Cake is a disgusting mashup of flour, sugar, and at least one reasonably edible ingredient. Pie, on the other hand, provides a framework for deploying any number of super delicious ingredients inside an edible sleeve.
I love me some pie. When I was a kid, I used to sneak off and pick wild raspberries until I had a gallon pail full, and then my mom would make me the most amazing raspberry pie. You can buy “Raspberry Pi” on the internet now, but it does not taste the same.
I am not going to follow up on this with a recipe. My mom took that recipe with her to the grave. This is not that kind of blog post anyway. I cannot bake to save my life.
It can be challenging to figure out how to split equity when starting or joining a company. You want to understand the exits and your upside during a liquidity event. Another important consideration is what you bring to the table related to the company’s age. I proposed joining several small companies early on as a first engineer for between five percent and forty percent of the company. Some of this had to do with the idea’s strength, the founders’ strength, and how much money was already raised for the business.
You want meaningful equity, and you want to know that the people you work with, known as your “first team,” have your back when it comes to taking you to a liquidity event.
The journey to a liquidity event is complicated. Most people want something magical to happen in two to four years, and you are more likely to wait seven to ten years. I was in the “two to four years” misinformed camp early in my career. I know better now.
The interesting thing about equity is that it tends to change over the life of a business. Most often, your slice of equity will get smaller. When this happens, you have to ask yourself if the business’s overall value will go up based on the change in equity. If the business value increases, then the dilution is worth it.
Sometimes, you will also find people who do not want their equity stake to evolve. This might relate to the amount of equity needed to control the company or to their perception of their own value and the relative worth of the business.
This is often boiled down to the question:
“Which is better: Bigger piece or bigger pie?”
If you have a scalable business or investors who believe you have a scalable business, you will probably fall into the “Bigger pie” camp. If you have taken venture capital, this is a pretty natural evolution. You raise some seed money, then a series A, then a series of additional rounds B through E, to either make a run to the IPO border or to be acquired somewhere in the middle of that run for a good return for the investors.
You should keep as much equity as possible if you have a small business. You will want to scrutinize the people you bring into your cap table carefully and be sure not to fall into the minority of your own company. If you want to read a tragic version of this story, Gary Gygax, one of the creators of Dungeons & Dragons, lost control of TSR, Inc. this way. You can read about that in Slaying the Dragon.
So which is better? Bigger piece or bigger pie?
It is hard to give a definitive answer.
There are some times when you will want to keep a bigger slice. It is worth examining these opportunities carefully to ensure you are not falling into a scarcity mindset trap or that keeping the equity levels where they legitimately make sense.
There are other times when you will want to create a bigger pie. When you raise money, your investors will want to own more of your company as a condition of increasing investment rounds. You should also grant some equity to advisors or key staff who want to accompany you on your journey. You should be careful about the equity levels you grant and what time frame you grant them. Having advisors with high equity levels or former founders who also have high equity levels, you might risk having a confusing cap table that will inhibit future investment.
In many cases, the right answer is not clear. You might not know whether or not you made the right decision about “bigger piece or bigger pie” until it is too late.
Are you faced with this decision today?
As someone who has been through many equity-related decisions, I am happy to have a courtesy conversation with you and give you my perspective.
