Slicing Pie - Funding Your Business Without Funds

1. Equity allocation in startups is often flawed, leading to unfairness and resentment

"Ask an old entrepreneur about the bad times and he will tell you how he was burned by a partner or an investor or a co-worker. The story is always the same."

Equity allocation pitfalls. Traditional methods of dividing equity in startups often lead to problems:

• Slicing the pie before it's baked: Founders predetermine equity splits without knowing future contributions.
• Slicing the pie after it's baked: Leads to arguments and feeding frenzies over perceived value.
• Fixed splits: Fail to account for changing roles and contributions over time.

These approaches frequently result in:

• Resentment among team members
• Lack of motivation
• Strained relationships
• Potential company failure

The importance of fairness. Treating all team members fairly is crucial for:

• Maintaining trust and motivation
• Fostering a positive work environment
• Increasing chances of startup success

2. The Grunt Fund: A dynamic equity split model for fair compensation

"Fairness is More Fun."

Dynamic equity allocation. The Grunt Fund model offers a solution to traditional equity splitting problems:

• Allocates equity based on relative, theoretical value of contributions
• Adjusts continuously as the company evolves
• Provides motivation for ongoing contributions

Key features of the Grunt Fund:

• Uses "pie" instead of actual equity during early stages
• Allows for flexible allocation based on changing needs
• Promotes fairness and transparency

Benefits of the Grunt Fund:

• Reduces conflicts over equity
• Encourages ongoing commitment from team members
• Adapts to the rapidly changing nature of startups
• Facilitates easy addition or removal of team members

3. Calculating theoretical value: Time, money, and other contributions

"All pie is created equal."

Valuing contributions. The Grunt Fund assigns theoretical value to various inputs:

Time:

• Calculated using Grunt Hourly Resource Rate (GHRR)
• GHRR = (Base annual salary x 2) ÷ 2000
• Travel time valued at ½ GHRR

Money:

• Cash contributions valued at 4x the amount
• Personal credit used by company valued at 4x if paid by individual

Other contributions:

• Business-enabling equipment: Purchase value or resale value
• Intellectual property: Development hours x GHRR + costs
• Relationships: Unpaid commissions x 2

Maintaining fairness. The model accounts for different types of contributions while ensuring equitable treatment of team members.

4. Implementing a Grunt Fund: Steps and considerations

"To implement a Grunt Fund, follow these simple steps: Appoint a Grunt leader, Assign a theoretical relative value of the ingredients provided by the various Grunts, Calculate the possible equity whenever you need to based on the percentage of value contributed by each Grunt."

Setting up the fund. Key steps in implementing a Grunt Fund:

1. Appoint a leader to manage the fund
2. Establish clear rules and expectations
3. Track contributions meticulously
4. Calculate equity percentages regularly

Considerations:

• Calibration: Adjusting theoretical base value to reward early contributors
• Pie partitioning: Isolating a portion of equity for founders
• Outgrowing the fund: Transitioning to formal equity structures as the company matures

Building trust. The Grunt Fund relies on mutual trust and commitment to fairness among team members.

5. Handling departures: Fair treatment of exiting team members

"When a Grunt leaves the herd, either by choice or by force, great care must be taken to treat the Grunt fairly."

Types of departures:

1. Resignation without cause
2. Resignation with good cause / Termination without cause
3. Termination with cause

Fair treatment guidelines:

• Resignation without cause: Forfeit pie earned through time, recalculate other contributions without multipliers
• Resignation with good cause / Termination without cause: Maintain pie minus severance payments, company retains buyback option
• Termination with cause: Treat as resignation without cause, plus non-compete agreement

Importance of fairness. Treating departing team members fairly:

• Maintains positive relationships
• Preserves company morale
• Reduces potential legal issues
• Upholds the company's reputation

6. Legal and tax implications of Grunt Funds

"To help you get the most out of your Grunt-Funded company you will want to discuss liability, ownership rights and taxation with your lawyer."

Legal considerations:

• Forming a legal entity (LLC or Corporation)
• Protecting intellectual property rights
• Establishing ownership of assets

Tax implications:

• LLCs: More flexible for Grunt Funds, allows profit distribution based on pie percentages
• Corporations: Trickier, but possible with restricted stock and 83(b) elections

Importance of professional advice:

• Consult with Grunt Fund-friendly lawyers and accountants
• Ensure compliance with legal and tax regulations
• Protect the interests of all team members

7. Case studies: Practical applications of the Grunt Fund model

"Grunt Funds are all about action."

Real-world examples. Case studies illustrate the practical application of Grunt Funds:

John's Bicycle Attic, LLC:

• Shows how the model adapts to changing partner commitments
• Demonstrates fair handling of partner departures

PhoneMatcherator.com, LLC:

• Highlights the pitfalls of traditional equity allocation methods
• Contrasts with the fairness and flexibility of the Grunt Fund model

Key lessons:

• Grunt Funds adapt to evolving business needs
• Fair treatment of team members is crucial for success
• Dynamic equity splits prevent resentment and motivational issues

Last updated: November 17, 2024