Equity Allocation for a Startup’s First CEO

When considering the allocation of equity for a startup, it's crucial to adopt a method that is fair, logical, and aligns with the inherent risks involved. Let's explore the concept of equity distribution in relation to the first CEO, drawing upon a rational model that emphasizes the value of each stakeholder's bets in the company's success.

The Rational Argument for Fair Market Salary

Imagine a scenario where your prospective employer is a wealthy rational individual who is willing to hire you in cash rather than with equity. Your responsibilities would remain the same. The salary you negotiate is considered a fair market salary, reflecting what a rational buyer would pay a rational seller. This salary is an acknowledgment of your value in the absence of equity.

A Gamble-like Approach to Startup Valuation

Startups are inherently risky ventures. Unlike traditional jobs, the time and money invested by all participants are essentially bets, with the possibility of no return. The value of these bets is determined by the fair market value of the unpaid compensation, including salary, commissions, and other expenses. Each day you work without immediate compensation is a new bet. Every dollar spent and unreimbursed is yet another bet. This applies to all employees, partners, and investors involved in the venture.

The Role of Equity in the Startup Puzzle

Given that every individual places bets in a startup, the question of equity allocation should reflect their share of these bets. Logically, the first CEO, along with all other stakeholders, should receive equity based on their contribution to the bets. This approach is not only logical but also unambiguous. Any other method would be illogical and subject to ambiguity.

Challenges in Determining an Initial Equity Split

It's impossible to establish a fair equity percentage at the outset of a venture. Many people make this mistake, often believing it's acceptable due to the prevalence of traditional methods. However, this is a foolish approach. Choosing an arbitrary percentage like 50%, 25%, or 32.6% is virtually guaranteed to be wrong due to the numerous unknowns involved. What if you quit? What if you go without salary for a decade? What if you get fired? What if you bring in a president or vice president, or an investor? Any change can render the initial split unfair.

The Slicing Pie Model – A Fair Equity Split

Introducing the Slicing Pie model, which provides a fair and adaptable method for allocating equity. This model is based on the concept of bets, effectively accommodating any possible outcome. It's the fairest way to split equity and is based on the value of the contributions made by each stakeholder. You can learn more about this model at [insert link here].

Adopting a method that accurately reflects the value of each participant's contributions and the inherent risks involved in a startup is crucial. By using the Slicing Pie model, you can ensure that the equity allocation is fair, logical, and adaptable to the evolving dynamics of the startup.

Remember, the fair market salary is an acknowledgment of your value in the absence of equity. The value of your bet in a startup is equal to the fair market value of your unpaid compensation. The Slicing Pie model provides a clear and fair way to allocate equity based on the value of each participant's contribution.

Conclusion

Equity allocation is a critical aspect of starting and running a successful venture. By focusing on the fair market salary and adopting the Slicing Pie model, you can ensure that equity distribution is logical, unambiguous, and fair. This approach will help you and all stakeholders navigate the challenges of a startup and maximize its potential.