by Mike Moyer
The Case of:
PhoneMatcherator.com, LLC-Redux
Let’s take a look at how this same story would have unfolded if Sally used a Grunt Fund:
Frank and Sally decided to use a Grunt Fund to start the company.
They decided to pay Frank a salary of $100,000 and used the following calculation to set a GHRR for Frank at $100 per hour:
In a Grunt Fund a company is entitled to buy back certain shares in the event of termination without cause or resignation with good cause. Sally agreed to severance payments that would buy back the equity based on how long Frank worked. Frank understood that he would lose rights to equity if he left for no reason or was fired.
Sally also took a salary of $200,000 but she agreed to accept pie instead of cash giving her a GHRR of $200 per hour:
When Sally began to worry that the company wouldn’t be the overnight sensation that she had dreamed about and, on a whim, she terminated Frank without cause. Frank was shocked.
But because Frank was terminated without cause he was able to retain the pie had had earned. Sally bought back some of the pie with the company’s cash as they had originally agreed, but Frank was treated fairly and the other team members knew it.
Sally was able to find a replacement for Frank, Ryan. Ryan started right away in the Grunt Fund and the team rallied around the him because they trusted Sally’s judgment and there was still momentum in the company.
PhoneMatcher.com Survives
Using a Grunt Fund, Sally was able to avoid costly lawyers and accountants and focus on running the company. She and Frank had an honest relationship and they built a culture of trust.
Sally still got cold feet, but the Grunt Fund allowed her to change her mind and terminate Frank fairly. The other employees knew the rules of the Grunt Fund and saw that everything was fair and square. When Ryan came on board he was able to hit the ground running in the same trusting environment.
The Case of:
Lake Shark Ventures, LLC
Business incubators and accelerators seem to be exploding in popularity. At their core, they allow older, more experienced entrepreneurs tap the passion and energy of younger, less experienced entrepreneurs who need the help. Of course, most of them wouldn’t sum up their business vision like that, but when you look at them from the outside that’s exactly what’s happening and I think it’s great. When I was a budding entrepreneur wanting to change the world it would have been nice to have some office space, a good internet connection, some spending money and a little gray-haired advice.
Now that my own hair is turning gray, I find that I’m spending a lot of time providing advice (and sometimes spending money) to younger entrepreneurs. It’s good for my ego (it makes me feel relevant), but I want to get paid! A Grunt Fund can provide a way for mentors and advisors to benefit from the time they spend with startup companies.
Lake Shark Ventures, LLC is a consulting company that is also a business incubator. The company offers early-stage startup companies extremely reduced rates in exchange for a slice of the pie using a Grunt Fund.
Additionally, a group of affiliated professionals (Mentor-Grunts) spend time with the startup portfolio companies offering advice and working on projects also in exchange for pie.
As you might imagine, things can get pretty complicated with a lot of different people working on a project. Plus, nobody likes the prospect of having to dole out equity to every Tom, Dick and Harry that provides some advice.
It is for this reason that Lake Shark has set up one single Grunt Fund to hold all the pie earned by the various contributors no matter what company the individuals spent time with.
It’s sort of like a Grunt Fund that holds pie from other Grunt Funds. That way, when there is a liquidation event in any of the companies everyone who participated in the incubator benefits, even if they didn’t actually spend time on the company that made money. (Stay with me on this….)
In an incubator setting the objective is to provide concrete incentive to individuals to spend time helping all the portfolio companies. When an individual spends an hour with one and a couple hours with another and another hour here and one there, the pie they earn is so small it’s meaningless.
Moreover, when it comes time to allocate real equity no company wants to dole out small shares to a bunch of absentee owners who only spent a few hours on the project.
The Grunt Fund solves both problems. Here is how it works:
Step One: The company creates their own Grunt Fund, pie earned by advisors and mentors in this fund is held by Lake Shark Ventures
For example, Lake Shark has a startup called Bug Supper, they make bug-tracking software. When the founder of Bug Supper and the Bug Supper team works on the company they each earn pie in the Bug Supper Grunt Fund. Additionally, when Lake Shark also provides inputs like office space, IT support, supplies and other items that help the business they also earn pie in the Bug Supper Grunt Fund.
However, the time that Lake Shark mentors and advisors spend on Bug Supper goes into another Grunt Fund that holds the pie from the Bug Supper Grunt Fund. Think of this as a “shared” Grunt Fund
Step Two: Lake Shark advisors and mentors track their time to the company, but earn pie in the shared Grunt Fund.
When someone outside the core team spends time advising, mentoring, freelancing, consulting or doing other work they log their time to the both the Bug Supper Grunt Fund and to the shared Grunt Fund.
For example, let’s say Johan spends 10 hours at a GHRR of $200 per hour working with the Bug Supper team. The shared Grunt Fund earns a theoretical $2,000 in pie. Johan earns a theoretical $2,000 in the shared Grunt Fund.
Over time, lots of people come in and out of Lake Shark Ventures providing all sorts of good advice. They start five new companies, each with their own Grunt Fund. All the time that people dedicated to the various projects has created a shared Grunt Fund worth $100,000. Johan, who has dedicated over 100 hours on various projects, has earned a theoretical $25,000 in the shared Grunt Fund or ¼ of the total pie. He only spent 10 hours with Bug Supper, however. Other people spent more time so the total pie earned by all the people in the shared Grunt Fund is equal to 20% of the Bug Supper Grunt Fund.
Lake Shark, through its inputs of cash, rent and supplies, has earned another 20% of the Bug Supper Pie.
Step Three: When there is a liquidation event the members of the shared Grunt Fund receive a percentage equal to how much pie they earned.
One day Bug Supper is acquired by a competitor for $1,000,000 cash. Everyone is elated. It’s a cash offer so shareholders can take cash out of the company. Here is how it is distributed:
Participant
Pie
Dollars
Bug Supper Team
60%
$600,000
Lake Shark
20%
$200,000
Shared Grunt Fund
20%
$200,000
Because Johan is a 25% pie-holder in the shared Grunt Fund he receives $50,000 in cash. Likewise, the other participants in the shared Grunt Fund get checks equal to their own percentages.
It is true that Johan received more money than he would have if he had earned pie directly in Bug Supper’s Grunt Fund, but he was spending lots of time with other portfolio companies that may cash in someday in which case others will be rewarded for his hard work.
Bug Supper loved this concept because they received all sorts of help from a lot of people, but they didn’t have to pass out small shares to a lot of people. So, when the buyer’s came-a-knockin’ they found an intact pie and an easy transaction.
From time to time Lake Shark starts new shared Grunt Funds to hold pie for new groups of companies. A shared Grunt Fund works best when it holds pie for just a few companies. Remember, when the pie gets too big incremental hours don’t add up to much and the motivation of adding more time dips.
Lake Shark uses the shared Grunt Fund model to manage small cash inve
stments as well. Investors earn pie in the shared Grunt Fund which in turn earns pie in the company Grunt Funds when it disperses the cash. This allows them to create their own crowd-sourcing option for their startups.
Not everybody participates in the shared Grunt Fund. Sometimes people will spend enough time with a project that they will become part of the core team. In these cases they get a slice of the company pie instead of the shared Grunt Fund pie. When they leave the shared Grunt Fund they are essentially resigning without cause and are treated as such (see way above). The time that they forfeit from the shared Grunt Fund is gained in the company’s Grunt Fund.
Other people don’t participate in the shared Grunt Fund because they receive other value such as access to potential clients. Or maybe their time commitment is so nominal that it’s not worth tracking.
At Lake Shark everyone is happy because they all have a mechanism for providing inputs that is fair and relatively easy to manage.
Too often incubators and accelerators are run like non-profit organizations. That’s fine if they are incubating non-profit companies, but most of them are not. Most of the companies being incubated or accelerated have aspirations for world domination. The people who help them should participate in the rewards that are later reaped.
Lake Shark thrives by providing a stable work environment for passionate entrepreneurs and a means for experts to benefit from their inputs.
Lake Shark
Your Case Study
If you have a story that you think would make an interesting case study please let me know at [email protected]. Would be happy to speak to you about your case and write it up for the SlicingPie.com blog or a new chapter in the book!
Getting Started
The nice thing about starting a company with a Grunt Fund is that you can start right now. You don’t have to wait for anything, just start tracking your time and the other inputs.
Tomorrow, when you are trying to hire a new software developer for no money just tell him about your Grunt Fund and how you are all working together to build something.
When you are approaching suppliers that you can’t pay, tell them you will pay them in pie by treating the cost of the services or products they provide like a cash contribution to your effort.
Grunt Funds are a clean, easy and quick way to start tapping the future equity of your company.
When you have questions or comments or ideas, please visit me at www.SlicingPie.com. I will answer your questions and provide more examples and furnish you with some nice spreadsheets for tracking things and I’ll even post some links to some online tools that can help get you started.
Now that you’ve got the tools, go!
Free Upgrades
This is Version 2.3. From time to time I will release updated versions of Slicing Pie that incorporate new ideas and feedback from my readers. As a purchaser of this book you are eligible for free upgrades when they are available.
Free E-Upgrades for Life
To register for Free Upgrades of Slicing Pie for life visit SlicingPie.com/upgrade or scan the code.
Enter the code “islicepie”
Slicing Pie: the Game (yep, there’s a game)
To help you and your cofounders better understand the impact of a dynamic equity split play the Slicing Pie board game! It’s fun for all ages!
Slicing Pie Board Game
To learn more about the Slicing Pie board game visit SlicingPie.com/game or scan the code.
Enter the code “pieplay”
The End
About the Author
Mike Moyer is a professional entrepreneur who has started companies from scratch, joined startup companies, helped others start companies, raised millions of dollars of startup capital and helped sell startup companies.
He has worked in a variety of industries ranging from vacuum cleaners, to motor home chassis, to fine wine.
Mike has a MS in Integrated Marketing Communication from Northwestern University and an MBA from the University of Chicago. He teaches Entrepreneurship at both universities.
Mike is also the author of How to Make Colleges Want You and Trade Show Samurai. Mike lives in Lake Forest, Illinois with his wife and two kids (three kids after May, 2013), and the Lizard of Oz.
Talk to Mike
Please feel free to reach out to me with any questions, comments or concerns. Or, as I promised before, if this wasn’t the best startup funding advice you have ever received I will happily refund your money.
Email:
[email protected]
Phone:
(773) 426-6353
Twitter:
@GruntFunds
Facebook:
facebook.com/mikedmoyer
LinkedIn:
linkedin.com/in/mikemoyer/
Website:
SlicingPie.com
MikeMoyer.org
Special Thanks to individuals who provided important feedback that helped make me make Slicing Pie better!
Jacob Babcock
Johan Bartholf
Chuck Bukrey
Clint Costa
Alejandro Gomez
Gant Laborde
Ryan McGeary
David Mittereder
Alex Moseson
Copyright © 2012-2013 by Michael D. Moyer
Release Notes: Version 2.3
Thank you to those who provided feedback and edits to earlier versions of this book. I have updated the book and have created this version 2.3. In this release I've added the following:
Updated dedication (because we had a new baby)
QR Codes that link to A La Mode topics
Grunt Glossary (please let me know if I should add other terms)
A variety of graphical and grammatical edits
The concept of a Grunt Daily Resource Rate (GDRR) with a chart on page 61
A note about milestones on page 67
A recommendation for a maximum GHRR on page 69
The introduction of the concept of the "Well" on page 72
More detail on how to value and provide appropriate rewards for ideas and intellectual property on page 83
A new chapter about how to retrofit the model to existing companies on page 131
An updated chapter (with a new title: “Legalize It”) on legal issues you will want to discuss with your lawyer on page 145
Some new drawings of pies and Grunts
A new cartoon at the end
This list is not comprehensive, but hopefully it will help previous readers get acclimated to the new version quicker!
Please don’t hesitate to provide additional feedback for future versions!
Grunt Glossary
Fat Grunt: A person who has more than his or her fair share of the equity relative to other participants.
Grunt: a person who works in a startup doing whatever it takes to make the company a success.
Grunt Hourly Resource Rate or GHRR: the theoretical value of one person’s time relative to another person’s time. It is not an actual value, it is used to calculate an individual’s percent of the pie.
Pie: The equity in a company or a Promise to Issue Equity. Not all companies need to grant actual equity in order for this to work.
Skinny Grunt: A person who has less than his or her fair share of the equity relative to other participants.
Theoretical Base Value or TBV: because startup companies are assumed to have no actual value in a Grunt Fund we use theoretical values with allow us to understand how important one contribution is relative to another contribution. The TBV is the sum off all the theoretical values of all contributions from all participants. It is used to calculate an individual’s percent of the pie.
Well: a financing tool for a Grunt Fund where an investor provide cash in the form of a loan, the cash converts to pie at the 4x rate as it is used.
Absentee Owners, 64
back-of-the-napkin, 25
Bankruptcy, 116
Base Salaries, 58
Bed
ford Falls, 117
calibrating, 108
Calibration, 89
Carl J. Schramm, 15
Cash, 33
Cash-In, 27
Cash-Out, 26
Consultant, 59
Credit, 34, 69
Death and Disability, 98
Ebay.com, 19, 132
Equipment, 72
Equity Allocation, 19
Equity-A Root Cause, 17
Ewing Marion Kauffman Foundation, 15
Facilities, 35, 75
Freelance, 59
GHRR, 78, See Grunt Hourly Resource Rate
Good Lessons and Bad Lessons, 15
Google, 12, 24, 29
Gordon Gekko, 127
greed is good, 127
Grunt Hourly Resource Rate, 55, 56, 84, 132
Grunts, 30
Hawaii, 25
hostile takeover, 12
Ideas, 32
Intellectual Property, 32, 76, 85
Jamba Juice, 26
Loans, 33, 69
Magic Number, 102, 106, 107
Microsoft, 29