A better formula for calculating startup equity - Quartz
Jared Sperli stashed this in startup
The main downside of this model is that it takes a lot of time to determine the fair market value of everything.
Little do most people know, there is an exact solution to this problem. There is a way to determine exactly how much equity each person deserves without guessing about the future. It’s called a dynamic equity split and, specifically, the Slicing Pie model that’s been developed for determining perfectly fair equity splits in early-stage, bootstrapped companies.
Rather than doing an even split or guessing about the future, the Slicing Pie model relies on the fair market value of the various contributions made to a startup including cash, ideas, time, relationships, supplies, equipment or facilities. When people contribute any of these things to a startup, they are risking what they would have otherwise been paid for the same contribution to someone who had the means to pay. In other words, they are risking the fair market value of the contribution.
Everything has a fair market value. The fair market value of time, for instance, is the salary a person would command for a certain type of work. The fair market value of an idea is a royalty on revenue. The fair market value of a relationship is the commission on a sale generated, or a finder’s fee on investment secured. For every contribution, there is an amount that someone, with the means to pay, would pay. Fair market value is easy to know, future value is impossible to know.