What is a grunt fund?
“A person’s share of the rewards should equal that person’s share of the at-risk contributions”
A grunt fund gives fiscal value to all contributions, tangible and intangible, that a founder makes to a startup. Everything from intellectual property and connections to time and cash is valued by the fund. A complex formula then assigns weight to each contribution and allocates company equity stakes among the founders accordingly. The purpose of grunt funds is to make sure that startup founders are rewarded for everything they offer their company, not just the money they actually invest. Grunt funds are dynamic, meaning they monthly recalculate equity stakes as contributions to the company change. For more information, see the Grunt Fund Calculator at slicingpie.com.
For example, three founders start a company. Using a grunt fund, the equity of the company is allocated monthly based on ongoing contributions. Founder A contributes $100,000 cash to the company in the first month but nothing more. Founder B contributes intellectual property valued at $50,000 and an average monthly work of ten hours, with each hour valued at $100 per hour. Founder C contributes an average monthly work of thirty hours valued at $120 per hour. Founders B and C earn more equity as they continue to work.
Reasons Why You Should Consider a Grunt Fund
- It is dynamic, meaning it accounts for real-time changes in contributions
- Accounts for non-cash contributions, such as ideas, relationships, and time
- It can help prevent legal battles and drama between company founders
- Helps calculate fair buyout price if someone leaves company before it breaks even
Reasons Why You Shouldn’t Consider a Grunt Fund
- It can cause the founders to avoid the necessity of having hard-conversations about value, stifle open communication, and reduce trust between company founders
- It is tedious and can lead to greater legal fees due to ongoing complexity of the capitalization table.
- Investors tend to be very skeptical of the formula
- There are many traditional, proven mechanisms that accomplish the same thing (e.g. vesting schedules)
Grunt funds may work well for founder teams who are unsure of their ability to consistently contribute. The founders need to be able to assign a dollar value for their contributions, including contributions made later in the life of the company, be it work or assets such as intellectual property, equipment, or rent. Time tracking is a matter of trust but can be linked to production metrics to confirm actual productivity. Using the online tools can help track contributions and update equity in real-time.