Alternative to the usual valuation guesstimates - slicing pie for early stage investors

Slicing pie is a method for founders to split the equity of their (future) business based on their direct contributions to the business. It is in the category of dynamic equity splits - which means that for a certain defined period of time the ownership stakes are dynamic (that is to say, changing). It was originally developed by Mike Moyer, a US serial entrepreneur, senior marketing executive and academic. Originally it was intended for early stage bootstrapped startups. Since then it has been used by 10k+ startups worldwide - led by US, UK and Australia. 

Why should you care as an investor? 

# 1: safeguarding your investment

Because of the fairness and future proofing of the method, slicing pie equity allocation creates more stable and better performing cofounding teams, giving you potentially higher and safer return on your investment. So you might want to ask the cofounding teams of the startups where you consider investing to use this method or at a minimum verify their existing equity split with this method. 

#2: alternative method to value your investment

The typical headache you probably do experience if you are an angel investor is what is the ‘correct’ value of the startup you planned to invest in - to define how much equity you are getting for your cash investment. I am NOT a certified fiduciary or an accountant, but one thing I can tell with a relative certainty - the pre-cash flow / pre-revenue startup valuations resemble more of a black box of magic guesstimates - heavily reliant on more or less wild or ‘conservative’ assumptions about the future (from market shares to conversions). In the end it often comes down to negotiation and your own acceptance range. And a lot of time and resources gets wasted in the meantime. Slicing pie offers an alternative method where you as an investor join the pie - meaning your cash contribution is recorded alongside the contributions of the cofounders.

PROS:

a) The value of your investment is set clearly: to appreciate the relatively high risk of the investment - all cash contributions are accounted for with a multiplier (the standard recommended multiplier is 4, compared to a multiplier of 2 for non-cash contributions)

b) If you contribute other resources to the startup, then - based on mutual agreement - they could also contribute to your equity stake 

c) Fairness - to balance the protection of your investment and the company, it is only the cash which is spent that is accounted for, providing the startup an incentive to be cautious with spending that cash and setting a clear framework if you would decide to pull out (differentiating good and bad leaver scenarios) 

d) Avoids a premature fixing of the valuation of the startup: any fixed equity stake sale for x amount of cash can set a valuation benchmark of the company.

CONS (or could be perceived as such):

Your equity stake is dynamic - it will change over time depending on the contributions of other founders. This could be seen as negative as you do not have a ‘guaranteed’ % of the pie. However, if you however understand the logic behind the dynamic equity split, your absolute % might well go down (which also happens with a fixed equity stake and additional financing round dilution) but the value of your pie should be increasing (though the other contributions).

Given the benefits of the method, there is a growing number of angel investors who prefer to use the dynamic equity split for their angel rounds with pre-revenue startups. Want to know more?