Health Innovators
Health Innovators

Episode · 2 years 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 learn how health innovators maximize their success. You're working on something big, something life saving, something world changing. Yet ninety five percent of health innovations fail and real lives are on the line. That's why launching is not enough. Commercialization is the most critical, yet overlooked stage of the innovation process. Through candid conversations with health innovators, early adopters and influencers, you'll learn the five components of the COIQ early adoption strategy. So, if you want to change lives and dominate your market, why not give your innovation the best chance to succeed? I'm your host, Dr Roxy, founder of Legacy DNA and international bestselling author of how health innovators maximize market success. And now let's join the conversation and maximize your success. Welcome back coiq listeners. On today's show I have Mike Moyer with me. He is the author of slicing Pie, and today we're going to be digging a little bit deeper into what is slicing pie and how does it impact or how can health innovators benefit from this conversation and benefit from his book? Welcome to the show, Mike. Thank you very much for having me. So tell our audience. Before we dig any deeper, tell our 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 to real job, to startups to real job, back and forth. I've worked in all kinds of industries, ranging from fine wine to motor home chassis to see your living to fishing tackle boxes. Sow. That is diverse. There is it worked. In six or eight years I've run a copy called fair and square ventures, where I've gone written number of books and run some software companies, ever camping gear company. And I teach a University of Chicago or a northwestern university, and Previously University of Chicago is a school nice. We teach entrepreneurship, of course. Huh. So what is slicing pie? Slicing Pie is an equity model for early stage, boost JUP startups. So one of the key problems that were the first deals a founders do is a deal between each other and typically what happens is you and I would do a start a company together and we'll go in fifty because we're friends, and then you do all the work and I own have the company. HMM. And this is the common problem all over the world. And slicypie solves the problem by creating a perfectly directors. But it's the only model on the planet that actually creates the directors. But every other every other methods we're studying, equity creates not unfairst. But so you know, this topic is seems to be a really hard and emotional topic for health innovator. Won't for any entrepreneur, but you know, in the context our listeners are health innovators. So explain to us a little bit about you know, how does your model help us work through some of that difficulty and the emotions of giving a piece of your company away? Well, it's hard because it's very ambiguous and we struggle between our want to be our need to be generous with each other and our need to be 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 complicated problem. 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 a team, not as opponents for the team, and we're going to split the winnings fifty because we're friends. So you go to Las Vegas, we each put a dollar on the same hand a...

Black Jack. We don't know if we'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 is unknowable. 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't really in our favor, but we're still playing. So the dealer deals two races. So what do you do those aces? Split them, split them and doubled on. Right, I'm out of cash in your not so you've been two more dollars down. So you've got three dollars and I've only been a dollar. We still have no idea what the future holes. You don't know if we're going to win, how much we're going to win. Our last going to the future still just as a noble as was before, or still ob domestic, but we know if going for sure. Those are you bet 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 getting the extra twenty five percent. You Bet, you Bett three dollars. Other of doors, I see twenty five percent. You shoot three seven percent. Show as a logical, obvious, on ambiguous answer based on the facts of the case. There's no other way to split it. I have a deal for fifty. I could sue you and probably win. That may be fair. Right, it's fair as at your share. The winnings should be based in your share of the bets. So startups are exactly the same thing. Instead of being on cards, are betting on ideas. We bet our time and 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 paid that amount. They are not paid as equal to the fair market value that contribution and that repudents are bet. So when you bet your time, you're betting 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 dollars a year and you work for me for a year, you bet a hundred thousand dollars unpaid conversations, but I don't pay you. If you put in your tractor and the throw of Twenty Five, you've bet twenty Fero with a 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 you think about that way, all you got to do is keep track of the bets and you know exactly you. I could should be as the basic scizing five. 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, because that makes that makes it easy to understand the slicing pie model, but let's talk about like a real world example. How are you fairly using your model to spread equity amongst different players and different types of players? So there's three basic kinds of contributors to start company. Patres, the startup team, which I call a grunt. It's called a grunt fund. Sometimes start up team 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 the startup team member and you can call them a founder or early employ whatever you want. If someone's contributing and not getting paid, their placing bets just like anybody else. So I can call you my employee, but if you're placing 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 too small to funde operations the foreseeable future. So chunks of cash, Tenzero, twenty, thousand, Thirtyzero, hundred, thouand small trunks of Gosh, my own money. The third type of investors professional investor, who invest large chunks of money, of other people's money, and junks that are large enough to fund it operations that are usually own as a VC. Those are the three types of equity investors. Now there's credit card, that and thread and not all kinds about things. There's investors. So anyone participating the company and then contributions 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 equity company. Right, HMM, he's just getting paid. In fact, that that's how most people work, is get paid and that's that. But if you're not getting paid, you huge deserves ruggle. Equity that it's based on your bet. An Angel investor should always get a convertible note. Convertible note is one that is basically a loan that, a certain point the future, turns into equity at the terms of the first major round of funding. It's important is because if you set a price for your equity too early, you create all kinds of problems, and a lot of people give their mom five percent for five thousand dollars, for instance. Right, give the early investor when I sell five percent for five thousand dollars, I just implied, and my companies worth a hundred thousand dollars. That makes sense. HMMMM. So now when I give up what a future equity grants if you can be taxed at as income is as a price. Now, plus, I basically create a 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 based my 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 holders will delude appropriately on equal footing. So I went in the got in the same 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 got to do is keep track of what I contribute. Now a lot of startups going to do that. They don't keep track of their expenses because they don't have 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 you run a company, strick music is not very hard. So all you, yeah, you're not paid that, you'll all do your bit. So what'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 seriously or break even. So the stud changes over time, which based all people uncomfortable. But you think about it all, I could just let's change, because if you go on five and fifty, we're going to adjusted it sooner or later. HMM, okay, y'all is guarantee. Did you always have a deserve? So? So, if I'm a health innovator and I want to hire a consultant to help me with commercializing my innovation, might go to market strategy, maybe product development, any of those things that this consultant's going to help me with, and I of course I've imagined that. It depends on the status of the funding of the company. But what do you do when there's a scenario where there's some financial compensation and then there's the balance or there's a difference in equity? You don't know the equity yet because you're not giving equity where yet. You just tracking the Pie and it is based on the unpaid portion. So the consoles a hundred dollars an hour and you pay them fifty an hour. They're betting fifty. Now, okay. Always ask you some the same question. If I was going to pay this person a full fair market wage or of conversation, what would I pay? Make a good 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 all or part of it. I use slices. So slices. If there a poker chip, 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 contribute something, your betting something. I'm going to keep tracked by allocating slices in my pie and when the postops, community slices will determine rectories. But based on 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, you know, gaining adoption of this model amongst entrepreneurs. Well, there's three reasons or 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 to do is. I'm got all kinds of resources, written three books on this topic. I've board games designed and spreadsheets and software and all kinds of ways to get it. Once were games. That sounds like fun. I use it for my classes. You actually you play cards in the different things that you contributed to shows you good. So it's on an online game. My job in life is a teacher and others works and once you click, what you 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 that version of fairness. Sure. The other reasons I wouldn't want to use this is it is because they're not willing to learn it, and there's lot of people like that. They just don't want to learn. So they knew I'm going to angel investor again, my five percent. That's all I want to do, 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's not 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 get it. But it is they're intense to take advantage of you. An example of this is a is a is a consultant, maybe sort of like an design or maybe worth Fiftwozero a year and the laws for a hundred thousand dollars year in slices and you may not find anything Ale supposed to else. We're willing to work for free. What they want? They want to take sizes at 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 you will do things. Once you do get to cash, you can replace that employers, 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 know where they're going to get and you think if they they do. It's called 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, no matter what it is, no matter how carefully you are, it's going to be the wrong number because it's not properly reflect your your risk. You know, people know that inherently. The say Gotya. You know, we agreed to fifty. That doesn't matter. It's because we agreed to it as made it 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'm taking a risk in you, that means you're willing to take benefit from my risk. That's not really fair. Hey, it's Dr Roxy here with a quick break from the conversation. Do you want your innovation to succeed, to change lives, to shape the future of healthcare? I want that for every health innovator, which is why I invented Coyq and evidence based framework to take your innovation from an idea to start up to full market adoption. If you're not 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 just because you have a low coiq score. The Free Assessment is at Dr Roxycom backslash score. That's Dr Roxiecom backslash score. And now let's jump back into the conversation. So tell us a little bit more about these resources and web pools that you have that you know our audience may be interested. But important to remember sizing by his free. It's pretty use. I own some lusher property. 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. You down at a free version of my sample, my book, this pre excel spreadchees you can download and worksheets and you can get design lawyers that offer templates and things like that. So there's no cost using sicy pie. That being said, there's also books you can buy that are more comprehensive and there's software on my website where you can track your contributions over time, so each person can log in and track their contributions. So I worked six hours to day or I paid for a playing ticket. There was in reinverse for it's kind of the software isn't much better to excel, the same way that quick books is better for accounting than excel is for accounting. Sure just helps you. That is going to be one of my next questions. was, you know, how Comm Lex you know, obviously entrepreneurs are wearing a million different hats, right, and so time is their most precious asset. So how are 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 just because 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 give them a salary every every Friday, every month, for instance. So in the software you'd set up a payroll. It's just said on recurrent contribution of x summer of hours per week, every Friday. So they're just you're going to track anything. If you want to track by hour, you can track by our but most people are used to, you know, tracking their expensive board for instance. Hmmm, mostly able are used to tracking payroll. There's another 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. In fact, this feature of the model gives you great insight to with your companies all about, because if you're not tracking these things, you don't understand your cost 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 and then I've got the competition. But because I'm not tracking with their their non cash, the non non expenditures are, they don't really know the cost of their company. Once you fully loaded with salaries, you realize that you can't charge 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. What you load up form with thousand dollars in salaries, all of a sudden you got to sell a hell a lot more units to make them my money than to go keeping tracking gives you much more inside of your company and the things you should be tracking anyway. Okay, so so kind of just weaving into a little bit more of your experience with teaching entrepreneurship. So I would say probably about sixty percent of our audiences health innovators that are in the trenches and in some stage of growth of their company. Some of them have just an 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 next big thing. And then the other segment of our audiences a lot of like more of the bigger enterprise, what I would call early adoptor so like the health plans, hospital little systems that the innovators are selling to and then key influencers. But it's kind of speaking to your experience with teaching entrepreneurship. What are some other lessons or recommendations that you would have for a health innovators that are listening today? Own it comes to investments and equity and things that is often illectual property. It goes along with help with health innovation and the whole idea, 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 billions of 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 want you to develop that, I'll give you five percent of the equity and I'll keep ninety five percent do nothing. It's extremely common that it thinks properly valueing idea in a chart. I was really important is discipline. Ideas have value if 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's worth something. If it's fixed in space and licensible to somebody, then it's worth with the license is worth. So if I have an idea for medical advice, I wantched oar new company and I could. I could lie the deviser for five percent on revenues. Then that's the fair market value the idea. Okay, though it's nice about that is I lies the idea to the 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 means but I didn't work and because I was paying a royalty the drug, I don'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 eculd you check for idea and then I pivot away from that idea. I got some you gave me a bad idea. Who has a chuck of Equity in the company? Right, but we got to think of the terms of what's what's the license? What's the royalty to dead? If I can't find anybody to 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 license in, 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, but ideas is it's usually our job to have good ideas. So if I'm going to start up team and I cam tracking my salary, that are not getting paid size you by having good ideas. It is my job. So you know, you us not get a royalties for job ideas. Have on a job that used to work in the fishing tackle box industry and it was my job to have awesome ideas and I invented new products that people use all of the world. But I don't get a royalty on that because it is my job. Become with I was the marketing VP, so you just part of my job. So it's a value of ideas. The second thing that can combined. 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 good for this. This early days before you raise capital. When you raise capital or raise break even, you can pay people their contributions for the contributions and you don't need equity. So if I I have this, you know I have a team of people at work for me. I pay them full marriage posts, fair market sal and they don't get equity. That's fine with them because they didn't pay people m once you raise the money, you don't need to use equitting. Your coming to in providing sentences. That's the big safe people make is a hard people do need. Gives them equity. Iquiting you start was like equity any other company. If I get paid a phone fair market salary, I can determine what I do with that salary. I can put in the bank, I can spend it on Cheetos or I can invest it in stock market investments. So investigate. It's the same decisions to the ply to my startup equity. If I'm not willing to buy the equity with my salary or my income, then it's not worthy to me. So give me 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 big companies want to invest in R and d through the startup community. So I'm a big you know big. I'm a bit labs and I want to invest in 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 do is just you have your fund and all I use pay people's bills on the way. You join a company. As you pay their bills, you get slices 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. But that a Voye is this whole? This whole a song and dance it at the pitch and negotiating terms and giving chunks of cast that it is sped through and then having dead equity. So traditional equity models are difficult to manage the early stages because it require this big commitment from an angel investor. Commitment for this is pland pitch, if you like, a team slicing bothers is just starting investing the immediately. So so you know, it's interesting. I'm starting to see a growing number of health innovators...

...who are wanting to kind of avoid the traditional funding route and self fund, in kind of adopt more of the slicing pile model and in really just kind of weather through that storm being bootstrapped for years and until they're actually start generating revenue and cash flow and just avoid it. What do you what did your thoughts on that? Well, a traditional model. I got a guy I have a hundred percent I can give away. If I start choking you a little bit to that. Once a Hunterson is gone, it's gone. And so if I give you five percent for your marketing efforts and I give you my landlord two percent freevorite, I just 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. was slicing by I can at an end. There's number of slices to the Pie and I would knows they get exactly the deserve. So I can acquire the resources 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 it equity, because if I'm don't pay for someone for a contribution, I just use slices in the whole time I'm making good financial decisions. I don't go 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 on all your need it. So it gives people a longer ramp up period for for 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 you where you are today. So you realize you have ten million slices in your pie 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 a good decision. I you tools. Sure, yeah, that's great. So is there anything else that you would want to share with our listeners? The important thing to keep in mind about equity splits in boots start companies is that there'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, break in half. I break and have you pick which half you want. Right now. I could give you my half the cookie, but my generosity does make it more fair. Right. You could steal my half the cookie. You agreed is make it more fair. Sorry, there's fifty now. If you bought the cookie, you can do whatever you want with it. If I 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 realize that when you are with a company that's a determined as a possibility. So any other method, is the model I use, is by definition going to be unfair because it's it's an alternative to the true one fairness. There is so keeping that in mind. I hope your listeners will take the time to listen 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 worked all over the world. Were just slaunch slicy pies dot ir and I ran no way. Example. It's been transferred to transcended versions or even in very different cultures and economy, economies and works. Just said, it's only one virgins a universal model. Are you seeing that's interesting. Are you seeing kind of adoption of the model more prevalent in the markets versus others, or some countries versus others or some verticals? I don't I don't know if any instance is in North Korea, but that transcended over a dozen different languages. I got lawyers all of the world who do it. Yeah, it always works exactly the same. amoutter whether what happens. It's it's universals. So if 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 to a lot of lawyers this with. It's sixty eighty percent of all the equity deals. They do wind up and dispute...

...their cards legal intervention. That means the chance of US winding up hiring lawyer to fix our request, but it's greater than the chances been not happening. Right ten years or has at launch slicing pie, it's been used all of the overby thousands of startups. I have yet here of a single instance that Clisif I couldn't solve the problem for that's incredible. I love the work that you're doing and I think it's so relevant to our listeners. Thank you so much for sharing your wisdom with us today. So how can folks get a hold of you? I know you talked 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 my guys is forwarded to me, or they get you on me at Mike at sliceyfycom. Awesome. Thank you so much, Mike. You're welcome. Thank you. Thank you so much for listening. I know you're busy working to bring your 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, automatically subscribe to the show on your favorite podcast APP like apple podcast, spotify and stitcher. Thank you for listening, and I appreciate everyone who's been sharing the show with friends and colleagues. See You on the next episode of Coiq.

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