Slicing Pie is perfect for lean, bootstrapping startups. However, it also works well if they eventually plan on raising investment. It’s easy to get distracted by fundraising hype. And there are lots of ways to finance a business without needing external investors, e.g. self-finance, bank loans, and – of course – profits. But if you’re using Slicing Pie, it’s also helpful to understand what is possible.

So here’s a brief guide to how Slicing Pie startups can work with investors – both dynamic and fixed – in the UK.

How investing works in traditional fixed equity startups

Startups traditionally raise money through fixed investment, i.e. by getting wealthy friends and family, business angels, VCs etc, to invest in return for a chunk of equity. However, selling equity for cash causes multiple problems for early-stage startups. For example, what is a startup worth? And how much of its shares should it sell? These questions are fundamentally tricky, because early-stage startups have so many unknowns, e.g. 

• can the concept be realised and a product/service built?
• will anyone want it? 
• does the team have the experience and skills to succeed? Etc.

Hence early-stage startup valuations are about as reliable as putting a finger in the air.¹

If a valuation is too high, future shareholders and investors pay too much for their shares.² And if it’s too low, founders overly dilute their own equity by giving away too much. So if a valuation turns out to be wrong – which without a crystal ball is almost always – one side always gets burned. Damaging valued relationships, sometimes forever. Ugh.

How does Slicing Pie dynamic investment work?

Slicing Pie works completely differently, by avoiding valuations entirely. No air fingers here. Under the Slicing Pie model, investors invest dynamically, and their pie slices increase as money is spent. This means that investor and founder goals are aligned. Teams have an incentive to spend dynamic cash wisely, otherwise they themselves are diluted. This is huge. Also:

• everyone gets what they deserve,
• no fixed share negotiations are needed, 
• investors can manage their risk, by releasing funds only when needed, and
• companies can raise money flexibly, without the hassle of formal fundraising rounds.³

And dynamic investors can get tax breaks too

Qualifying dynamic investors can benefit from a range of UK tax breaks, e.g.

• if individuals:
  • Investors’ Relief (10% CGT up to a £10m lifetime limit), and
  • if they also want to be involved in the business (e.g. as an unpaid investor director), BADR (10% CGT up to a £1m lifetime limit, formerly known as Entrepreneurs’ Relief);⁴
• if corporate investors, SSE (the Substantial Shareholdings Exemption, which can give 0% corporation tax on gains).

And Slicing Pie startups can continue with dynamic investment until they bake their pies, i.e. they get to a point where no one needs to take any more unrecompensed risk. But wait, there’s more…

UK Slicing Pie startups can have fixed investors as well!

Yes, that’s right. Over the years, we’ve pioneered ways for UK Slicing Pie startups to raise fixed investment at the same time as continuing to run their team pies. We do this via: 

• advance subscription agreements (also known as convertible equity agreements or SAFE agreements in the US), and
• formal fixed equity fundraising rounds. 

So not only can they have dynamic investors, with some extra work, they can have fixed investors too. 

Advance subscription agreements give investors a right to receive future shares if/when the startup does a fixed equity fundraise or is sold. They therefore work well for investors who want fixed shares, but are willing to wait for a formal fixed round before the price is set and their shares are issued. ⁵

In contrast, formal fundraising rounds give investors fixed shares immediately – so can be useful for individual investors who want SEIS and/or EIS tax breaks.⁶ They are however complex and costly for startups to qualify for, negotiate, manage and close. (And of course, fixed equity issues can still arise, even though the team still shares dynamically.)

What do fixed investors think about Slicing Pie?

In short, we’ve found them to be really relaxed. They may have perfectly good reasons (e.g. tax, accounting, etc) to want fixed shares themselves. But once they understand what Slicing Pie does – and that it helps early-stage startups reduce fallout risk – they get it extremely quickly. After all, investors are smart: they know that fixed equity splits can cause messy issues that destroy teams. So anything that protects their investment – like Slicing Pie – is all good.

And Slicing Pie provides investors with other benefits too, e.g. clean, conflict-free cap tables, and fantastic due diligence info (as investors can look at time pie records to see who’s done what). So it’s a great way to attract investors, regardless of type.⁷

So what kinds of investments do UK Slicing Pie startups have?

Well, this is interesting. You might think that they’d all have dynamic, but in fact we see fixed rounds and advance subscriptions as well. Why? Because it depends on what a startup looks for, when, and what their potential investor(s) want in return:

1. Dynamic investors:

Dynamic investors are generally the easiest for a Slicing Pie startup to find, as they’re usually people that share its vision and who team members know well. As a result, they often join early on or right from the start, and become part of the team, e.g. as unpaid directors. (This means they can monitor how their money is used and also get slices for any unpaid time.)

Dynamic investors can be, e.g. individuals or companies who want to contribute more money than time (or money only), mentors, etc. Accordingly, these sorts of relationships are often highly supportive and where we see the largest sums get invested – anything from £100k to £2m+.

2. Advance subscription investors:

Once a UK Slicing Pie startup has got to a certain point, we then start seeing advance subscription agreements (ASAs). Sometimes accelerator programs have these as a condition of joining, or fixed investors prefer them. 

ASAs are less straightforward than dynamic investments – and the fixed equity shares that result can often end up being very one-sided, e.g. so that these investor(s) get a lot more or less than they would have, if dynamic investment had been used. However, they can work well if a business expects to bake the pie and/or do a fixed equity fundraising in a year or two. The amounts raised by these tend to be more modest, e.g. £15k to £150k.

3. Fixed equity fundraising rounds:

And finally, if a UK Slicing Pie startup has access to fixed equity investors (e.g. investors who want SEIS/EIS), then it can go for a fixed equity fundraising round. This requires a great deal of negotiation and effort, and can be stressful and hard, even for experienced founders (particularly if they’re building a syndicate). However, if the team thinks it can get a good deal, e.g. on valuation, how much members will be diluted, etc, then this can sometimes be useful.

We find fixed rounds usually raise somewhere between ASAs and dynamic investment, e.g. anything from £150k to £500k depending on syndicate size (as they’re so much hassle that they’re not really worth doing for anything less).

So if you’re contemplating investment at some point in the future, then hopefully this gives you some info to think about. 

And now…

So Slicing Pie and investors…

Who knew?! Investment is a huge topic, and when we first started out, we never imagined that we’d be able to help UK Slicing Pie startups have so many forms of investment – or raise so much.¹¹ Just remember to focus on building something your customers love. Then if you need investors, set up Slicing Pie legally, so investors can come.

^{1 What usually happens is that an investor offers, e.g. £100k. The founders go, ‘Wow, £100k, great!’, then offer, e.g. 10% of the shares. If everyone agrees, then the business ends up being valued effectively at – in this example – £1m, as 10% = £100k. Scientific? Not so much. Valuations can become a bit more considered, once a startup has started to make some sales, i.e. has built, tested and launched their product or service. But even then, experts still have to forecast all manner of things, e.g. costs, growth potential etc. So valuations always involve guesswork, they’re never exact.
2 Which can then make future investment rounds hard, because shares have to be priced higher each time, otherwise existing investors take a loss on their money, in what is known as a “down-round”. Also, if restricted shares are being offered as an incentive, workers have to pay more to receive them (as under HMRC rules, directors and employees have to pay either a higher share price, or income tax on any discount on acquisition). This makes it harder to grow the team, as there is no guarantee they’ll make this money back.
3 It’s much simpler legally to bring in a dynamic investor – particularly if they’re being onboarded at the same time as a Slicing Pie startup is doing their Slicing Pie legals – than it is to run a formal fundraise with invitations, term sheets, pre-emption waivers, new share classes etc.
4 A qualifying investor can combine both BADR and Investors’ Relief, if they had no prior connection to the business and become an unpaid director only after acquiring shares: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg63550. If you’re an investor and interested in a particular tax relief, then consult your accountant, and do careful tax planning, to ensure that you qualify.
5 We call these future fixed equity agreements, because they’re for fixed (rather than dynamic) equity, at some time in the future.
6 Which are admittedly great. After all, who wouldn’t want 30-50% initial income tax relief, 100% CGT relief, CGT deferral relief, CGT loss relief, and IHT relief? Alas, SEIS and EIS aren’t available to dynamic investors, because Slicing Pie shares are restricted, which breaks the rule that there must be no pre-arranged exits at time of issue (e.g. leaver restrictions, pre-emption rights, etc). Control issues can also arise if an investor grunt exceeds 30% of the pie and shares at any time. However, maybe one day…
7 If a fixed investor really didn’t like Slicing Pie, and a Slicing Pie startup really wanted their cash, then it could simply bake its pie and move to fixed shares. But we’ve not seen that happen. Instead, we find UK teams tend to keep using Slicing Pie for a lot longer than they (and we) expect. And when investors do contact us, it’s almost always because they want to find out how to make their potential investees use Slicing Pie. Go figure.
8 The one-off communications exemptions (FSMA Order 2005 ss. 28-28A) are particularly useful, as they can cover, e.g. discussions that co-founders have with a potential grunt which lead to discovering that they want to invest dynamically.
9 In December 2021, the UK Government launched a consultation on changes that would tighten the rules on who can be an HNW or sophisticated investor (FSMA Order 2005 ss.48-50A), so these exemptions may well get tighter.
10 Associations of high net worth or sophisticated investors (FSMA Order s.51).
11 Some UK Slicing Pie startups even raise more than one type, e.g. dynamic and ASAs, or ASAs and fixed rounds. So far, we’ve not had any team go for all three – which makes sense, as either teams want to avoid valuations or not. But who’s to say.}