CW 954 - Partnering on Real Estate Deals & Startups, Slicing Pie by Mike Moyer

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Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome and thank you for joining me today. This is your host, Jason Hartman. It is a beautiful, gorgeous day in Las Vegas, Nevada. A beautiful day in a rather ugly city. Yeah, I'm not a fan of Las Vegas, I gotta be honest with you. Not that I live in the exact right place. If I lived in Henderson or in Summerlin, I'd probably like it better. But I think I'll be moving sometime in the near future. I'm just too lazy to move. It's such a hassle. Very few things in life are more of a hassle than moving. It's probably one of the worst things yet. I've done it a lot in my life. Maybe I'm just a glutton for punishment. Not sure. But maybe Austin, Texas will be my next one. I've thought of moving there for many years. If you have any opinions about this, feel free to share your thoughts@jason hartman.com ask jason hartman.com ask. But I really do want to live a few more places before I decide where I'm going to settle down. And places that provide the most opportunities to meet that wonderful lady that I'd like to settle down with. Yes, haven't met her yet. I don't think that definitely is a criteria in choosing your city. I saw an interesting article the other day that said millennials are actually not that mobile. Now this is kind of contrary to popular belief that millennials move for jobs and so on. And as I was reading the article and I was thinking about the housing market and how it impacts us as real estate investors and all of this great stuff, I was thinking, well, what is my normal question, folks? You know my normal question, right? What is the question? The question Is compared to what? Compared to what? In the aggregate, they're still pretty mobile, that group. But they first got to get out of their parents home, you know, they've got to leave the nest. And the boomerang generation, as you know, comes back, they go to college, they go away, then they come back and they're like, hey, why pay rent? Why pay a mortgage? I already got a mortgage to pay, it's called my student loan, but I didn't get a house with it, et cetera, et cetera. So that's an odd situation with Generation Y. Gen Y has an odd situation. Hey, speaking of Gen Y, our Venture alliance member Brandon is going to be talking to a few of you, his fellow Gen Y ers, about a new membership opportunity for the Venture Alliance. Yes, a junior membership opportunity. So you may hear from Brandon soon. He's got a couple of you in mind. He's going to be reaching out to. So look for that. And what am I thinking about today? Well, I'm thinking about our guest today who is fantastic by the way, and has developed a fantastic system because you've heard the terms about partnerships and equity sharing and bringing a partner in on your real estate deals and all of these different ways to do that. Well, today you are going to hear a very good way to do it. Now it is amazing to me that I think it was maybe it was New Year's Day 2018. It was possibly New Year's Day 2018. I remember very specifically having my last slice of pie. Yes, my last slice of pieces. Pumpkin pie, my favorite. I love pumpkin pie. I love chocolate too. I love income property, but chocolate is better than income property. The question though is what is better than chocolate? Is anything better than chocolate? I'm not sure, maybe pumpkin pie. Pumpkin pie is pretty good. But today we'll talk about slicing pie as it applies to real estate deals. And I think you'll really like this. There are many ways to do partnerships and one of our clients who you've heard on the show before, Muthayam, he's a very social, very pleasant, nice guy. He has I think 19 houses now and he recently interviewed me and we Talked about the 280 ish give or take units I have, he thought my investment portfolio was some secret. It's not a secret at all. I don't know, I guess I just don't talk about it a lot. I have over the years, many times, but maybe Muthai has not listened to the prior 953 episodes, but I think he has actually So I don't know. But yeah, I've talked about it a lot and I have done some slicing pie. I have invested with other people, in fact really all but one and over decades I have had many partners on real estate deals over the years and you know, they've all worked out pretty darn well. I think only one really worked out poorly. But income property is a pretty easy thing to partner on. Why do I say that? Well, as long as neither party lives in the property, it's pretty easy as long as you keep it arm's length. Then you know, you're just doing some math. You're just slicing the pie. But there are some nuances to it that you might think are valuable today as we talked to Mike Moyer, the author of Slicing Pie now understand that the slicing pie model and I've had him on my other shows when we've talked about startups. He's been on my Speaking of Wealth show and so forth. But today we're going to focus the slicing pie methodology for real estate investing. So again, I think you'll get some stuff out of this. Mike was nice enough to speak to our Venture Alliance Mastermind group at our Chicago event. And hey, maybe we'll have him out at a future Meet the Masters or some other event in the future to talk about slicing pie for real estate investors. But what am I thinking about today? Well, I'm thinking about a few things before we get to Mike. Number one, I'm thinking about how I want to say welcome to the Venture Alliance. Our newest members are Guy and Mary Ellen. You may have met them at some of our events. They were at Meet the Masters. It's great to have them on board. And I know they will also be planning to come and join us in Sweden in April for the Ice Hotel trip. Yes, we are just two more people. I think we're just two more people away from green lighting that trip. So very, very exc bucket list item. The Ice Hotel. Go to Jason hartmanicehotel.com and check that out. If you'd like to join us. Venture alliance members and non members can go as well. Then the Venture Alliance Mastermind, of course, venturealliancemastermind.com what am I thinking about though? I am thinking about absorption rates. Absorption rates as they apply to real estate. This really goes into the concept of how much inventory is there in the marketplace at any given time. I'm not going to talk about statistics today. I'm just going to talk about the concept. Why am I not talking about statistics? Because If I do, I will mislead you. And I never, ever want to mislead you. People at CNBC and in all the other media, let them mislead you with their sound bite quickie statistics that aren't very meaningful. Why aren't they very meaningful? Well, first of all, because there's no such thing as a national real estate market. All real estate is local. There are about 400 real estate markets in the United States and then many more around the world. Of course, all real estate is local, but also you have to segment the market by price, by product type, a lot of things. Okay. This is not as simple as all those people make it. You really got to drill down very deeply when you're talking about real estate statistics. So today, just conceptually, I want to talk to you about the three basic types of markets. Now, you've heard me talk about that before and you think I'm going to talk about linear, cyclical and hybrid markets. No, I'm not talking about that. Those are geographical markets or. Well, they do change a little bit. So they're also based on time. But what I'm talking about now is a market condition barometer for the market, and that is really how many months of inventory in housing there is, or in any type of real estate, for that matter. You know, how much supply of office space is there, how much supply of retail space during the retail apocalypse we're going through now, how much is there of anything in any marketplace? Not just real estate, of course. So there are three kinds of markets. Now, other people will name these differently than I do, and there are varying opinions as to how you know which market you're in in terms of how many months of housing supply. Now, most people will say there is a buyer's market and there is a seller's market and there is a balanced market. Right. You've probably heard that before. I am going to say that there is a buyer's market, a seller's market, and a broker's market.

Yes. I'm going to think kind of selfishly here because I've been in the brokerage business all my life, since age 19 years old. Yes. I've been doing this a long time, folks, because, hey, I'm 22, so three years. Just kidding. These three types of markets we've got. How do you know which market you're in? Well, the way you know which market you're in is by the speed of absorption of properties or the speed of absorption of the product in the marketplace. And how do you know how that is going well. You can look at the months of supply on the market. You take a snapshot in time, click snapshot in time, and you say, if no more properties appear on the market after today, how many months of supply do we have? And people have differing opinions about this. So just call it a reference point, call it a rough estimate, but it's close enough. Some will say, if there are zero to four months of inventory on the market, you're in a market that is a seller's market. Why is it called a seller's market? Because in the seller's market, the sellers have the advantage because demand for property exceeds supply of properties. Now you might think, well, if it takes four months to sell a house, that doesn't sound like it's moving very quickly. Well, that's not what I said. I didn't say it takes four months. I said four months of supply. And some will say up to five months of supply. And that's a seller's market. So, for example, if you have people absorbing properties at the rate of. We'll just do this in thousands. Okay. You know, this is just an arbitrary number. Okay, well, let's just do it in one or two. Right. If you have one person buying a property per month in whatever your given market area is. Now, obviously you want to add a lot of zeros to this, but we'll just make it real simple. And you have four homes on the market, then it will take four months to absorb the supply at the rate of one per month. Right. Or five months. People would call that a seller's market. Mostly four or five. Zero to five months. Really? You know, maybe four. Okay. Depends who you're talking to. Right. Depends who you're talking to. The balanced market, or what I like to call the broker's market, because it's the market I like best and I know you like what I like. Right. So, yes, I like the balanced, kind of even keel market. Several episodes I said ago, I said, I hope the market slows down. Yep, I did say that. And in the same breath I said, I hope I don't regret saying this. So I. I would like to see it be a little more calm than it is. Right. We have very low inventory, but I think. I think we got a pretty good outlook. I'm still very bullish on the real estate market, and you know me. Hey, you've been through the thick and thin with me. I've been talking to you for 14 years. Okay? So you know that when I tell you things aren't good you're getting, hopefully you believe an honest answer on my outlook on the market. But hey, when things aren't good, that's when you should be buying the most. Right now. Now, granted, you're never going to know where you are in the cycle in terms of how bad they can get. Because in 2009, people thought it was going to get worse and it only got better. Right? It's very hard to know when you're at the bottom or when you're at the top. But one metric is this absorption rate or the months of supply. Not exactly the same thing, but conceptually they go together, they're aligned. So four to seven months or five to eight months is considered kind of that balanced market, that broker's market, as I like to call it. Okay. And then if you have more than seven to nine months of housing inventory, you are in a buyer's market. That's what most people call a bad market. Right, but those are dumb terms. You know, a good market is a seller's market and a bad market is a buyer's market. And the middle of the road market, well, hey, that's the brokerage market. I think it is easiest for brokers to operate in that middle type of market. It's the one personally I like the best. But things are crazy right now. It's a crazy, crazy market. Prices rising quickly in most places, interestingly, and I wish I had more time to talk about it. We've got into get into slicing pie here, but I was looking at a housing forecasters or a housing economist kind of website the other day and he was offering some really good, interesting insights. But again, I couldn't really listen to him as a definitive source because his areas, even when they were by the city, were too macro in nature. So I hope I'm gonna get this guy on the show. I've invited him a couple of times, so that'll probably happen soon. But yeah, there's a lot to this. We could talk about this for days. Okay, we really could. But let's talk about partnerships. Let's talk about equity sharing. Let's talk about slicing pie. I've had many partners and I do have partners currently on some of my properties. And I pretty much have always liked those partnerships. Only one went kind of badly. So. Ice Hotel. Oh, San Jose event. Don't forget, San Jose is coming up. We are selling tickets very briskly for that. By the way, the early bird pricing goes away soon. Okay, you can go. We've got a, a website just for that event. By the Way now it's Jason Hartman university.com Jason hartmanuniversity.com and the JHU event is really interactive. You'll do the math, you'll work the numbers. You'll know how to do the math and work the numbers, how to analyze a real estate deal and how to build a portfolio. The portfolio building game we do at that event has just received rave reviews and people absolutely love it. So join us in San Jose. That's March 3rd, Jason Hartman university.com Of course, you can also register for the event@jason hartman.com but if you want to look at a page just about this event, Jason hartmanuniversity.com okay, without further ado, here is Mike Moyer as we talk about slicing pieces. Yeah, it's my pleasure to welcome back a returning guest and that is Mike Moyer. He is the inventor of a phenomenal system 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. I 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 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. You invest your time and your money, you could 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 can actually lose at 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 it is like a company because there's a chance of losing it all. And when 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, 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, just 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 it's 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 bank loan, but there's no cash out of pocket, 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 too. 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, 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 a 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'd pay income taxes on it. When you bought the thing, you'd pay sales tax on it. Plus, cash is more scarce as a member of the factor. So you 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 a slice is a fictional unit of at risk contribution. It's the same thing as a poker chip. Okay, just like buying 4,000 poker chips, the poker chip itself cannot be used for anything except for playing the game.

Right.

The slices simply determine what the split is. And that's what'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 slice.

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 inexperienced contractor. So for instance, if I did 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. You always want to make the most efficient use of our cash. You get two slices per dollar for every non cash contribution you put in. The reason you put those multipliers is to create some consequences when somebody leaves the company, leaves the pie. So find 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 license 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 really 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 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 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 done by a bad equity split. But it's not really a very good tool because all it really is takes into account is time. It 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?

Well, 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, 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. When I'm paying you a full market salary, then all I want you to do is stick around then and time is 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, 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, you know, multimillion dollar chunk of equity that invests in 15 years. So now none of it will last for 15 years.

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

Long ramp.

Yeah.

But if he fires them before that 15 year mark, then that's going to be prorated. And 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. You know, current set of compensation.

Yeah, yeah, Interesting that time is the.

Only factor in time investors shouldn't use. In fact, slicing PI 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 I have to allocate shares relative to your risk. And it's always relative. My risk relative to the rest of the team's risk. So if I raised $100,000 in years ago and $1,000 worth. 50. 50. If you risk $200,000, it's 56, 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 gets into business because the odds suck. They're just. 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. And the odds are definitely against you. Right. But does slicing pie work when things go badly and 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 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, 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 gonna do tomorrow? Is it gonna go up or down? I mean, we have tons of data on that company, but it's still crapshoot whether it's gonna go 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. 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, you know, 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.

Using 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 is, 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 get out of the ATM machine is essentially slices allows you to convert your equity into basically a secondary currency where 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% of this advisor, or 10% of 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. 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. And it's much easier to observe the fair market value or negotiate the fair market value. It is to negotiate an equity that'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 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 got to think so creatively and who's contributing what, and it's just really complicated and you never know. The slicing piece 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 of 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. Too much out of the box. There's a great story on my website. There's a guy, 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 in the past three, four years, he's done over a thousand slicing PI consultations. Not one has gone 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 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 more.

Absolutely. Good point.

So slicing pie in itself will always guide you in the right direction, 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 by is sort of a foot in the door for lawyers to work for 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 spicy 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 in your payroll. If you're not paying anybody, you're not tracking payroll. So slicing PI tools to 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.

Yeah. 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 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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