Slicing Pie


            It is not uncommon for people who have ideas to think they are entitled to a big chunk of equity just for having the idea. The instinct to want to benefit handsomely from “your baby,” is real and it’s very common. In the context of fairness, however, slices are only given when risk is taken and risk is a function of fair market value. The most common way to compensate an inventor of an idea in the open market is through a royalty on revenues. Inventors, authors, and musicians routinely collect royalty checks as compensation for their ideas.

            Royalties generally apply to “the” idea that is the idea upon which a company is founded. Ideas generated “on the job” usually don’t get royalties. If you work for a company, coming up with great ideas is part of your job.

            The Slicing Pie Model uses the fair market value of unpaid royalties to calculate slices. 

            Fair Market Value of Ideas = Royalty Rate x Revenue 

            This assumes, of course, that the revenue generated can be directly attributed to the idea. If my publisher sells one of my books, for instance, I receive a royalty. If the same publisher sells a book from some other author, I don’t. I might enjoy receiving a royalty on other people’s intellectual property, but that wouldn’t be fair. In fact, knowing that it’s not fair would take all the fun out of it, so I wouldn’t actually want the royalty from someone else’s book. Fair is more fun.

            Not every idea deserves a royalty. The idea has to enable a business to generate revenue and create a competitive advantage. For this to be true, the idea has to be good and unique enough that it creates some sort of “ownable” intellectual property, usually in the form of a patent or copyright. Starting a hamburger stand might be a good idea, but it’s not unique enough, in itself, to create a sustainable competitive advantage. In the case of a hamburger stand, the execution may create a sustainable advantage, not the idea.

            If, however, you invent a single-polarity magnet that can create unlimited energy, you can probably secure a patent and the patent can create a sustainable competitive advantage. This idea, therefore, is the kind of idea for which the originator of the idea deserves slices.

            In some cases, the time and money spent developing the idea before the company started could be translated into slices using the relevant calculations.

            Updated: 04 Apr 2016 11:22 AM
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