Most employed people do not receive equity as part of their compensation package and are perfectly happy as long as they feel they are being paid what they deserve. The “perfectly happy” price is the fair market value of their time as long as their work for the startup is similar to what they would do for someone else at a fair market rate.
For example, if a person is “perfectly happy” making $50,000 a year as a marketing executive, they should be willing to accept a similar amount for similar work at a startup (to be paid in Pie). However, if that person is leaving their job as a marketing executive to flip burgers at a burger startup, the fair market rate would be the rate at which the person would otherwise be paid to flip burgers at a similar establishment. Big companies, like McDonalds or In ‘N’ Out Burger, are likely to have a significant influence on the fair market rate for burger-flippers.
A Slicing Pie salary negotiation, therefore, is like any other salary negotiation. A manager should ask herself, “If I could pay cash for this person’s services, how much would I pay?” A potential employee should ask himself, “If this company paid me and did not give me equity, how much would I be perfectly happy to accept?” If there is overlap between these two numbers, a deal can be struck; if not, you can part ways as friends.
When the company eventually has enough money to pay people for their services, it can pay part or all of the salary and reduce, or eliminate, the allocation of slices. This isn’t the same things as buying back slices; it just reduces the amount of additional slices the person would deserve going forward. For instance, if you paid $20,000 of a fair market salary of $50,000, the person would be risking $30,000. The more cash you pay the less risk the person takes and the fewer slices are allocated for the time she contributes. If you pay 100% of her fair market salary she would contribute zero slices.
Once you agree on the fair market salary for your job, you will want to convert the annual salary into an hourly rate. Do this by dividing the entire amount by 2,000, which is roughly the number of working hours in a year (40 hours times 50 weeks). I assuming at least two weeks of vacation time.
On a side note, I recommend an open vacation policy. This means people can take as much time off as they need as long as their work is getting done. This not only treats people like adults who can manage their own time, but also it avoids the problem of managing slices for paid time off.
In most cases, the amount of time people spend on the startup varies dramatically. It is not uncommon for some founders to spend 80 hours a week while others spend less than 10 as they juggle startup work with their day jobs. It is for this reason that you have to create an hourly rate. Participants will simply track the hours they spend working to determine the fair market rate of their contribution of time:
Fair Market Value of Time = Hours x Hourly Rate
You can also calculate a Slices Per Hour which will show you how many slices you contribute with every hour you contribute:
Slices Per Hour = Hourly Rate x Non-Cash Multiplier
This is the part of the program that some people find concerning (sometimes). The first thing that people don’t like about this calculation is the thought of tracking their time. Most people, including me, don’t like tracking their time. However, few things will give you better insight into what is going on with your startup company than a time report. If you don’t know what people are spending time on, then you probably don’t have a good handle on your business.
Most time-tracking systems, including the online Pie Slicer, will ask for notes on what was done during the time logged. Your time log reports are an excellent coaching tool for helping people better manage their time and become more productive.
Not long ago, I spoke to an entrepreneur who was frustrated with his company’s inability to generate revenue—a common complaint among startups. Because he was using the Slicing Pie Model, he had fairly detailed records of his time. A quick review of the reports showed that very little of the teams’ time had been spent on selling. Most of their time had been spent on development, customer service, research and other administrative tasks. They turned their attention to getting out and selling and within a few weeks they had some new customers. Without a good understanding of how time was being spent, this guy may still be scratching his head.
The next thing that people worry about with regard to time tracking is the productivity of the time spent. People are afraid that an unscrupulous coworker can simply log a bunch of hours and not do any work.
Time reports will not only tell you what someone is focusing on, but how productive they are. If someone is taking a lot of time to do simple tasks, you have a management issue with that person; it is not a flaw in the Slicing Pie model. If you have a chronic time-waster, you may have grounds for termination with cause (more on this later). In the Slicing Pie Model time tracking, therefore, discourages time-wasting rather than encourage it.
On the flip side of the productivity concern is the concern that time doesn’t equal value. And, people with more experience may be more productive than less experienced people. Remember that a contribution is what it is. Time spent on a startup does not magically make it more valuable. You are expected to perform at the same level for a startup that you would be for a real job. More experienced people usually have a higher hourly rate, which encapsulates their skills and expertise. You pay more for good employees because they can produce more for less money. You also pay more for good employees because they are supposed to come up with more great ideas than other employees.
The next major concern I hear about time tracking is the concern that there is much more to building value in a company than simply logging hours. That is true, but without time-tracking you will never understand one person’s contribution relative to another. One person may work full time and another a few hours per week. Unless you want to guess what each person is doing you should keep track.
You don’t have to account for every minute of every day. You and your team can decide how much granularity you will accept. Some teams may be comfortable with a monthly entry that says “120 hours: did stuff,” other’s may want more detail. I personally like to know what people did with the time they spent.
If you still have a problem with time tracking, then you’ll have to figure out some other way to accurately measure the fair market value of a person’s time. I’ve heard lots of ideas; so far, none works as well as time tracking!