This month, I chose Outpost 18, an 18-card 2-player sci-fi game. Looks like a fun game to play with my son.
Creating a game can easily lead to starting a new company. Once you’re talking about that, how do you decide how much of that company belongs to you, any partners you have, and any workers you can’t afford to pay?
This a summary of the book, “Slicing Pie”, by Mike Moyer. I was intrigued by this book since it is promised to help with the complicated process of splitting up the equity of your new company.
The problem, according to the book, is that when you try to split your company by percentage, it almost always leads to resentment. How do you value the person who does most of the work versus the person whose house you work at versus the person who invests most of the money?
Mike Moyer’s solution is to “slice the pie”. Here’s some of the key concepts that explain what’s involved with that:
- Ideas are worthless by themselves. Not until work has begun does it start to have some value.
- Before you have investors, each person gets a dollar-based portion of the company, depending on their contribution.
- Each person is “paid” (with equity) for the work they do according to a mutually agreed upon hourly rate. As a rule of thumb, that pay will be twice as much (2x) as they’d get if they were paid with cash. This makes up for the risk they are taking that, should the company fail, that work will remain unpaid.
- Each person is paid the market value for typical equipment, supplies, and rental space used for the business. If it’s something that you could get anywhere, the value is just 1x.
- Cash investments are paid at 4x since that is money that could be lost. However, loans that must be repaid with cash do not get any equity, they are just repaid at regular interest.
- Percentage ownership of the company can be computed at any time by using the above rules of thumb. That could mean that one month one partner could own a majority and then next month a minority, based on participation and investment.
- The book also has great tips on how to handle partners leaving for various reasons and other complex situations.
Look for Mike Moyer’s “Slicing Pie” at your favorite bookseller.