CFD 548 – The Slicing Pie Model of Funding Your Company

Mike Moyer is the author of the bestselling books Slicing Pie: Fund Your Company Without Funds, and the new book Bird’s Eye Business: A Primer on How Companies Work. He is an Adjunct Professor of Entrepreneurship at Northwestern University and the University of Chicago Booth School of Business. 

Moyer is an entrepreneur who has started a number of 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; College Peas, LLC which provides publications and consulting on college admissions; and Trade Show Samurai, LLC a company that teaches trade show exhibitors how to capture lots and lots of leads. 

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. He has taught entrepreneurship at both Northwestern University and the University of Chicago.  

Podcast Highlights

  • Who is Mike Moyer? 

Mike got the entrepreneurship bug in high school, he wanted to be a veterinarian and was keeping and healing animals in his backyard. One day he found himself as the owner of 24 baby rabbits and had to do something with them, so he took them down to the state fair. His aunt suggested that he sell them for $25 each and he sold them all in a matter of hours. That put him on the path to starting his own clothing manufacturing company in college and a number of other companies since then.

Mike pivoted from the veterinarian career path due to poor grades and his parents subsequently refusing to pay for his schooling. Instead of finding a job Mike started a clothing company to pay for his education and he ended up selling the business after he graduated. 

Mike values both education and practical experience. Education saves you a lot of time doing your own work and Mike spent much of his time split between startup companies and established companies. A combination of all three has been very useful in building Mike’s later businesses.

  • Real Jobs, Real Companies, and Startups 

At a real job you’re getting paid for your work and that’s pretty much it. With a startup you are basically betting on the future of the company, and until that company starts generating revenue and profit it doesn’t qualify as an asset.

With a bootstrap company the way you get started in the early days is by not paying the bills. What this means is that for an employee who would normally be paid $100,000 a year they are basically betting that salary on the success of the company. For those employees, their share of the equity in the company should be proportional to the size of their bet, the challenge is that it’s very hard to know the value of the entrepreneur’s idea.

In the grand scheme of things, a person capable of execution is comparatively rare to the accessibility of capital in the beginning stages of a business. 

An idea is simply an intention to do something. Without the actual value created through production, the intention isn’t worth anything. 

  • Slicing Pie And Your Business

People are much more accustomed to negotiating fair market value rather than future value. When it comes to equity, it can’t be determined accurately until the company is either funded through Series A investing or it reaches the breakeven point. Mike has created a framework named Slicing Pie that businesses can use to figure out the fair valuation and equity share of all partners.

Slicing Pie uses a tool called a Slice that essentially marks the fact that a bet has  taken place. When someone is just contributing capital to a company the framework accounts for the after tax and scarcity of the cash by giving the person four Slices for every dollar contributed. The point is to provide the right incentives and alignment for everyone participating. By allocating Slices over time you can prevent everyone’s risk from becoming unbalanced.

Slices are like poker chips, all they do is keep track of the bets. They help determine ownership until there is either valuation or cash flow. 

  • Slicing Short Term Rentals

Slicing Pie is a financing tool for short term liabilities. In that scenario the unknown variable is the ability of the operator to make the venture work. With short term rentals the operator should be assigned a salary, so if the business breaks even after 60 days and starts being cash positive, the balance of Slices will be pretty lopsided towards the person who contributed the capital. 

In real estate, since we’re dealing with relatively known entities it usually makes more sense to use debt financing as opposed to equity. When you do equity financing, the cash is what matters.

Slicing Pie can also apply to other expenses that you can’t pay, like a lawyer’s fee. You can take that fee and assign it a Slice value that gives the person a share of equity. The beauty of the Slicing Pie model is that it’s a universal one size fits all model for the allocation or recovery of equity.

  • How do you determine the value of the entrepreneur’s time?

The way you pay someone in the real world is the same way you would pay them with Slicing Pie. Once you start paying the operator a salary, the remaining is profit and would be reinvested into the business or paid out as a dividend to the shareholders according to the Slices allocated. With Slicing Pie, the investors shouldn’t be upset that they’re getting diluted down because the value of their bet is still represented properly.

Once you’re faced with fairness, the only thing you have operating for yourself is your willingness to be a jerk.

The origin of the Slicing Pie model came from personal experiences on both ends of a deal for Mike. Traditional equity splits fail at a rate of 60-80%, which means your odds are pretty high that you will end up fighting with your co-founders.

You should always be projecting forward into time with your business but that is still just a variable until it’s real. Until the day you can pay everyone in the business, the bets keep happening. 

There are three reasons someone won’t use Slicing Pie: they don’t get it, they aren’t willing to learn it, and the third reason is they do get it but they still want to take advantage of you. In the third case, if your deal is good you should walk away because you will find another investor that’s interested. Sometimes walking away is your best option.

Reference: Bird’s Eye Business: A Primer on How Companies Work, Mike Moyer

  • Mike’s Takeaway

The first thing is to figure out is if you’re getting what you deserve to get. If not, you’re taking an unnecessary risk to benefit somebody else. It’s easy to figure out if you’re getting screwed or not by adding up the contributions, and that will teach you if you should keep going with that company. Make sure the job you’re in is compensating you what you should be compensated, if not you should find something else. 

Links:

SlicingPie.com

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