by Mike Moyer
Individual Grunt’s Percent of the Pie
You can do this every day, once a month or whenever you feel like it. This is a rolling pie-slicing plan, meaning that everyone’s theoretical ownership will change on a regular basis. This is okay. The people who put in the most work and provide the most value to the organization will have more pie relative to the others.
Remember, slicing pie does not actually grant equity to anyone. For now it is just a way to keep track of what everyone deserves. The pie will show what everyone’s possible equity stake would be if you actually issued stock to everyone at that particular moment.
In a Grunt Fund, the owner or founder or leader Grunt holds all the equity until it’s time to allocate it. In some cases the Grunt Fund may simply determine profit-sharing percentages without using equity at all. I’ll talk more about these things later, but just remember that making this work requires a great deal of trust between Grunts. Don’t join a Grunt Fund unless you trust the other Grunts.
On that same note, don’t form a Grunt Fund unless you are a trustworthy person with a genuine interest in treating people fairly.
Chapter Three:
Creating a Grunt Fund
To create your very own Grunt Fund you simply need to keep track of the relative value of the inputs provided by your herd of Grunts. Each input has its own value. You must agree on how you are going to value the input before it is put into the company (that’s what this book is for.)
Determining Value
Ingredients provided have different values. It is essential to have a standard method for determining this value and keep it consistent. If the other Grunts find out that one Grunt is being favored it will appear unfair. Don’t worry; incentives for ideas, experience and special talent are built into the methodology.
Consider the following calculations to determine the theoretical value of the ingredients:
Time
Time is pretty much the main contribution of Grunts. It is also the most important contribution. Ideas are nothing without people willing to put the time in to turn it into a company with paying customers.
Determining the value of a person’s time, however, can be difficult because people often think they are worth more or less than they actually are. The best way is to determine a realistic opportunity cost for their time. Find out what they could earn somewhere else at a similar job (if they could get the job). Getting the number “right” is less important than making sure it’s fair relative to other Grunts.
Relative value is the key here. Different people are worth different amounts. Clearly, the junior developer straight out of college has a different value than a former SVP of sales for Oracle. So, relatively speaking, the senior guy’s time is worth more than the junior guy’s time.
However, depending on your company, you may need a junior developer more than you need a hot-shot sales manager. It is up to you to decide who you want to bring on board. Don’t make the mistake of taking on more than you need in terms of Grunts, especially high-profile Grunts who may think they are doing you a favor by joining your company. If you choose to slice the pie before or after baking it, it’s easy to over-allocate to these kinds of people.
Using a Grunt Fund, the value of an individual’s time is based on whatever salary you would have paid them if you had the cash (this is their opportunity cost) times two. You double the amount because they are assuming risk by joining an early-stage startup.
Next, divide the number by 2000 which will help you calculate the Grunt Hourly Resource Rate (GHRR)
I use 2000 hours which is 40 hours per week times 50 weeks per year. This allows for a couple of weeks’ vacation and it gives you a nice, round number to work with. Most Grunts work longer than 40 hours per week but it doesn’t really matter. What is important is that you keep it consistent from Grunt to Grunt.
Speaking of consistency, it’s okay to round the GHRR up to the nearest $10, $50 or $100. If you and your partners had similar earnings levels at your previous jobs you should consider agreeing to the same GHRR for each of you. This isn’t a good time to split hairs. Come up with a rate you are comfortable with.
If the job you are hiring a Grunt for is typically paid on an hourly basis, you can simply multiply their hourly rate times two to determine their GHRR.
Make sure the base salaries you use for calculations are realistic. If your company doesn’t need a $300,000 CEO then don’t hire a $300,000 CEO because their base rate will be too high. Additionally, don’t think that just because you’re the founder that you should earn the same GHRR as your partner who has 20 years of experience. If I joined a company started by a high school student I would expect to have a higher GHRR. After all, I have lots of experience starting companies plus a college education and two master’s degrees. It wouldn’t be fair to expect me to take the same rate.
Another rule of thumb is to use a base salary that is commensurate with the job. I may be worth a six-figure salary, but if you hire me to clean the toilets (and I agree) then the base salary should be closer to that of a toilet-cleaner (albeit an experienced toilet cleaner I hope).
So, the theoretical value of a Grunt’s time is calculated using their Grunt Hourly Resource Rate or GHRR. The GHRR is the salary you would be willing to pay if you had the cash times two divided by 2000.
All Grunts need to keep track of their hours on a regular basis.
If a Grunt travels for the company you should calculate the travel time as ½ GHRR while in transit.
Time Tracking is a Pain in the Grunt Rump
If the thought of tracking your time makes your skin crawl, you’re not alone (I know exactly how you feel). I hate tracking my time. It’s a hassle.
That being said, I do it because I know that it is not only an important way of keeping things fair in a Grunt Fund, but also an invaluable tool for running a startup.
Startup companies can be extremely time-consuming and time is often the majority of the pie. Knowing how people spend their time is critical because it tells you what people are focused on. You may wonder why you don’t have more sales, but if your time records show that 90% of people’s time is spent on development projects it will no longer be a mystery. There is no better tool for helping you better manage your staff and set priorities. In business time is money, most businesses keep track of where their money is spent. It only makes sense that they would also track where their time is spent too.
Tracking time brings an important discipline to a startup that can help keep people focused on the right things and concentrate on productivity. Tools like Harvest make it much easier. I know it can be a hassle, but it becomes routine when you get used to it.
Grunt Daily Resource Rates
So many startup companies have part-time employees and advisors that the hourly rate just makes sense. However, in some cases you may want to use a Grunt Daily Resource Rate (GDRR). After you subtract bank holidays, there are 250 business days in a year. So, the calculation for the GDRR is salary times two divided by 250. This will give you a daily rate to track your time with a typical eight-hour day.
Of course, you may think that you put in a lot more hours per day. This is sometimes true so using the daily rate won’t tell the whole story. This is why the hourly rate is more accurate.
The hourly rate is better, but I realize the hassle of tracking every hour can be a burden. If employees are full time the daily rate should work just fine.
A Note about Base Salaries
When you negotiate the base salary that you will use to calculate the GHRR, make sure it is a salary that you would be willing to pay if you had the cash. This is important because someday you may want to convert the Grunt to cash compensation and you don’t want to pay too much or too little.
In the early days of a startup founders either tend to be too generous because they desperately need the help or they tend to be too stingy because they are afraid of the future. To get it right, pretend that you have raised enough money to get yo
ur company comfortably past your breakeven point and set salaries that would make sense.
Wages and Grunts
Not all Grunts can afford to forgo salary and may require at least a nominal income to make ends meet. In these cases you should deduct the amount paid to the Grunt from the base salary and use the remainder to calculate the GHRR.
For instance, if a Grunt made $100,000 in their last job their GHRR would be $100,000 x 2 ÷ 2000 which equals $100. If the company paid them a $50,000 salary you would subtract that amount from the base so the new GHRR would be $50,000 x 2 ÷ 2000 which equals $50. In other words, your pie slice is based on whatever compensation is put at risk.
Let me qualify this with a quick note: not all Grunts will earn equity in your business. Sometimes you’ll hire a Grunt, pay it a salary and everything is fine and fair. These “mercenary Grunts” are generally more entry-level or with skills that are relatively easy to replace. For instance, a receptionist, a junior web developer, a customer service rep, an entry-level sales rep, unpaid interns and any number of other positions who offer tactical, but probably not strategic, value to the firm. If you can’t pay them, however, you will probably have to cut them in.
These people may become pie-seeking Grunts in the future and, although they are still part of the herd, they are happy with money instead of pie as long as you pay them a salary that is commensurate with their experience. If, however, you choose to lower a mercenary Grunt’s salary, pay them with pie to make up the difference.
Freelance or Consultant Grunts
If you want to hire a freelance consultant for a well-defined project on a short-term basis then their GHRR is equal to their “startup” consulting rate times two.
Make sure they read a copy of this book so they will understand a Grunt Fund. You should reserve the right to “buy them out” within one year of the last day they render services. You may have to pre-negotiate the buyout rate but never pay more than twice their rate. Remember, you need to compensate them for not only the work they did, but also for the risk they take.
One way to negotiate a buy back with a consultant is to offer them a sliding scale that will build to twice their rate over one year (or two). The scale looks like this for a one-year deal:
So, if you received financing nine months after you stopped working with a contractor you could settle-up with them for 173% of their original bill. This is a pretty nice return for the contractor. A 100% premium might be too high or too low depending on the type of work. As long as you figure it out in advance you should be okay.
After twelve months they receive pie which should translate into an equity grant that they can keep. You can always offer to buy it back after a year, but they should not be required to sell it to you. Remember, they took the risk and helped you when you needed the help. You can’t renege later—it’s not fair.
The buyback option should have a one-year protection clause that allows the consultant to receive the full value of the shares if the company sells or goes public within 365 days after the buyback occurs.
This will prevent the company from buying back the equity at the last minute before a liquidation event to turn a quick profit at the expense of the Grunt. That would be a dick move (even if it’s perfectly legal).
You can use this same method to pay for other sorts of things like supplies, ad space, rent, etc.
An Important Note about Consultants
If the consultant is going to be a long-term member of the team they need to be provided a GHRR that is more in line with what they might earn as a full time employee. A typical consulting rate is much higher than you might pay the same person as an employee. This is because consultants have to charge more to cover the cost of overhead, insurance, marketing, etc.
Let’s say I work with a freelance designer who charges me $100 per hour. If he worked for me full time his salary might be more like $50 per hour. I don’t mind paying $100 because I don’t need a full-time employee.
If I hire the same person for my startup I would pay him $200 as a freelance Grunt or $100 as a regular Grunt. If the person is going to be an ongoing member of the team the regular Grunt rate should apply. An ongoing member of the team would eventually work for the company full time if the company grows.
The key here is to make sure the rate you pay is fair to the other Grunts working just as hard. Just because one person has done freelance work it doesn’t mean they should be paid higher than everyone else.
Generally speaking, a freelance or consultant Grunt would do one or two small projects that have fairly discrete deliverables. If a person is part of the team, making decisions with the team, and helping to shape the direction of the company they are not freelance or consultant Grunts. They are regular Grunts or part-time Grunts and should be treated like a member of the herd.
Milestones
Unfortunately, earning pie with hours does provide incentive to work more hours, which is something you will want to keep an eye on. In some cases, you may want to provide extra encouragement for getting something done and extra discouragement for taking too much time.
You can do this by sitting with the herd and discussing how much time it will take to reach important milestones. For instance, your developer may estimate 80 hours to complete a working prototype. The hours will be accrued only when and if the milestone is met and only up to the agreed-upon hours.
There are a couple of things to keep in mind when doing this to avoid conflict. First, you must resist the temptation to change the timing and the scope of milestones. If you do, you may have to accept the hours spent working towards a changed milestone even if it’s not met. It’s impossible to know, in advance, what activities and behaviors will be most important or what will change. You can’t penalize a Grunt for acting in good faith.
Second, if the project moves faster your developer will still have incentive to take the extra hours. In this example you will be allowing 80 hours for a job that may have otherwise taken 40.
If you see people gaming the system you may have to have a little Grunt-to-Grunt talk with them.
Grunts on Boards
While most startup companies don’t have formal boards of directors until formal money comes in, it is not uncommon for a startup to form a board of advisors. These are often unpaid professionals with domain expertise who volunteer to help a startup get off the ground by offering advice, guidance, important introductions and other inputs that not only help the company get started, but also add credibility to the concept which is comforting for potential investors.
The involvement of these people can vary dramatically and they usually don’t expect to be paid, but giving them pie is fair if they are providing real value. A Grunt Fund can accommodate these people quite nicely as long as their GHRR isn’t unreasonable. Because advisors are often successful people, they can command high salaries and, therefore, high hourly rates. These rates can get out of control pretty quick for the average startup.
One way to manage this is to develop an “advisory plan” that sets a fixed rate for an advisory board member’s time and a minimum number of hours before a slice of the pie is cut for them.
For instance, you could tell them that, as a member of the advisory board, they are entitled to a $200 GHRR starting after ten dedicated hours. So, when they hit ten hours they would get a slice equal to $2,000 of the TBV (Theoretical Base Value—more on this later) and they would begin participating as a Grunt. Unlike a consultant Grunt, a buyout option probably doesn’t make sense given that the money may not be significant and their ongoing relationship with the firm would be beneficial.
Maximum GHRR
In general, I recommend capping the maximum GHRR at $200 to keep things from getting too skewed. This rate implies that a person’s opportunity cost is over $200,000 a year. The typical Grunt would not fall into this range (80% of Americans make under $100,000).
It may not be uncommon for a more experienced entrepreneur or business advisor to have a high earn
ing potential, but GHRRs of over $200 tend to be demotivating for other Grunts. If someone wants much higher rates than that then early-stage startups may not be the best choice.
Pie A La Mode
Advisory Board Member Letter
To see a sample offer letter used to invite an Advisor to a Grunt Fund company, visit SlicingPie.com and click Pie à la Mode or scan the code.
Absentee Owners
Most of the time, a buyout right is important when dealing with people who are not employees. Anyone who owns equity or options in your business who is not an investor or an employee is known as an “absentee owner” (Also known as “Dead Equity”). Prospective investors will be wary of a business that has too many absentee owners.
Absentee owners can be difficult to manage and may have rights and make demands that can distract the business. The ideal number of absentee owners is zero. However, if you are in the Gap and have no cash, then allowing absentee owners may be your only option. The right investor will respect that kind of tenacity but they will still appreciate being able to buy out the absentee owners. In other words, they can “cash-out” the individual.
Cash
People are much more likely to provide ingredients like equipment or time than money so an extra incentive is preferable for those who provide cold, hard cashola.
If a Grunt provides small amounts of working capital, pays for services (like corporate formation), or covers material out-of-pocket expenses for which no reimbursement will be received, the theoretical value is the value of the cash or credit used times four.
