Slicing the Pie Agreements at Startups

There is currently a start-up trend in Germany that has evolved from the need for collaborative development of software and/or project development for startups. The basis for this is that many start-ups/founders in the pre-investment phase often lack the capital to employ employees within the framework of a limited liability company.

This is of course especially true if a project/product has not yet reached market maturity in order to generate sales.

Here, so-called “Slicing the Pie” contracts offer an opportunity to “invest” working time in a project and in return to receive shareholder shares or other monetary benefits at a later stage. This is therefore a mixture of employment contracts, partnership agreements and agreements on exploitation rights.

The “Slicing the Pie” principle is not complicated. In fact, it is a simple formula based on the principle that a person’s percentage of equity capital should always be equal to that person’s share of the risk contributions.

Risky contributions include time, money, ideas, relationships, supplies, equipment, facilities, or anything else someone provides without full payment of fair market value. There are two basic types of contributions. Cash deposits consume cash, benefits in kind do not. Unpaid time, for example, is a benefit in kind, while a non-refundable expense is a cash benefit. Slicing Pie normalizes cash and in kind benefits by converting them into a fictitious unit, which then represents a normalized contribution to the risk potential.

“Slicing the Pie – Agreements exist in many variants, as partial solutions and in founding scenarios. In Germany, of course, the joint-stock company is suitable under company law, but a limited liability company can also be used with some restrictions and preconditions.

The model is usually used up to a certain point in time or until the company reaches the profit threshold or raises enough capital to pay participants for their contributions. At this point, the split “freezes” and then determines the distribution of the dividend or the proceeds from a sale.

Such contracts therefore offer a high degree of flexibility in the creation of start-ups and thus facilitate the financing of start-ups, but also involve a large number of pitfalls in the field of labour law, social security law and company law. and copyright. In case of doubt, such contracts are a grey area between the establishment of the Company, the GbR contract and any bogus self-employment. Slicing the Pie – Contracts should therefore not be drawn up, signed and implemented without legal advice. The liability risks could otherwise be enormous. This is particularly true in Germany with the very strict laws on bogus self-employment in Germany, which have just been tightened up with the new “Law against Illegal Employment and Benefit Abuse” of 18 July 2019.

In the past, I have advised clients both in the drafting of such contracts and on the part of the “co-entrepreneurs”. Contact me without obligation for an initial inquiry and I will try to explain to you briefly the alternatives to find out whether a “Slicing the Pie” agreement makes sense for your own company or the planned project, how I can help with this and where the risks lie.