Nearly two-thirds of startups fail because of ‘people problems’.1 That’s a scary statistic. So who gets what, and who does what are some of the biggest challenges your business will face. But you know that already – otherwise you wouldn’t be interested in Slicing Pie!
We want your startup to be a raging success. So here are some legal tips and collected wisdom to help you with building your team, including:
- who should be in your pie, and how many,
- who is a co-founder or founder,
- what job titles to call yourselves,
- whether you should be a director, employee or consultant,
- what it means if you’re a de jure director, and
- how Slicing Pie can help your team’s culture.
We hope these give you something to think about, and help answer questions that may be on your mind.
Who should be in your pie?
No doubt you’ve got amazing people to work with. We certainly hope so! But who should be grunts? Simple. Anyone who is contributing unrecompensed inputs, e.g. time, money or assets for pie. You can have as many grunts as you like (as long as you have at least two). However, remember:
- employees and consultants who are getting paid fully are not grunts. If they’ve not put contributions at risk, they’re not part of the pie;
- also, don’t include people who can’t contribute right now – even if you would like them to, or they say they will in the future (some people are all talk and no action. Sign them up only once they show up and lean in); and
- most important, do not include anyone you do not trust. If you’re concerned that someone will not record their time honestly, then they should not be a grunt. Period. After all, if you can’t even trust them with something that’ll hopefully soon turn into money, can you trust them with actual money? We don’t mean to sound harsh, but you can pick plenty of other great fair-minded people to go into business with.
How many grunts should you have?
Whether you have a big team or small – and plenty of startups keep things very lean – one of Slicing Pie‘s benefits is that it’s easy to bring people on board. You don’t have to re-negotiate everyone’s equity shares. Having a stake – no matter how small – can be an incredibly powerful motivator.
However, just as you would with fixed equity, it’s good to limit dynamic equity ownership to key people only, for various reasons, e.g.:
- giving shares to all and sundry for tiny contributions is all very noble, but tiny shareholdings aren’t always attractive;2
- investors like to see that key people are sufficiently incentivised, which becomes harder if you’ve got too much dilution;3 and
- having too many shareholders can jeopardise your chances of qualifying for Business Asset Disposal Relief (a.k.a. Entrepreneurs’ Relief).4
So including a lot of people in your pie isn’t necessarily the best thing to do. We usually find that Slicing Pie startups come to us with 2 to 4 grunts, and aim for no more than 5 – 10 grunts at exit (though no doubt you’ll prove the exception).
Who are your co-founders or founder?
So now you’ve got your starting line-up. Who are your co-founders or founder?5 Most startups know the answer to this. However, sometimes we find they’re a bit fluffy. So here’s our rule:
Co-founders are the people who had the original vision, are instrumental in starting the business, and committed to seeing it through. If just one person, then they are the founder.Fairsquare LLP
Note that you must tick all three boxes to qualify. (You can’t have just been in the pub when the idea was born.)6
Why does this matter? Well, asides from avoiding title inflation (see below), we care when advising on founder/co-founder rights in your setup. (Also – whilst what you put on your business cards is up to you – when you talk with investors, they’ll quickly sniff out pretenders.)
However, all is not lost. You can give non-founder grunts Co-owner titles. And if you want to show who the ideas person is, you can name them when telling your story – which is better than having Founder and Co-founder titles within the same team, because: a) really only sole founders should use the term Founder, and b) your co-founders might think you’re trying to steal some of their glory if you call yourself Founder without them agreeing.7
What job titles to call yourselves?
Which brings us nicely to what else to call yourselves. Startup approaches to job titles are fascinating, because they can say a lot, not just about you but about your brand. Should you have them? Do you want them? And if so, how imaginative do you want to be? E.g. techmeister, genius, buzz maven, happiness hero…
However, getting carried away can cause legal problems later. So if you’re not sure, then with a very big hat tip to The Founder’s Dilemmas – written by Harvard professor, Noam Wasserman, who also wrote the foreword to The Slicing Pie Handbook – we have a few thoughts that may be helpful:
- Have titles: Even if you don’t care about labels – and some startups that use Slicing Pie are egalitarian – the people you meet do. Because that’s how they make sense of your world. So it’s good to have titles for dealing with others, whether or not you care about status.
- Keep titles broad when starting out: Research shows that having a clear division of labour promotes ownership and creativity. However, assigning roles and titles prematurely can cause problems – because a) people can become too narrowly focussed, and b) if people do more than their given title, this can also lead to confusion. It therefore makes sense to have broad – even vague – titles to start off with, until people’s roles settle.
- Avoid title inflation: Yes, we know you want to look good. Yes, we know customers like it if you sound important. But calling everyone “Head of…” can cause sensitivities – and makes it much harder later – when you need to bring in others who are better qualified.
- Take your time: It doesn’t take long to give out fancy titles. But it does take a long time – and can be painful – to get them back or get people to change them. Because most people don’t like giving up status and power – even if it’s an illusion or they’re no longer right for or doing that role. So whilst you’re all doing everything, don’t rush to pin titles down.
- Make someone CEO…eventually: And when you do come to deciding who should be in charge, which you should, think carefully about who that person should be. Although people often gravitate towards the ideas person, they may be a better fit as CTO or to head up innovation or creation, especially if they don’t enjoy management. When you start off, it’s totally fine to just call yourselves founder or co-founder, and dole out the CEO title later. (Don’t have co-CEOs, because that just leads to delay, inefficiency and confusion.)
Directors, employees or consultants?
Regardless of what you call yourselves, for legal and tax purposes, most people in company startups are one of three things: director, employee or consultant – or a combination.8 The laws that decide this are complex. For example, someone can be a:
- de jure director, i.e. director registered at Companies House,
- shadow director, i.e. not registered at Companies House but behaves as an director,
- director & employee, i.e. de jure director registered at Companies House and has a director’s service contract,
- employee with an employment contract, or
- consultant with a consultancy contract.
Some Slicing Pie startups assume that grunts will be employees. However, this doesn’t work if you’re self-funding or bootstrapping, and would rather pay pie than National Minimum Wage. (Sad face.)
By contrast, directors can work unpaid. They also don’t have set hours, which suits Slicing Pie‘s flexibility well. And if they’re just de jure directors, then written contracts (i.e. directors’ service contracts) also aren’t needed.
(We don’t really come across consultants for pie, because they are massively expensive unless very short-term.)9
As a result, we find that most Slicing Pie company co-founders and grunts choose to be de jure directors.
What it means to be a de jure director
So what does it mean if you’re a de jure director with no written contract?
It means your duties are set out by law. This is not a small thing. Being a de jure director is arguably even more onerous than being an employee – because directors must act in a way that they think is most likely to promote the success of the company for the benefit of its shareholders.
So you do have a wide range of legal duties, which require you to meet very high standards, even though you have no written contract.10 (These standards are also good tests for deciding whether someone is right for your business.)
But if we don’t have written contracts, how can we make people do what’s needed? Good question. Well, hopefully your people are motivated and conscientious. If so, hurrah! Our solutions also include advice on business conduct and control. Most importantly, however, you need management skills – communication, planning, delegation and leadership – and to meet and talk regularly, whether you use Slack or any of the myriad tools that help manage projects and build effective to-do lists.
Finally, a word about culture
Many of the details we touch on above apply to all startups, regardless of how they share equity. However, Slicing Pie can offer more than just fair equity splits – if you want. Some of the strongest teams that we know use it to help define their core values. For example, for us sharing equity fairly promotes integrity, trust and transparency. So take a moment to think about your own culture and what you do or do not want it to be. Remember, it’s easier to persuade others they’ll be well-treated, if you treat your own people fairly.
We advise on founder issues so you can build your Slicing Pie team. And our legally-binding tax-efficient solutions include company director, LLP member and partner appointments.
So talk to us about your Slicing Pie startup – we love to help.
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1 And two-thirds may even be low. VCs identified problems within the management team as a top three contributing factor in 95% – yes, 95% – of failed or in-danger-of-failing portfolio companies, and as the number one factor in 65% (The Founder’s Dilemmas, Noam Wasserman, Princeton University Press, 2012; Gorman and Sahlman, 1989).
2 If your friend helped you out for an hour and you want to say thanks, just buy them coffee or flowers. You can always make a grand gesture once you become Facebook.
3 What is sufficient? That’s a good question – we don’t know that there are any hard and fast numbers. It depends on how valuable VC and PE (private equity) investors think founder(s) and key managers are to the business, and whether they need them to stick around. Sometimes investors even ask key people to invest more in the business to ensure they commit.
4 Because in order to qualify for Business Asset Disposal Relief (a.k.a. Entrepreneurs’ Relief), shareholders must be directors, officers or employees and own 5% or more of the business for at least 24 months before the business is sold. (The Government renamed Entrepreneurs’ Relief as ‘Business Asset Disposal Relief in March 2020.)
5Note you can be a sole founder and use Slicing Pie. As many sole founders have discovered, it’s a great way to bring people on board and share equity fairly.
6 Had the original vision’ means the person(s) who came up with the idea and knocked it into shape. ‘Instrumental’ means the person(s) who got the business off the ground. And ‘committed’ means they intend to be in for the long-term.
7 Oh, and by the way, if you’re co-founders, then you’re all called Co-founder – hyphen please and no capital F – although collectively, you can be called founders or co-founders.
8 And in an LLP or partnership startup, they can be a member, partner, salaried partner, employee or consultant etc. But to keep things simple, we’re not going to go into that here.
9 As their hourly rates are much higher than regular fair market values, and they get a 200% buyback uplift. Note that even if you are a consultant by trade, that doesn’t automatically mean you earn pie at consultant hourly rates. If you’re long-term involved, then you should have a normal grunt’s fair market value. Being a Slicing Pie consultant is only suitable if you’re doing a one-off project and are involved for a very short time.
10 Remember, businesses rarely get stuff done by just writing job descriptions. Usually they only pay attention to these when: a) writing the ad, b) they want to change someone’s role, or c) someone is under-performing.