Slicing Pie: How to Divide Your Company’s Equity
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When starting a company, there are a million things can go wrong. But when they do, you will want to make sure that your founding team is on the same page. Founder splits are one of the biggest reasons that startups fail, and equity division is often a very sensitive subject. Mike Moyer is an entrepreneur, author and professor of marketing at Northwestern University. Learning from some mistakes made in his early ventures, Mike addresses how to approach the process of dividing up equity in his book, Slicing Pie: How to Fund Your Company without Funds.
Even if you haven’t land venture funding, you can still make things happen through equity, but this process requires extreme care. In Mike’s words, “How much do we each get?” is the most dangerous question of all business questions. It causes more problems than any other question I have found. It is most dangerous in situations where the contribution of the individual has a material impact on the outcome.”
It’s something he touched on during SMW13 in Bogota:
If your company is a pie and each piece of equity is a slice of the pie, how can you cut it so that everyone is happy? Here are three themes from Mike’s book that every entrepreneur should think through as they start out on their business venture.
- The idea is nothing without execution!
“If you remember nothing from this book, remember this: all pies, and therefore equity, are worth nothing when they are first created. Pies are essentially ideas and ideas are pretty much worthless in the beginning.” This is good news and bad news- someone else has your idea? So what? Execute first. Have the best idea ever? You still have to execute.
- Fairness is always better
“When everyone feels that they are getting what they deserve, everyone can get along and move the business forward as a team.” Nothing will kill the motivation of partners and early stage employees than the feeling that their contribution isn’t being properly appreciated or compensated. These are people you can’t afford to alienate.
- Contributions come in many forms
“Time, Money, in the form of cash or cash equivalents, Supplies and equipment that enable the business, Relationships, Intellectual property”. Contributions to an early state company come in many forms other than cash and it is critical to take all of these contributions into account when splitting up the pie.
For more great advice on how to split up your company’s pie you’ll want to read the rest of the book. To learn more strategies for you early stage company, check out the schedule for Social Media Week, February 17-21, for seminars on business and entrepreneurship. Register now and we’ll see you there!
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