Health Innovators
Health Innovators

Episode · 1 year ago

Slicing Pie: A Better Model For Splitting Equity in Early Stage Innovation w/Mike Moyer

ABOUT THIS EPISODE

Splitting equity can be a hard and emotional subject for innovators, and the models used for these splits can be unfair for the parties involved.

What is the Slicing Pie model and how does it solve many of these equity issues? How does this model help entrepreneurs work through the emotional aspects of giving up equity share? What are the different types of contributors in a startup and how do they get compensated differently?

In this episode, Managing Director at Fair and Square Ventures and creator of Slicing Pie, Mike Moyer talks about this new model, and how it helps innovators. 




Guest Bio- 

Mike Moyer is an entrepreneur, author, educator, Managing Director at Fair and Square Ventures and creator of Slicing Pie, an equity model for early stage bootstrapped startups.

Mike is an entrepreneur who has founded numerous companies including Bananagraphics, a product development and merchandising company; Moondog, an outdoor clothing manufacturing company; Vicarious Communication, Inc, a marketing technology company for the medical industry; Cappex.com, a site that helps students find the right college; and College Peas, LLC which provides publications and consulting on a variety of topics including, college admissions, trade shows and job search.

In addition to his experience as an entrepreneur he has held a number of senior-level marketing positions with companies that sell everything from vacuum cleaners to financial data services to motor home chassis to luxury wine.

Mike teaches Entrepreneurship at Northwestern University and the University of Chicago Booth School of Business.

 

For more information, visit https://slicingpie.com/

Welcome to Coiq, where you learnhow health innovators maximize their success. You're working on something big, something lifesaving, something world changing. Yet ninety five percent of health innovations fail andreal lives are on the line. That's why launching is not enough. Commercializationis the most critical, yet overlooked stage of the innovation process. Through candidconversations with health innovators, early adopters and influencers, you'll learn the five componentsof the COIQ early adoption strategy. So, if you want to change lives anddominate your market, why not give your innovation the best chance to succeed? I'm your host, Dr Roxy, founder of Legacy DNA and international bestsellingauthor of how health innovators maximize market success. And now let's join the conversation andmaximize your success. Welcome back coiq listeners. On today's show I haveMike Moyer with me. He is the author of slicing Pie, and todaywe're going to be digging a little bit deeper into what is slicing pie andhow does it impact or how can health innovators benefit from this conversation and benefitfrom his book? Welcome to the show, Mike. Thank you very much forhaving me. So tell our audience. Before we dig any deeper, tellour audience a little bit about who you are and what you do.I am a career entrepreneur. I've spent my life going from startup companies toreal job, to startups to real job, back and forth. I've worked inall kinds of industries, ranging from fine wine to motor home chassis tosee your living to fishing tackle boxes. Sow. That is diverse. Thereis it worked. In six or eight years I've run a copy called fairand square ventures, where I've gone written number of books and run some softwarecompanies, ever camping gear company. And I teach a University of Chicago ora northwestern university, and Previously University of Chicago is a school nice. Weteach entrepreneurship, of course. Huh. So what is slicing pie? SlicingPie is an equity model for early stage, boost JUP startups. So one ofthe key problems that were the first deals a founders do is a dealbetween each other and typically what happens is you and I would do a starta company together and we'll go in fifty because we're friends, and then youdo all the work and I own have the company. HMM. And thisis the common problem all over the world. And slicypie solves the problem by creatinga perfectly directors. But it's the only model on the planet that actuallycreates the directors. But every other every other methods we're studying, equity createsnot unfairst. But so you know, this topic is seems to be areally hard and emotional topic for health innovator. Won't for any entrepreneur, but youknow, in the context our listeners are health innovators. So explain tous a little bit about you know, how does your model help us workthrough some of that difficulty and the emotions of giving a piece of your companyaway? Well, it's hard because it's very ambiguous and we struggle between ourwant to be our need to be generous with each other and our need tobe greet you with our gree we want as much as we can for ourselves, we also want to be generous and want them to feel right about it, and so creates a lot of problems. But it's really not a very complicatedproblem. Do you know how to pay out of play blackjack? Hmm, let's pretend that you and I are going to play blackjack together as ateam, not as opponents for the team, and we're going to split the winningsfifty because we're friends. So you go to Las Vegas, we eachput a dollar on the same hand a...

Black Jack. We don't know ifwe're going to win, we don't know how much we're going to win,we don't know how long it's going to take to win. The future isunknowable. Right. Yeah, I hope we're going to win. We're hopeful, we're optimistic, replaying because you think we're to win. The odds aren'treally in our favor, but we're still playing. So the dealer deals tworaces. So what do you do those aces? Split them, split themand doubled on. Right, I'm out of cash in your not so you'vebeen two more dollars down. So you've got three dollars and I've only beena dollar. We still have no idea what the future holes. You don'tknow if we're going to win, how much we're going to win. Ourlast going to the future still just as a noble as was before, orstill ob domestic, but we know if going for sure. Those are youbet three dollars. Not Bet a dollar. If we win, there's fifty.Sound Fair. Well, depends on which place that you're in. Right, we'll change five hundred and twenty five. Right, right, right, right. Yeah, and unless I was to go on that, we've gettingthe extra twenty five percent. You Bet, you Bett three dollars. Other ofdoors, I see twenty five percent. You shoot three seven percent. Showas a logical, obvious, on ambiguous answer based on the facts ofthe case. There's no other way to split it. I have a dealfor fifty. I could sue you and probably win. That may be fair. Right, it's fair as at your share. The winnings should be basedin your share of the bets. So startups are exactly the same thing.Instead of being on cards, are betting on ideas. We bet our timeand our money and our facilities and our relationships and our equipment, our supplies. We've contribute all kinds of things to start up for which we're not paidthat amount. They are not paid as equal to the fair market value thatcontribution and that repudents are bet. So when you bet your time, you'rebetting the fair market value your time. You're not any more than that.You know, I'm many bet lesson that. If you're worth a hundred thousand dollarsa year and you work for me for a year, you bet ahundred thousand dollars unpaid conversations, but I don't pay you. If you putin your tractor and the throw of Twenty Five, you've bet twenty Fero witha tractor. So if you contribute to start up and you're not paid,you're essentially betting on the future profits or capital gains that startup. So youthink about that way, all you got to do is keep track of thebets and you know exactly you. I could should be as the basic scizingfive. Okay, so how? So just kind of help us out here. How should equity be divided amongst co founders and investors and early employees?Give us so I appreciate the poker example, I mean the blackjack example, becausethat makes that makes it easy to understand the slicing pie model, butlet's talk about like a real world example. How are you fairly using your modelto spread equity amongst different players and different types of players? So there'sthree basic kinds of contributors to start company. Patres, the startup team, whichI call a grunt. It's called a grunt fund. Sometimes start upteam members someone who contributes to start up and is not paid for the contribution, whether your time or materials or money, that they're not reimbversary expenses at thestartup team member and you can call them a founder or early employ whateveryou want. If someone's contributing and not getting paid, their placing bets justlike anybody else. So I can call you my employee, but if you'replacing bets, you're treated the same as me and size you Bo I.Hmm. The second kind of investor, contributor, is called an angel investor. An Angel investor some to invest their own money in amounts that are toosmall to funde operations the foreseeable future. So chunks of cash, Tenzero,twenty, thousand, Thirtyzero, hundred, thouand small trunks of Gosh, myown money. The third type of investors professional investor, who invest large chunksof money, of other people's money, and junks that are large enough tofund it operations that are usually own as a VC. Those are the threetypes of equity investors. Now there's credit card, that and thread and notall kinds about things. There's investors. So anyone participating the company and thencontributions about being paid is considered a participant...

...in slightly five mile thank you.Keep trucking their bets. When you can pay them, the betting stop.So if I paid you your full of Marquess salary, you deserve any equitycompany. Right, HMM, he's just getting paid. In fact, thatthat's how most people work, is get paid and that's that. But ifyou're not getting paid, you huge deserves ruggle. Equity that it's based onyour bet. An Angel investor should always get a convertible note. Convertible noteis one that is basically a loan that, a certain point the future, turnsinto equity at the terms of the first major round of funding. It'simportant is because if you set a price for your equity too early, youcreate all kinds of problems, and a lot of people give their mom fivepercent for five thousand dollars, for instance. Right, give the early investor whenI sell five percent for five thousand dollars, I just implied, andmy companies worth a hundred thousand dollars. That makes sense. HMMMM. Sonow when I give up what a future equity grants if you can be taxedat as income is as a price. Now, plus, I basically createa budget of nine five thousand dollars. When I run through, is gone, and so it creates all kinds of problems. So the first VC round, the first day series a round, should be your first price dround.So you use slicing pie for founders and early employees that are taking risk,and that's the poker's like an example. So yeah, here the equities basedmy share, the rew other the bets I give Angel Investors Convert will known. So it convert later on and when they convert, all the pie holderswill delude appropriately on equal footing. So I went in the got in thesame boat because my dollars always work at the team worth thing as your dollar, and I find the founder or early employee. HMM, all I gotto do is keep track of what I contribute. Now a lot of startupsgoing to do that. They don't keep track of their expenses because they don'thave any expenses either's working for free. But most companies track pay roll,which I expense. Is the track read. So as a matter of how yourun a company, strick music is not very hard. So all you, yeah, you're not paid that, you'll all do your bit. Sowhat's going on is you don't know your split up front. You don't know. You only know when the betting stops at the page. That's a seriouslyor break even. So the stud changes over time, which based all peopleuncomfortable. But you think about it all, I could just let's change, becauseif you go on five and fifty, we're going to adjusted it sooner orlater. HMM, okay, y'all is guarantee. Did you always havea deserve? So? So, if I'm a health innovator and I wantto hire a consultant to help me with commercializing my innovation, might go tomarket strategy, maybe product development, any of those things that this consultant's goingto help me with, and I of course I've imagined that. It dependson the status of the funding of the company. But what do you dowhen there's a scenario where there's some financial compensation and then there's the balance orthere's a difference in equity? You don't know the equity yet because you're notgiving equity where yet. You just tracking the Pie and it is based onthe unpaid portion. So the consoles a hundred dollars an hour and you paythem fifty an hour. They're betting fifty. Now, okay. Always ask yousome the same question. If I was going to pay this person afull fair market wage or of conversation, what would I pay? Make agood financial decision and then you just pay it if you have the cash.If not, use slices or whatever. I can't pay of that either allor part of it. I use slices. So slices. If there a pokerchip, it's a confictional you conjubut. Is it slicnse to the Pie.So this allows me to hire consultants or employees or landlords and rent space, create certain this all turning currency which says I owe you, you contributesomething, your betting something. I'm going to keep tracked by allocating slices inmy pie and when the postops, community slices will determine rectories. But basedon that. So if you've worked with...

...entrepreneurs, what are you know,when you're explaining this, do people get it? If not, to like? What are some of the the challenges that you're still facing with, youknow, gaining adoption of this model amongst entrepreneurs. Well, there's three reasonsor someone would not use slicing. By the first reasons that don't get it, and it's my job to do stuff like this and teach people how todo is. I'm got all kinds of resources, written three books on thistopic. I've board games designed and spreadsheets and software and all kinds of waysto get it. Once were games. That sounds like fun. I useit for my classes. You actually you play cards in the different things thatyou contributed to shows you good. So it's on an online game. Myjob in life is a teacher and others works and once you click, whatyou get, what you realize there's only one version of fairness that exists.Then you'll see the slishifis is the best too, of our I cover thatversion of fairness. Sure. The other reasons I wouldn't want to use thisis it is because they're not willing to learn it, and there's lot ofpeople like that. They just don't want to learn. So they knew I'mgoing to angel investor again, my five percent. That's all I want todo, or I'll want to. I want to know where I'm getting,which is impossible because things change all the time. Yeah, but if someone'snot willing to learn, my invested by to walk away from that person.And the third time, which was more interesting, it's someone who does getit. But it is they're intense to take advantage of you. An exampleof this is a is a is a consultant, maybe sort of like andesign or maybe worth Fiftwozero a year and the laws for a hundred thousand dollarsyear in slices and you may not find anything Ale supposed to else. We'rewilling to work for free. What they want? They want to take sizesat a higher rate. Yeah, it's really is take advantage of you,and sometimes you got to. You got to do this. You know,if you're desperate and you need cash, you need to help you or youwill do things. Once you do get to cash, you can replace thatemployers, a lower cost employ but you know that the big barriers are this, this notion that equality changes over time. People have this strong desire to knowwhere they're going to get and you think if they they do. It'scalled a fixed equidis better a fifty splitter, twenty, twenty five, twenty,and anything that they do that, they'll somehow know what they get,but they can't do with the ging. It consis. You're going to change. You can't pickt the future. Any newber you pick in advance, nomatter what it is, no matter how carefully you are, it's going tobe the wrong number because it's not properly reflect your your risk. You know, people know that inherently. The say Gotya. You know, we agreedto fifty. That doesn't matter. It's because we agreed to it as madeit right. What's right is that my share the best. So so,if you have fifty and you don't want to change that, even though I'mtaking a risk in you, that means you're willing to take benefit from myrisk. That's not really fair. Hey, it's Dr Roxy here with a quickbreak from the conversation. Do you want your innovation to succeed, tochange lives, to shape the future of healthcare? I want that for everyhealth innovator, which is why I invented Coyq and evidence based framework to takeyour innovation from an idea to start up to full market adoption. If you'renot sure where you are in the commercialization process, take the free assessment now. At Dr Roxycom backslash score. Don't miss out on impacting more lives justbecause you have a low coiq score. The Free Assessment is at Dr Roxycombackslash score. That's Dr Roxiecom backslash score. And now let's jump back into theconversation. So tell us a little bit more about these resources and webpools that you have that you know our audience may be interested. But importantto remember sizing by his free. It's pretty use. I own some lusherproperty. That everything. There's no license...

...to use slightcy buying your company.There's no barriers. Used as free resources, free videos on what Internet. Youdown at a free version of my sample, my book, this preexcel spreadchees you can download and worksheets and you can get design lawyers that offertemplates and things like that. So there's no cost using sicy pie. Thatbeing said, there's also books you can buy that are more comprehensive and there'ssoftware on my website where you can track your contributions over time, so eachperson can log in and track their contributions. So I worked six hours to dayor I paid for a playing ticket. There was in reinverse for it's kindof the software isn't much better to excel, the same way that quickbooks is better for accounting than excel is for accounting. Sure just helps you. That is going to be one of my next questions. was, youknow, how Comm Lex you know, obviously entrepreneurs are wearing a million differenthats, right, and so time is their most precious asset. So howare they keeping track and making sure that they don't file behind and you know, some of these slices don't get misappropriated, you know, inadvertently over time justbecause it's you know, how are they managing it at all? Well, if someone's working full time, the traditional pay that person is to givethem a salary every every Friday, every month, for instance. So inthe software you'd set up a payroll. It's just said on recurrent contribution ofx summer of hours per week, every Friday. So they're just you're goingto track anything. If you want to track by hour, you can trackby our but most people are used to, you know, tracking their expensive boardfor instance. Hmmm, mostly able are used to tracking payroll. There'sanother on unbelievable things. You know what you had paid and we basis.So you just just trucking things you would truck anyway in regular company. Infact, this feature of the model gives you great insight to with your companiesall about, because if you're not tracking these things, you don't understand yourcost structure. On the biggest mistakes I see entrepreneurs make is, hey,our cost structure is really low, so we're going to charge low prices andthen I've got the competition. But because I'm not tracking with their their noncash, the non non expenditures are, they don't really know the cost oftheir company. Once you fully loaded with salaries, you realize that you can'tcharge a little. I teach our students student teams say we're not getting paid, so you can charge the our price. They'll one, fiftyzero years. Whatyou load up form with thousand dollars in salaries, all of a suddenyou got to sell a hell a lot more units to make them my moneythan to go keeping tracking gives you much more inside of your company and thethings you should be tracking anyway. Okay, so so kind of just weaving intoa little bit more of your experience with teaching entrepreneurship. So I wouldsay probably about sixty percent of our audiences health innovators that are in the trenchesand in some stage of growth of their company. Some of them have justan idea, others are actually in the market place and they're really gaining adoption. Actually, some of them have already exited and now they're on their nextbig thing. And then the other segment of our audiences a lot of likemore of the bigger enterprise, what I would call early adoptor so like thehealth plans, hospital little systems that the innovators are selling to and then keyinfluencers. But it's kind of speaking to your experience with teaching entrepreneurship. Whatare some other lessons or recommendations that you would have for a health innovators thatare listening today? Own it comes to investments and equity and things that isoften illectual property. It goes along with help with health innovation and the wholeidea, but it's Ni redial worth is a really important thing to think about. People who have ideas for businesses often think that our ideas are worth billionsof dollars and you'll see this in the check transfer and universities. You know, I have an idea for a new medical device, and so I wantyou to develop that, I'll give you five percent of the equity and I'llkeep ninety five percent do nothing. It's extremely common that it thinks properly valueingidea in a chart. I was really important is discipline. Ideas have valueif there're somehow fixed in space and form...

...of a copyright, a trademark,a patent or some kind of trade secret, and as we developed now, that'sworth something. If it's fixed in space and licensible to somebody, thenit's worth with the license is worth. So if I have an idea formedical advice, I wantched oar new company and I could. I could liethe deviser for five percent on revenues. Then that's the fair market value theidea. Okay, though it's nice about that is I lies the idea tothe start up thinking to pay me cash or you slices in the Pie.If they can't baby, if they pivot away from my idea, that meansbut I didn't work and because I was paying a royalty the drug, Idon't get a royalty because idea don't work. It can starts pivot all the time. It's I give a big chunk of equity, random number of eculdyou check for idea and then I pivot away from that idea. I gotsome you gave me a bad idea. Who has a chuck of Equity inthe company? Right, but we got to think of the terms of what'swhat's the license? What's the royalty to dead? If I can't find anybodyto pay for my idea, is probably not worth something. You know,if I have an idea and there's no, no, no one afther's the licensein, it's worthless. Things are either with they don't. Ever,if if I can ask you in a price to ether worthless or its priceless. Either way, I'm getting stuck. Yep, the other thing, butideas is it's usually our job to have good ideas. So if I'm goingto start up team and I cam tracking my salary, that are not gettingpaid size you by having good ideas. It is my job. So youknow, you us not get a royalties for job ideas. Have on ajob that used to work in the fishing tackle box industry and it was myjob to have awesome ideas and I invented new products that people use all ofthe world. But I don't get a royalty on that because it is myjob. Become with I was the marketing VP, so you just part ofmy job. So it's a value of ideas. The second thing that cancombined. Who comes to healthcare, is usually once you at a certain point, it needs a lot of capital. So start ups, you know,many, a lot of capital right up front. So slicy by is goodfor this. This early days before you raise capital. When you raise capitalor raise break even, you can pay people their contributions for the contributions andyou don't need equity. So if I I have this, you know Ihave a team of people at work for me. I pay them full marriageposts, fair market sal and they don't get equity. That's fine with thembecause they didn't pay people m once you raise the money, you don't needto use equitting. Your coming to in providing sentences. That's the big safepeople make is a hard people do need. Gives them equity. Iquiting you startwas like equity any other company. If I get paid a phone fairmarket salary, I can determine what I do with that salary. I canput in the bank, I can spend it on Cheetos or I can investit in stock market investments. So investigate. It's the same decisions to the plyto my startup equity. If I'm not willing to buy the equity withmy salary or my income, then it's not worthy to me. So giveme to me. Isn't worthwhile. So thin it's pretty bill to think about. The third thing that keep in mind is this this idea or a bigcompanies want to invest in R and d through the startup community. So I'ma big you know big. I'm a bit labs and I want to investin startups to get the electro property from the order to find good ideas.Slicey pie is a wonderful tool for doing that because it allows you to dois just you have your fund and all I use pay people's bills on theway. You join a company. As you pay their bills, you getslices in the Pie and if you like them and things are going well,you keep paying their bills and keep running equity and get him to break even. If you don't like him, you just stop working with them. Butthat a Voye is this whole? This whole a song and dance it atthe pitch and negotiating terms and giving chunks of cast that it is sped throughand then having dead equity. So traditional equity models are difficult to manage theearly stages because it require this big commitment from an angel investor. Commitment forthis is pland pitch, if you like, a team slicing bothers is just startinginvesting the immediately. So so you know, it's interesting. I'm startingto see a growing number of health innovators...

...who are wanting to kind of avoidthe traditional funding route and self fund, in kind of adopt more of theslicing pile model and in really just kind of weather through that storm being bootstrappedfor years and until they're actually start generating revenue and cash flow and just avoidit. What do you what did your thoughts on that? Well, atraditional model. I got a guy I have a hundred percent I can giveaway. If I start choking you a little bit to that. Once aHunterson is gone, it's gone. And so if I give you five percentfor your marketing efforts and I give you my landlord two percent freevorite, Ijust keep to one of the is it's a fun eye resource. Yep.So I chunk it away and Chokolo and that makes it very difficult. wasslicing by I can at an end. There's number of slices to the Pieand I would knows they get exactly the deserve. So I can acquire theresources I need for much longer period of time before I run out of juice. For instance, Fussy buys a much, much more logical way to divide itequity, because if I'm don't pay for someone for a contribution, Ijust use slices in the whole time I'm making good financial decisions. I don'tgo on rent ten thousand dollar month for office place. I don't. Right, right, I'll just keep you know and then the spending continues enjoining onall your need it. So it gives people a longer ramp up period forfor boot stopping as much easier tool to use because no matter what changes,you're always be fair, and also gives you the size of your pie.Gives you an idea of what kinds of contributions were necessary to get to youwhere you are today. So you realize you have ten million slices in yourpie to get your MVP. That's pretty expensive to get to an MVP.So you got to be very care of moving forward. It gives you agood decision. I you tools. Sure, yeah, that's great. So isthere anything else that you would want to share with our listeners? Theimportant thing to keep in mind about equity splits in boots start companies is thatthere's only one version of fairness. If Our dad gives us a cookie,you and I were, now our sistant brother. He says split it up. Kids the only fair winners. But the cookies fix fifty right, breakin half. I break and have you pick which half you want. Rightnow. I could give you my half the cookie, but my generosity doesmake it more fair. Right. You could steal my half the cookie.You agreed is make it more fair. Sorry, there's fifty now. Ifyou bought the cookie, you can do whatever you want with it. IfI bought to get you. So so there's only one version of fairness.There's no ways puts cookie, and once you keep that in mind you'll realizethat when you are with a company that's a determined as a possibility. Soany other method, is the model I use, is by definition going tobe unfair because it's it's an alternative to the true one fairness. There isso keeping that in mind. I hope your listeners will take the time tolisten to just like to look slicy pie is a for example on my website, slifycom, and give it a chance, because he definitely works. It's workedall over the world. Were just slaunch slicy pies dot ir and Iran no way. Example. It's been transferred to transcended versions or even invery different cultures and economy, economies and works. Just said, it's onlyone virgins a universal model. Are you seeing that's interesting. Are you seeingkind of adoption of the model more prevalent in the markets versus others, orsome countries versus others or some verticals? I don't I don't know if anyinstance is in North Korea, but that transcended over a dozen different languages.I got lawyers all of the world who do it. Yeah, it alwaysworks exactly the same. amoutter whether what happens. It's it's universals. Soif you're based in you know to say it's you can work people India.You's an exact same model. Is always the same. So it always works. Lawyers estimate that the ones that I talk to you and I talked toa lot of lawyers this with. It's sixty eighty percent of all the equitydeals. They do wind up and dispute...

...their cards legal intervention. That meansthe chance of US winding up hiring lawyer to fix our request, but it'sgreater than the chances been not happening. Right ten years or has at launchslicing pie, it's been used all of the overby thousands of startups. Ihave yet here of a single instance that Clisif I couldn't solve the problem forthat's incredible. I love the work that you're doing and I think it's sorelevant to our listeners. Thank you so much for sharing your wisdom with ustoday. So how can folks get a hold of you? I know youtalked about the website, but what if they want to connect with you?Sizing ficoms the website. If you fill the form of the contact forum myguys is forwarded to me, or they get you on me at Mike atsliceyfycom. Awesome. Thank you so much, Mike. You're welcome. Thank you. Thank you so much for listening. I know you're busy working to bringyour life changing innovation to market and I value your time and your attention. To save time and get the latest episodes on your mobile device, automaticallysubscribe to the show on your favorite podcast APP like apple podcast, spotify andstitcher. Thank you for listening, and I appreciate everyone who's been sharing theshow with friends and colleagues. See You on the next episode of Coiq.

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