Finding the right equity split among startup founders is like solving a complex puzzle. Get it right, and everyone’s happy, focused on pushing the business forward. Get it wrong, and you might find dissatisfaction slowly eroding founders’ motivation.
You can use a simple equal split (50-50, 33-33-33), but it can quickly become obsolete. New founders join, people’s lives change. The equity split should reflect people’s commitment over time.
An equal division (50-50 or 33-33-33) seems tempting in its simplicity. But as a one-size-fits-all solution, it can’t adapt to the nuances of a startup’s journey. Founders come and go, life events shift priorities, and commitment fluctuates. Your equity model needs to reflect these shifts.
That’s where negotiation and tracking come into play. In this article, I’m going to show a refreshingly simple approach to managing your startup’s equity distribution, using the robustness of plain text and git version control.
Slicing Pie framework
If dividing equity equally (and never revising it) is a bad practice, then what’s the alternative? Slicing Pie offers a solution. This method systematically allocated equity based on people’s individual contributions, not how great they are at negotiating. It keeps the internal disputes and negotiations to a minimum, redirecting people’s energy towards building something great.
The formula works like this: Founders log their contributions in monetary terms, such as USD. For instance, if I work 100 hours at $75 per hour, I’ve contributed $7,500 to the project. What makes Slicing Pie interesting is the idea of multipliers for certain kinds of contributions. By valuing raw cash higher than work, you keep people incentivised to be creative instead of overspending.
For full description of the method, I encourage you to buy and read the book.
Plaintext accounting and ledgers
I’ve been tracking my personal finance with plaintext accounting toolset for months now. It’s hard to deny the simplicity of TXT files. There’s a community around this (https://plaintextaccounting.org/) full of people passionate about finance and accounting.
In this article, I’ll discuss hledger, my preferred tool, though similar setups can be achieved with beancount or ledger.
With hledger, all your transactions are recorded in a single big TXT file. By running the hledger CLI utility, you can obtain various reports and insights from your data. Its well-structured format and simplicity allow even thousands of transactions to be processed swiftly.
Using hledger for equity tracking
I’ve been intrigued by the Slicing Pie method, and, having used hledger for a while, it occurred to me that they could be made to work together.
First, define units and commodities (SL is short for SLICES).
D 1,000.00 SL
D 1,000.00 USD
P 1970-01-01 WORK 2 SL
P 1970-01-01 CASH 4 SL
Slicing Pie recommends using a 2x multiplier for work, and 4x for cash contributions. This incentivises frugality and creativity around constraints.
Mike and Andy do initial work on the proejct: web development, marketing, and a little bit of everything else. After 1 month of working together, they sit down and decide what their work was worth:
2023-03-31 Full-time work: marketing & hustling
slices:andy
salaries:andy -4,000 USD @ 1 WORK
2023-03-31 Full-time work: mostly web development
slices:mike
salaries:mike -6,000 USD @ 1 WORK
The @ 1 WORK syntax takes care of the multiplying. Now, we can check the current slices and share split:
> hledger balance slices -X SL
8000 SL slices:andy
12000 SL slices:mike
--------------------
20000 SL
The -X SL tells hledger to convert final results to slices. We can check the current share split with:
> hledger bal slices -X SL -%
40.0 % slices:andy
60.0 % slices:mike
--------------------
100.0 %
In the second month, Andy worked 50% less and Mike bought a computer that was needed for working on the project:
2023-04-30 Mike buys laptop for company work
slices:mike
cash:mike -1,299 USD @ 1 CASH
2023-04-30 50%: marketing & hustling
slices:andy
salaries:andy -2,000 USD @ 1 WORK
2023-04-30 Full-time: web development
slices:mike
salaries:mike -6,000 USD @ 1 WORK
Notice that we’re now using @ 1 CASH which will multiply the amount by our preset multiplier (4x).
Our numbers now look like this:
> hledger balance slices -X SL
12000 SL slices:andy
29196 SL slices:mike
--------------------
41196 SL
> hledger balance slices -X SL -%
29.1 % slices:andy
70.9 % slices:mike
--------------------
100.0 %
Mike has contributed cash and worked more than Andy. Thus, it’s sensible he has more % shares of the company now. This should motivate Andy to commit more to working on the project (unless he’s ok with a smaller split).
The full file now looks like this:
D 1,000.00 SL
D 1,000.00 USD
P 1970-01-01 WORK 2 SL
P 1970-01-01 CASH 4 SL
2023-03-31 Full-time: marketing & hustling
slices:andy
salaries:andy -4,000 USD @ 1 WORK
2023-03-31 Full-time: mostly web development
slices:mike
salaries:mike -6,000 USD @ 1 WORK
2023-04-30 Mike buys laptop for company work
slices:mike
cash:mike -1,299 USD @ 1 CASH
2023-04-30 50%: marketing & hustling
slices:andy
salaries:andy -2,000 USD @ 1 WORK
2023-04-30 Full-time: web development
slices:mike
salaries:mike -6,000 USD @ 1 WORK
What you’re looking at is a single TXT file that contains all your company’s cap table information and changes with double entry bookkeeping precision.
There’s a lot more you can do with hledger. For an example, you can go back in time and see what was the equity split for a given date:
> hledger balance slices -X SL -% --period="from 2023 to 2023-04-01"
40.0 % slices:andy
60.0 % slices:mike
--------------------
100.0 %
For full documentation on hledger, check it’s official website.
Benefits and implications
Now it gets interesting. Because it’s a simple TXT file (or rather, a .ledger file), you can do all sorts of things you can do with text files.
You can use version control to track changes. When a change in the cap table occurs, you can git commit it with an attached rationale. Every stakeholder can keep their local copy of the repo, making the setup decentralised and zero-trust by default.
You get transparency for free. A single TXT file tells the equity story of the company that anyone can read. Whether you decide to share this file with all your company later on that’s up to you.
It’s auditable. Anyone can check git history and see how the equity split evolved. Even without using git, hledger allows you to generate historical reports and splits.
You can use CI/CD workflows (e.g. GitHub Actions) to update this file monthly and send notifications to each slice-holder with the updated cap table.
Finally, you can show this to your investors and skip explaining your equity negotiations of the past 2 years.
—
Disclaimer: I haven’t used the Slicing Pie method. Decide for yourself if it’s something for you. However, even if you don’t use it, consider keeping a record of your equity split decisions. You will thank me later ;).
Have fun! Build great things, don’t fight over that 5%.