This week worldwide is the Google for entrepreneurs week and here in Kampala and across Africa, Google is reaching out to entrepreneurs helping out with one of the most difficult question that startups face which is how to fairly share Equity between Co Founders. In collaboration with Startup Grind Kampala, Google For Entrepreneurs organised a meetup at the Kampala Sheraton Hotel and invited the Author of Slicing Pie – Mike Moyer who was very kind to clear his schedule in order to teach African startups a fair way of splitting equity.
When you think about it, sharing equity is something most startups postpone but it’s always at the back of their minds during the development phase and after they have a prototype and have talked to customers or when the startup starts making money, then the big question pops up; by the way how much does each one of us own in this venture? The other scenario and I have witnessed this would be a venture we start with our friends and share equity equally, promising each other that we shall all work hard and build this startup, and as friends we shall make this work so we say, but we all know how this story ends, one of us gets so busy and cheats others.
The Alligator Pit.
Mike pointed out that in a fixed equity split, someone is bound to be cheated (the Less Than Gators) or cheat someone (the Greater Than Gators) because starting out with giving someone their equity split is like handing someone cash for an entire year before they start doing any work and it’s not a surprise we get a lot of disappointments when we travel this road. Therefore to avoid the Alligator Pit, we need not to even think of the
fixed equity split.
Fair = Fun:
To be fair to everyone and to avoid the awkward argument that comes up when we disagree with people, we are going to have to use the Fair equity split.
Your Share % = (The Value of Your Contribution/ The Total Value)
This looks very easy but it’s still very hard because it’s still confusing, how to get the value of your contribution and later on the total value of the company or startup which brings us to the allocation framework.
In this framework we start by assigning a proxy value (Slice) to everyone according their input in a startup. So then the formula will look like this;
Your Share % = ( The Proxy Value of Your Contribution / The Total Proxy Value)
This is called the dynamic equity split and in this scenario, the more you contribute to the startup, the more you will get in slices and the more equity will be allocated to you. Therefore in a nutshell,
Your Share % = (The Slices You Contribute /All the Slices Contributed by Everyone)
According Mike, Slices are converted in 2 ways there are those that are non cash for example your ideas, the time you spend working on the project or the commissions for selling a product or cash. The Cash is multiplied by 4 and the Non Cash is multiplied by 2.
To get the number of slices everyone needs per hour, you will need to use this formula (( Fair Market Salary – Cash Compensation) X2 /2,000 =
Grunt Hourly Resource Rate (GHRR!)
One last Example and we are done…….
If you hire a developer to work on your startup and this developer works for $4000 a year, lets say you pay this developer $1000 in the course of the year for his time, the number of his slices per hour would be……
($4000 – $1000) X 2 / 2000 = 3 slices per hour.
In case someone invests in your startup liquid cash , you will multiply their slices by 4 not 2.
If you like what you see here and I know its some confusing math just go buy the book to know more. You can also get a free book sample if you sign up here