AIPIS 237 - Slicing Pie in Real Estate Deals with Mike Moyer

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It's my pleasure to welcome back a returning guest and that is Mike Moyer. He's the inventor of a phenomenal system called called Slicing Pie. He's an award winning speaker, author of eight books focused on business. He's an adjunct faculty member in entrepreneurship at both Northwestern University and the University of Chicago's Booth School of Business. Mike has presented the slicing pie concept to audiences all over the world and he also presented to our Venture Alliance Mastermind group when we were in Chicago and it was a pleasure to host him there and it's great to have him back on the show. Mike, welcome. How are you?

Very good. Thank you very much for having me.

Good, good. Well, hey, I gotta tell you something I am extremely disappointed with and that is that when we talk about pie, I think I just had my last piece of pumpkin pie for 11 months. It is amazing to me that we can't have pumpkin pie year round. Just thought I'd start with a little silly humor here, but no. Slicing pie is a phenomenal model that helps keep business relationships and maybe real estate deals equitable because contributions from various members or partners are never equal. And slicing pie helps offset that and make it, make the relationship equitable.

Right, Right. Startups are unique in that when you invest in a startup company, the chance of losing everything is very real. When you invest your time and your money, you can lose it all. And other companies and stocks and even real estate and a lot of other investments, there are very few investments that you actually lose it all. You might lose some of your money, you won't lose all your money. But stock is more like the startup is more like a gamble in Las Vegas than is like a company because there's a chance of losing it all. And when you that chance exists, you have to make sure there's a tool in place that allows you to weigh people's bets on the table.

Yeah. If someone is, you know, maybe, maybe there's two people that they want to go in on a property and buy a real estate deal together, how Might they use slicing pie? I'm using it in one of my businesses and there have been some real challenges and problems with that relationship. But I think slicing pie really helped keep it good. Well, as good as can be expected, I'll say. And you're familiar with those problems we've had. How would you use it in a real estate deal? Is it much different?

Well, one of the main contributions to real estate deals is cash. So in startups like a tech company, for instance, there's cash is certainly involved. There's also a lot of non cash people's time. And the main contribution to a real estate deal is cash. There's some non cash, most of it's cash. So if all you're doing is purchasing a property for rental, for instance, then you can divide up the equity based on the amount of cash you put in. So if you provide 70% of the cash and I provide 30%, we can do a 7030 split, which is logical. However, if we're doing we're flipping the property or someone's managing the property for instance, and as an investment of time as well, that time should be taken into account using slicing pie. And the cash financing piece can be treated separately. So there's usually multiple components to a real estate deal. There's the loan financing, bank financing, and there's sort of down payments out of people's pockets. And there's time and energy involved in managing and maybe remodeling, for instance. So it wouldn't be fair for us to Split the equity 5050 if you did all the work on the remodel, for instance, and put your own money towards remodeling. So you have to account for your non cash contributions. So the first go to for financing would be your bank loan and a bank loan not at risk. Now I know that there's risk associated with a bank loan, but there's no cash out of pocket and doesn't take any time out of pocket. So it's treated as non risk in slicing pie. Which might sound strange to your listeners, but once you read the book, you'll understand why the risk part would be the down payments people make and the investments they make out of their pocket into the company into this property and the time they spend. Two, you have to set a fair market salary for someone who's spending time. If they're not paid that time, they would be accounted for in slicing pie.

Okay, so we went in a little deep kind of quickly there and I want to make sure we just make sure we got the broad Strokes here. So maybe I'll just back up a little bit here before we go kind of take another deeper dive. Again, you know, in a relationship between, people contribute different things. So slicing pie accounts for, and maybe there's more than this, but accounts for things like intellectual property, contributions of equipment, or like you give the example in a startup, well, you know, everybody's got their own laptop computers and they bring them in and you know, the startup is brand new, so they don't go out and buy new computers. Everybody already owns one, right? Then there's cash and there's time. And those are valued differently in the slicing pie model. But maybe what are all the things someone can contribute and then they're valued with different multipliers. Maybe you can explain that.

Well, the basic philosophy behind slicing pie is that a person's share of the equity should be based on their share of the risk taken. So risk comes in the form of not being compensated. So if I spend a year's worth of my time working for your startup and I'm not compensated, but I'm worth $100,000 a year on the open market and I'm risking $100,000 a year. If I put my laptop into the company and it's worth $2,000, then I'm risking $2,000. So there's two basic kinds of contributions. People can make a non cash contribution which does not require cash out of pocket, and a cash contribution which does require cash out of pocket. The slicing pie treats this slightly differently. But the main concept is that when we acquire things for a company, we purchase them at fair market value. We don't pay more. So if we're starting a lawn mowing company, we pay 150 bucks for the lawnmower. No matter how we're going to use it. I might use it to mow my own lawn, or I might use it to mow a dozen lawns and make thousands of dollars. I still pay the fair market price for the lawnmower. So when you buy things for a company, whether it be people or their intellectual property license rights or equipment, you always acquire it at the fair market value. A company should either pay the fair market value or provide equities instead. So the fair market value would translate to equity using the slicing by model. And the basic model is that for every dollar in non cash contribution somebody makes to a company, they actually contribute two slices to the pie. And for every dollar in cash contribution they make, they are contributing four slices to the pie. So you simply account for what you're not being paid, multiply it by the number of slices in the pie and your share is always equal to your slices divided by all the slices. The reason there's a difference between cash and non cash is because if I paid you $50 an hour to work for me and you want to buy something that costs $50, it would take you more than an hour to earn enough money to buy the thing. Because when I paid you, I'd pay employment taxes on it. When you receive the money, you pay income taxes on it. When you bought the thing, you pay sales tax on it. Plus cash is more scarce as a member of the factor. So we have to weigh cash higher than non cash.

Balance out and the difference between non cash and cash.

Right. You know, an interesting little kind of aside about that is when someone makes a cash contribution, it's already been taxed, you know, a thousand ways, right? So they're almost always, unless they're using a retirement account, you know, they're making a cash contribution in post tax dollars. So yeah, you're right because they had to, I mean this is macro. But they had to do the labor to earn the cash, pay all the tax on it and then contribute it. So yeah, that's a good point. So cash has the highest multiplier in the slicing pie model of 4 to 1. So if you contribute a thousand dollars to the business, and if it's a real estate deal, it's a business. You know, you might think of it like, oh well, there's a store or a startup or something. But you know, real estate deals a business too. So if you contribute a thousand dollars, just for example, then that has a four times multiplier. So it's worth $4,000 worth of PI. Is that how you would equate that.

Or say that 4,000 slices, and that slice is a fictional unit of at risk contribution. It's the same thing as a poker chip. Okay, so it's like buying 4,000 poker chips. The poker chip itself cannot be used for anything except for playing the game.

Right?

But slices simply determine what the dispute is. And that's an important thing to think about when you think about financing in a real estate deal. Because if the financing comes from the bank, it's not out of your pocket. So it doesn't count in slices at all. If money comes out of your bank account, they would go into slices.

Very interesting. Yeah. Okay, good, good. And so then the time contribution gets a two times multiple. So the partners in this business or real estate deal decide, hey, each of our Time is. Or maybe one person's time is worth more than the other. Right. So one person's time might be billed at $50 an hour and the other might be 75. Right. And then the payment for that time is on a two times multiplier, right?

Yeah, two slices per dollar. So if you're an experienced contractor, you may build out at a higher rate than an inexperienced contractor. So for instance, if I did a real estate deal with you, I have no experience remodeling houses, but you might have a ton of experience and be able to do some of the work yourself. So you'd bill out a different rate.

Right.

You're doing contract work. Your salary, your hourly rate would be similar to what a contractor would otherwise cost us. We always want to make the most efficient use of our cash. You get two slices per dollar. Every non cash contribution you put in. The reason you put those multipliers is to create some consequences with somebody leaves the company and leaves the pie. So finding the company and I fire you for no good reason and take your equity back. That's not fair, is it?

No, not fair. I would be upset.

Similarly, if I fire you for good reason and take your equity back, that may actually be fair.

So if you don't want to lose your equity, don't get fired. So what happens is if I fire you for no good reason, you keep your slices in the pie, meaning they just give you two x slices. If I fire you for good reason, you lose your non cash slices and you readjust your cash license to one, thus creating penalties for you to get fired. If you want to keep playing the game, don't get fired. And I should think twice before I fire you for no reason because it costs me a lot of equity. So you always want to make sure people's interests are aligned when it comes to the relationship and people's decisions they make.

Yeah. You know, Mike, this is the key to life, is an alignment of interests. And I talk about that on the show all the time. The relationship, for example, between an income property owner and the property manager, I would contend much less aligned than it should be. There are certainly the largest part of that relationship is aligned. You know, the manager wants to collect rent because they get a percentage of the rent and the investor wants it to be rented and you know, is usually happy to pay a percentage of the rent. But there are some areas where these little sort of nickel and dime, I'll call them almost garbage fees, where the relationship becomes misaligned and then the problems arise and in the slicing pie model. It's interesting because I've been having some problems with this partnership. The partner wanted to quit, and we talked to you, and I think you kind of settled that debate a little bit for us. Thank you for doing that. You said that. Well, hey, look, if you quit, you. You lose your pie that you've earned for your time, but you don't lose the money you invested. You always keep the equity that you bought with cash, right? Can you elaborate on that a little bit?

So you can't put someone in a position where they can steal someone's money. If I took you on as a partner and I convinced you to put $10,000 in and then I fired you and kept your money, that would be the equivalent to stealing, right? What I can do is fire you and pay you back your $10,000 at a later date. What always surprises me is when someone quits a company and then is upset that they lose their equity for their time contributions if they're quitting the company, they clearly don't believe in the future of the company anymore. So why would they want to keep equity in a company they don't believe in?

Right?

They own the company and they own 100% of it, and they walked away, lose their entire investment.

You know, really, Mike, that's pretty much the same idea as earning a vesting of equity in a company when you're an employee. So, you know, companies reward good employees with. They call them the golden handcuffs, right? You know, so they say, hey, look, if you stick around for a long time and do a good job, you know, after the first three years or after the first five years, you'll start to be vested and you'll vest at a rate of, you know, 10% per year or whatever. There's a schedule for this, right? You'll end up. If you really build your career here, you'll end up with equity in the company. But look, if you leave too soon, you're not going to have any equity. You're just going to have your paycheck, right?

Time based vesting is a tool that's very commonly used to help mitigate some of the damage you've done by a bad equity split. But it's not really a very good tool because all it really takes into account is time, doesn't take into account contribution. So in order to use the time based vesting program, I have to predict what you're going to be worth in the future and allocate a chunk of equity in advance. Are you actually doing any work you.

Said contribution though, what does that mean contribution when you said that?

So If I'm worth $200,000 a year and I don't get paid, my contribution is $200,000 a year in unpaid equity, an unpaid salary. If you're worth $50,000 a year and you don't get paid, Your contribution is $50,000 in unpaid salary. So there's differences in contribution have to be accounted for. Now as a startup, I don't know when I'm gonna be able to pay you six months or a year. It's just, it's unknowable. So it's hard to predict that in advance and allocate a chunk of equity that reflects that is a futile exercises. But it happens all the time. So what happens is I'll allocate a chunk of equity knowing deep down in my heart that it's wrong. And then I'll slap on a time based vesting program hoping things go the way I plan and you'll stick around. But there's nothing preventing you from quitting the day after your stock vests. There's nothing preventing me from firing you the day before your stock vest.

Right.

I've seen both scenarios in practice.

Right.

And it's not a good thing. Now when I'm paying you a full market salary, then all I want you to do is stick around then and times all that matters, then I can give you a bonus and use best. For instance, I was working with a guy who has a 15 year product development horizon. It's extremely long product development horizon. And he wants to make sure his scientists stay on board for 15 years. So he's giving them a major chunk of equity, multimillion dollar chunk of equity that invests in 15 years. So none of it will last for 15 years.

That's a long ramp. That is a long ramp.

Long ramp. But if he fires them before that 15 year mark, then investing be prorated. If they leave anytime before the 15 year mark on their own or get fired for good reason, they lose 100% of their equity. Because all that matters to this guy is time. Because he's paying their salaries off in real time. Current set of compensation.

Yeah, interesting stuff.

And that time is the only factor in time vesting shouldn't use. In fact, slicing pie is a vesting tool in more startups.

Right, Right. Now, Mike, couple questions here. Does it only work for startups? And if, if so or if not. How do you define startup? I mean, I mean what if the, you know, the business is sort of considered A startup, but then it's a year old or two years old, but it's still sort of in that, I don't know, you know, that's a real opinion sort of thing of what's a startup? You know, it's hard to define, isn't it?

Well, people have different definitions for startups. My definition is people are taking personal risk. And personal risk means I'm taking money out of my pocket or I'm not getting paid. When a professional investor is somebody who invests somebody else's money, venture capitalist, for instance, and that person is charged to be a fiduciary of that money. So when they make a deal, they are sort of deemed by our culture as having the skill set to appropriately value an opportunity. An entrepreneur is not in a position to value their own opportunity because they're always going to be overly optimistic, which is why they start an entrepreneur in the first place.

That's true. It's good we have those people.

It's not really ethical to value your own company at a time when there's no predictable revenues or customers.

Sure.

When you have predictable revenues and breakeven points and customers, then you can't put a value on it. So when you can put a value on your equity, reliable marketable value on your company, you can start using that dollar amount as the sort of denominator for equity deals. So if my stock is worth a dollar a share and I want to reward you $50,000 in equity, I can give you 50,000 shares. If I don't have a stock value, then I can't use that stock value to determine how many shares you get. So we have to allocate shares relative to your risk. It's always relative. My risk relative to the rest of the team's risk. So If I was $7,000 in years ago, a thousand dollars worth. 50. 50. If you risk $200,000, you know, it's 66, 33.

Right, right. So, Mike, most startups certainly don't go well. In fact, most businesses in general don't go well. It's so amazing that anybody even get odds suck.

They're just terrible. Like if you looked at it from a purely sort of empirical, analytical point of view, this would be crazy. Like nobody would do it. Right. You know, there has to be some sort of emotion or ego behind it because otherwise probably nobody would take the risk. It's, you know, the odds are definitely against you. Right. But does slicing pie work when thin things go badly? And you know, I'm thinking of my own deal Right. It's not going that well. The partner doesn't like it anymore because the pie is actually shrinking, although the partner's share of the pie is increasing based on, you know, number of hours contributed to the business. But the whole pie overall for both of us is shrinking, and that's not so good.

Well, it's shrinking in your minds. There's no way to know if it's actually shrinking or not. I mean, you can look at your numbers and see your revenues are going down, for instance, but there's no telling that the next day you might get a big deal, you know, or your revenues might increase overnight, or you might be having a huge customer, and the next day they might quit you. So, you know, one thing that's really, I always stress people is we can't predict the future. You know, what's Apple Computer going to do tomorrow? Is it going to go up or down? I mean, we have tons of data on that company, but still, it's a crapshoot whether that's going up or down. Even with the best data in front of us, we can't predict the future. All we can do is see what's actually been played and see what decisions have been made. So if I believe in the future, I'll stick with the company. If I don't believe in the future, I won't stick with the company. So when things go south, that's when you want to start thinking about, how do I get equity back, Do I need equity back? Or how do I make decisions that might push somebody out of the company?

Yeah, well, I agree. You know, that's the thing to be an entrepreneur. It requires a lot of faith, and it is amazing to me. And, you know, I've never had a real job, Mike, how in the morning the world is falling apart, but in the afternoon, you got some really great news and your whole mood is better.

You never know what's going to happen. And that's the thing. It does require a lot of delayed gratification, a lot of faith, you know, a lot of maturity, really. Because, you know, maturity is what gives us the ability to delay gratification. It's phenomenal how something will just happen that'll just change the whole thing in a moment. And you never expected it. It could be great news, could be bad news. It goes either. It goes both ways all the time. Yeah, you're definitely right about that.

One thing I noticed a lot is this whole idea of it was my idea, so I get more equity than you. And people who come up with the ideas often want to get a big chunk of equity for it, which is understandable, but it's problematic in the sense that so many companies pivot away from the original idea and pursue something else. So if I give someone a chunk of equity for an idea, then I later pivot away from it. I just reward someone for an idea that wasn't that good.

Yeah, right.

They use the slicing pie model. You'd assign a royalty to that idea only when revenues came in. So if the idea was good, it would generate revenue and therefore equity.

True, true.

You just never know what's going to happen.

You never know what's going to happen. Mike, did you share with us all of the elements that contribute to the pie? We talked about time money. Now you mentioned royalty. So what is that under? What's that called? Is it just called intellectual property or.

How many intellectual property?

How many things are there?

There's basically time money ideas which would be done through a licensing deal or development. Time relationships which reward through commissions, potentially facilities, supplies, equipment. Slicing pie allows you to run your company like you run a real company. Pretend you are funded. The decision you should make is, in every case, when I need to buy something, if I had the money, how much would I be willing to pay? Magic ATM machine. Every time you ran out of money, you take money out of the ATM machine. As long as you make good decisions, keep producing cash. Money to go to the ATM machine is essentially slices allows you to convert your equity into basically a secondary currency which you used to buy things. But when you don't think about it that way, you think of equity as a finite resource. You think about, you know, gosh, do I give 2% to this advisor or 5% to this advisor, or 10% to this advisor? What you need to be thinking is, if I was going to pay this advisor, how much would I pay them? And if I have the money, I pay it. If I don't have it, I should use slices. So if I want to get license a book, for instance, I would pay a royalty on that book. If I had a manufacturing plan, I want to license someone's idea, I'd give him a license for it. If I wanted to pay a salesperson because he had a big Rolodex, I'd pay him a commission. So there's always a fair market value. Everything has a fair market value. It's much easier to observe the fair market value or negotiate the fair market value. It is to negotiate in equities. But it's going to have some future Value.

Okay, good, Good stuff. Now, Mike, I want to conclude with this, and I think our listeners are going to absolutely love, love this, because you have made it so easy for people to implement your slicing pie system. First of all, you've got the book. You've got. Well, you've got several books now you've got the software. You're doing a deal to combine your slicing pie software with a company called Harvest. I can't wait till that happens because that'll do the actual time tracking. Then you've got agreements. You know, like, if nothing else, you can save a ton of money on lawyers, you know, just by buying the templated agreement. Or you've also got a referral network of attorneys who practice your system. I mean, folks, one of the challenges I've always had in business, and I just love entrepreneurship, is that I can't do that many deals because, you know, you gotta think so creatively and who's contributing what. And it's just really complicated. And you never know. The slicing pie model has taken a lot of that confusion out of it and made it possible to engage in more partnerships in an equitable, fair way. Tell the listeners about some of that just before you go about some of these tools that just make it pretty easy to launch this.

Well, I call it a universal one size fits all models with the allocation and recovery of equity in a bootstrap company. That means any company on the planet can use the exact same model to do their equity split. And just like you mentioned, there's so many in every other model in the world. It's. It depends on this, it depends on that, and what's going to happen in the future.

Impossible.

Yeah. Out of the box. There's a great story on my website. This. A guy started a company with someone he met on Reddit. He never met him before. They put slicing pie in place and it worked out and they produced a successful company because of it. Didn't have to negotiate their equities, but they just used slicing pieces. It's a free model to use. You don't have to pay me for it, but I do sell contracts and books and software and things like that to help support people in it. There's a lawyer who wrote an article for Forbes not long ago, and before he discovered slicing pie, about 50 to 80% of the deals that he worked with in startups wound up in some kind of dispute that really required legal intervention.

Oh, yeah. Litigation on this kind of stuff is so frequent, it's. It's not even funny. It's just all the time. Yeah.

Commonplace. But he said the past three, four years, he's done over a thousand slicing PI consultations. Not one has wound up in a legal dispute.

Wow. Yeah, that's. That's amazing. Okay, so these resources are available and what do people need? Do they just buy the agreement and, you know, fill in the blanks or should they get a. Well, I mean, you're probably not going to tell them not to use a lawyer. Nobody's going to say that. But what's the basic.

How do you start slicing pie is a moral agreement? By doing the right by those to help you get to where you're going. Every country has slightly different legal restrictions on that. So just because things legal doesn't make it fair, doesn't make it moral.

Doesn't agree. Absolutely. Good point.

So slicing pie in itself will always guide you in the right direction to make the right decision to implement it legally. And then make sure you're not taxed inefficiently was the biggest problem. You need to find a lawyer in your area, and I have lawyers in Europe and South America and Africa and the United States. And you can download the legal form and most lawyers do a free consultation with you. Lawyers don't make a ton of money on corporate formation. It's not really the good business. What they want to do is form a relationship with you. Other kinds of contracts, intellectual property contracts, things like that. Slicing pie is sort of a foot in the door for lawyers to work with startups.

Right, Good point.

So the first step is to kind of buy into the slice and buy philosophy. The books do that. There's videos online, there's summary papers online. There's all kinds of ways to learn that. Once you get that in place, you can hire a lawyer through my website or if you have a lawyer that you work with already that doesn't know Slicely by, I'm happy to talk to them at no charge and provide legal guidance and templates, whatever they need.

Good stuff.

Software online is a way to track your contributions that are not paid out. Because, you know, QuickBooks tracks your cash transactions and in your payroll. If you're not paying anybody, you're not tracking payrolls. So slicingfi tools will do that for you. It's going to help you keep split and it's fairly easy to use once you get your head around it. Matter of keeping track of who's betting what, the tool does all the work for you.

Fantastic. Well, Mike, good stuff. Where can they find all this stuff? Give out your website and you also offer consultation calls and your fees are reasonable. So share whatever websites you like people.

To have slicingpie.com and click on the learning resources. You can set up a phone call with me through Clarity this morning. I do call this all the time.

Fantastic. Well, Mike Moyer, thank you for joining us. Welcome.

Thank you very much for having me.

Again.

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