles, your idea wouldn’t have worked the way you wanted it!” yells startup guy two.

  “That’s not true! I came up with the great idea, you only thought of a little bit. I can get another developer in a heartbeat, your skills are replaceable!” yells startup guy one.

  And so it goes. Tensions rise, arguments ensue and the relationship starts deteriorating. Even if it goes better than in this example, it’s a weird conversation at best. Everything else is great, but this one little conversation seems to create an unwanted awkwardness. It’s a palpable break in the “startup high,” that wonderful feeling you get when you embark on a new venture with people who think like you. You are one with the idea and the idea is one with you. But this little conversation seems to create a weird tension. If you could just get over it, you would be well on your way to acquiring Google in a hostile takeover in year three.

  The Disgruntled Millionaire

  Not long ago I had lunch with a man who had recently become a millionaire after the company he worked for was sold for hundreds of millions of dollars. He was an early employee and was now rich beyond his wildest dreams.

  In spite of his financial gain, the man was complaining about the deal. He said that while he was happy that he now had a nice nest egg, he would have gotten a lot more if he hadn’t been “screwed” by the company’s owner. While he made only a few million dollars the company’s owner had made over one hundred million dollars.

  His resentment can be traced back to the early days of the business when early equity was being allocated. He didn’t feel that he received a percent of the equity that properly reflected his contribution.

  Wow, I thought, here is a man who four years ago was headed towards retirement on social security and a meager pension. He is now a millionaire and can retire in style, yet all he can think about is how he resents the man who helped put him there. I’m sure he will get over it and move on, but it’s a shame that such a happy time should be sullied by resentment and anger.

  This scenario plays out time and time again. A new company hits it big and interpersonal relationships become strained because many people feel undervalued. The biggest wins go to the people with the largest equity stake in the company. Of course, not every employee deserves equity; but, very early participants often feel entitled, especially if they see concrete evidence of their contribution. There are movies about this kind of thing.

  After the deal, the participants usually go their separate ways if they don’t feel they were treated fairly. This is unfortunate because they are the people who should stay and try again. After all, they had one successful deal, why
not create another?

  As a rule, people expect to be treated fairly. They expect their contribution will not only be valued, but also rewarded in a manner that is consistent with the rewards of others. Nothing causes more damage to business relationships than when there is a perception of unfair or inconsistent compensation and reward practices.

  In my experience I’ve found that it’s not really about the money. It’s frustrating how often people think money is a motivator. It’s very difficult to refute, but I know that money is only a part of the equation. People want to know that their contribution is important and valued. And, they want some kind of evidence that that is the case. They want proof that they are a valued contributor on the team.

  A Falling Out

  Whenever I hear of two people in a business relationship that have a “falling out” I usually start looking for the answer to the question “who burned whom?”

  When a falling out occurs it generally means that at least one person in the relationship didn’t feel as if they were treated fairly. And, rather than coming to an equitable agreement, they simply stopped working together. Both leave the relationship angrily trying to justify why the other person was wrong. Even in situations that the individuals would describe as “amicable”, there is usually anger and resentment.

  In many cases burning a fellow entrepreneur isn’t intentional; it is a byproduct of ignorance rather than a product of arrogance.

  The life of an entrepreneur, especially a career entrepreneur, can be exciting and meaningful. Entrepreneurs spend their careers, or at least part of their careers, trying to improve people’s lives. Not just the lives of their customers, but also the lives of their employees and, of course, their investors. I think entrepreneurship is a noble profession.