Retrofitting a Grunt Fund- New Chapter Sneak Preview!

Posted by on Dec 7, 2012 in Blog | 0 comments

If you have already launched your business chances are good that you have already implemented a fixed split that is causing some angst among the founders. You now need to unwind your fixed split so you can get on the right track with your equity. This will require you to retrofit the Grunt Fund. Retrofitting a Grunt Fund is fairly easy as long as everyone is willing to cooperate.

Getting Buy-In from the Herd

The first thing you will need to do is get everyone on board with the program by helping them see the benefit of a dynamic equity split program. To do this, just give them a copy of this book.

The people on your team will fall into two categories:

  1. “Skinny Grunts” are those who have less than they deserve
  2. “Fat Grunts” are those who have more than they deserve

(It is unlikely that anyone will have exactly what they deserve.)

The Skinny Grunts will be easy to convince. They already feel cheated by the Fat Grunts and, as much as they might like the business and believe in the vision, their motivation is probably waning because they feel like they are working for someone else’s benefit.

The Fat Grunts may be harder to convince because the retrofitting of the Grunt Fund will not only re-calibrate their share into a smaller portion, but also they will have to start working to maintain their position in the company. This, of course, is completely fair.

In most cases, if they have this book, they should be on board by the time they read this section. If not, I have a message for them:

 Your current share of the company was granted by mistake. The equity that you hold in this business is disproportionate to what you deserve and it is now threatening your relationship with your team members at best, and destroying the company at worst. The company will be more valuable if you realign your interests with the rest of the team. Unless you are willing to be fair about what you and everyone deserves you will limit the chances that your shares will ever be worth anything.

             If that doesn’t work, you are probably dealing with someone who has trust or greed issues. Either way they are not properly aligned with the team. This is a good time to fire them.

You need to work with people that you can trust. You can’t trust people who aren’t willing to treat you and the other members of the team fairly. A greedy Fat Grunt is someone who is comfortable benefiting at the expense of others. There is a word for people like this; the word is “Asshole.” It’s is best not to do business with Assholes. You can probably find someone else to do that Grunt’s job

Some Grunts, like those who have controlling interest in the company, own the core intellectual property or have large amounts of cash invested, are difficult to replace.

If you are dealing with an irreplaceable Grunt you may have to cut your losses and leave the company yourself. There are greener pastures for a good Grunt.

Such are the problems with fixed-split equity program. Next time you will be older and wiser and can start a Grunt Fund from the beginning.

The Retrofit

Once you get everyone on board with the program you will have to calculate what the pie would have looked like if you had been using a Grunt Fund from day one. This will require you to do an inventory of the various contributions that people have made and add it all up to determine your TBV. Time will be the most difficult because in most cases people will not have been tracking their time very accurately.

Time Tracking

At this point it will be impractical for everyone to remember how many hours they contributed. It will be easier to divide people into full time, half time and part time.

Count the number of weeks people have been involved and use 40 hours per week for full time employees, 20 hours per week for half time employees and 10 hours per week for part time employees. Do your best, but don’t split hairs—it’s not worth it.

The Pie

Once you figure out what the pie should look like all of the participants in the Grunt Fund will continue earning pie according to the regular rules. Things will proceed as described in this book. At some point you will outgrow the Grunt Fund and you will want to issue actual stock and work with your lawyer to put the right agreements in place.

When you issue stock (in an LLC they may be called “participation shares” or “units” or something like that) you simply issue enough shares to bring everyone to the right percentages.

 Example:

Grunt 1 and Grunt 2 start a company together and split the equity “50/50” they issue 100 shares in the company and each take 50 shares.

A few months go by and it becomes obvious that Grunt 1 isn’t very interested in the business. They agree to retrofit a Grunt Fund to solve the problem.

They go back and tally up each of their contributions since the beginning and determine that if they had been using a Grunt Fund from day one Grunt 1 would have about 25% of the pie and Grunt 2 would have 75% of the pie. (At this point it doesn’t really matter what stock has been issued because the stock is worthless anyway.) From that point on they earn pie under the terms of the Grunt Fund.

When Grunt 3 joins the herd she starts earning pie under the terms of the Grunt Fund. Easy as pie.

Six months go by and the team is getting some traction in the market. They are generating some nice revenue and they have outgrown the Grunt Fund. Grunt 1 has about 30% of the pie, Grunt 2 has 60% of the pie and Grunt 3 has 10% of the pie. They decide to issue 168 shares of stock to allocate the proper percentages.

Remember, Grunts 1 and 2 already each have 50 shares. So, Grunt 1 gets zero new shares, Grunt 2 gets 52 shares and Grunt 3 (who had zero) gets 17 shares. When the new stock is granted the ownership looks like this:

 

The Grunt Fund has properly allocated shares to the right people. Each Grunt has a share that is fair relative to the other Grunts. The original allocations had no impact on the outcome because the additional stock grants balanced things out appropriately.

Grunt 2, who originally owned 50% of the company now owns 30%. He has nothing to be sad about; the company is now worth much more than before. If he had decided to be an Asshole the company probably would have fallen apart.

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