Many clients, both current and prospective, have been wondering if they should chase their entrepreneurial dreams and start a new business despite tough economic times or if they should put their plans on hold. While we recognize that securing capital is increasingly difficult and costs are rising, we firmly believe in following your dreams. In fact, challenging economic conditions are an ideal time to launch a new business (I’ve done it myself) if you use the right equity allocation model.
How do you find the right model?
If you're on a tight budget, planning to bootstrap your venture, and looking for a fair way to share equity with your co-founders, dynamic equity is the solution. Mike Moyer, author of The Slicing Pie Handbook and Will Work For Pie, provides the foundation for perfectly fair equity splits in bootstrapped startups. We have developed a legal framework for limited liability companies, allowing you to start your business with minimal cash investment while fairly and proportionately distributing equity.
How does the model operate?
Slicing Pie, or dynamic equity, offers both an equity allocation framework and a recovery framework. At the outset, we contractually establish specific initial goals for the venture. From the founding of the business, all uncompensated time, cash contributions, and other efforts (referred to as "Inputs") are meticulously tracked. Once these initial goals are achieved, we “bake the pie” and form a new agreement, determining each member’s ownership stake based on their Inputs relative to everyone else's contributions. For example, if Alex and I start a business today and our initial specific goal is to achieve $10k in monthly revenue. Upon reaching said goal, we look at our relative contributions to the venture and determine what percentage of the venture each of us should own at that time. In other words, instead of requiring the founders to predict the future (wouldn't that be nice!), Slicing Pie or dynamic equity uses a quantitative, algorithmic method for equity distribution. This model also includes a recovery framework for situations where a founder decides to leave the venture for any reason or is terminated for cause.
Conclusion
There is no time like the present! Slicing Pie and dynamic equity enable you to follow your dreams and start a new business with minimal cash capital. Schedule a free consultation with Sentient Law to discuss how they can help you make the most of challenging times.
About the Author
Matthew M Rossetti is the founder of Sentient Law, Ltd. and began his legal career as a law clerk at 19 years old. While earning his B.A. at DePaul University, Matt interned for the Attorney General of Illinois and worked as a clerk at a personal injury firm, where he assisted in the litigation of several complex, multi-million dollar medical malpractice, personal injury, products liability, and workers’ compensation claims.
