Allocation Framework
The Well
Slicing Pie allocates slices of the pie when contributions to the company are put at risk. When you spend an hour working on company affairs, for instance, you are taking a risk that you will never get paid for your contribution. The amount of that ...
Recovery Framework
After slices in the company have been allocated, it may be necessary for the company to recover some or all of it in the event of separation from employees. Absentee owners are individuals who own part of a company, but are no longer actively ...
Facilities
These days, there is plenty of unused office and warehouse space that startups can move into. Most startups are willing to put up with less-than-perfect conditions so there are lots of choices. If someone contributes office or warehouse space, they ...
Relationships
A well-connected person can do wonders for a startup by bringing the right relationships. Relationships are so important to startups that people usually wind up overpaying when using traditional equity splits because they are desperate. Similar to ...
Ideas
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, ...
Contractor Time
Startups often engage contractors and freelancers to work on specific projects. The hourly rate of a contract or freelance employee is likely to be much higher than their fair market salary. An individual who might be able to secure a job for $40,000 ...
Raises and Bonus Payments
If you have an employee that has lots of good ideas, they will be more valuable to your company and may deserve a raise, just like they would if they were working for a company that was paying them. Similarly, it’s okay to negotiate a bonus if ...
Time
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 ...
Non-Cash Contributions
A non-cash contribution is pretty much anything that an individual contributes without an outlay of cash. Time is an example of a non-cash contribution. There are no direct expenses associated with the time I spend working on a startup. Similarly, ...
Supplies & Equipment
Many companies require supplies and equipment to get into business. A T-shirt company needs printing presses and dryers. A hamburger stand needs a grill and spatulas. A tech company needs computers. A zoo needs cages and at least a couple of nice ...
Loans and Credit Cards
Sometimes, an individual uses personal credit to secure a loan on behalf of the company or puts expenses on their credit card. If the individual is making the payments on the loan, the money is treated as cash when the money is spent. If the loan is ...
Unreimbursed Expenses
The most common cash contribution from employees is an unreimbursed expense. This can be money spent on just about anything for the firm that does not get reimbursed from the company account (Well). Examples: Norvin pays $2,500 for the cost of an ...
The Well
It is usually not a good idea to make a habit of paying expenses from a personal account if it can be avoided. Founders, friends, family, and angel investors can contribute cash to a company savings account. I call this account “the Well”. The Well ...
Cash Contributions
A cash contribution is a contribution that consumes an individual participant’s actual cash, usually in the form of an unreimbursed expense or cash expenditure from the company account. A cash contribution can also be tangible property with cash ...
Allocation Framework
The allocation framework consists of a basic set of calculations that define the number of slices received in exchange for various contributions based, in part, on the fair market value of the contribution and, in part, on a multiplier for cash and ...
Multipliers
I recommend a non-cash multiplier of two (2) and a cash multiplier of four (4). These numbers are set based on my personal experience with the model and they are important. Resist the urge to change them! The multipliers make the model work. Without ...