Lawyers don’t agree on much. But they definitely don’t agree on dynamic equity.
Some attorneys swear by it. One startup lawyer with over 1,000 consultations says it has “virtually eliminated equity disputes” among his clients. Another calls it “a waste of founder time and money” that “never survives scrutiny from investors.”
So who’s right?
We dug into what legal experts actually say about dynamic equity, the concerns they raise, and whether those concerns hold up in practice.
The Case For: Lawyers Who Recommend Dynamic Equity
Matt Rossetti, a startup attorney at Sentient Law who has done over 1,000 consultations on the Slicing Pie model, puts it bluntly:
“Before trying the model, at least 50% of founders had a dispute over their equity split that required legal intervention within the first year or so of formation. In my experience, the Slicing Pie model has virtually eliminated equity disputes among founders.”
That’s not a small claim. Equity disputes are one of the most common reasons startups fail. Research suggests over 65% of startups fail due to co-founder conflicts, and equity is usually at the center.
Rossetti now makes dynamic equity his “default recommendation for equity distribution in bootstrapped startups.”
He’s not alone.
Bay Legal PC, a venture-focused law firm, describes Slicing Pie as “one of the most intriguing and transformative models” for equity allocation. They note it “presents an equitable, adjustable method for divvying up equity that can truly resonate with every team member’s contributions.”
Fairsquare LLP in the UK has built their entire startup practice around dynamic equity. In 2015, they received HMRC approval for a “legally-binding tax-efficient company grunt fund solution,” the first of its kind in the UK. They’ve since implemented it across hundreds of startups.
David Coon, a Dallas-based startup attorney, “helps clients execute dynamic equity agreements on a regular basis and feels that implementation from a legal and tax standpoint is straightforward.”
The pattern among these lawyers: they were skeptical at first, tried it, and became converts.
The Case Against: Lawyers Who Advise Caution
Not everyone is sold.
Jose Ancer at Silicon Hills Lawyer is one of the most vocal critics:
“If you are building the type of startup that will raise angel and VC money, stay away from ‘Grunt Funds’ or anything that attempts to create a variable, constantly changing founder equity split. It is tedious, ends up costing more in legal fees in the long-run, and in my experience never survives scrutiny from investors.”
His advice: stick with standard vesting schedules. They’re well-understood, investor-friendly, and accomplish a similar goal of protecting against early departures.
Aaron Hall, another attorney, lists several concerns:
- “It avoids the necessity of having hard conversations, open communication, and trust between company founders”
- “Becomes tedious and frequently generates higher legal expenses”
- “Investors tend to be very skeptical of the formula”
These aren’t fringe opinions. Many startup lawyers, especially those who primarily work with VC-backed companies, share similar reservations.
The Core Disagreements
The debate comes down to a few key issues:
1. Do investors actually care?
Critics say investors hate dynamic equity. Proponents say that’s outdated.
Matt Rossetti’s response to the investor concern: “Having seen companies using the model grow and move through multiple funding rounds, I have yet to encounter an investor who takes issue with the model or cites it as a reason to pass on an opportunity.”
One founder reported after their third funding round: “The second thing investors asked us is how we’ve held the team together. Slicing Pie has provided us with a really strong answer to that.”
The reality is probably nuanced. Some investors may be skeptical of unfamiliar structures. But a clean cap table with fair ownership and no festering disputes is exactly what investors want to see. How you got there matters less than where you ended up.
2. Is it too complex to implement?
Critics argue that tracking contributions and converting them to equity creates unnecessary overhead and legal fees.
Proponents counter that the complexity is front-loaded. Once you understand the model and set up tracking, it runs itself. And the alternative, negotiating a fixed split before you know what contributions will look like, often leads to expensive disputes later.
As one UK firm noted after implementing dynamic equity for hundreds of startups: “Converting hypothetical splits into actual shares is quite simple from a legal standpoint.”
3. Does it avoid hard conversations or enable them?
This is where the critics have a point, sort of.
Dynamic equity can let founders defer the “who’s worth more” conversation. Instead of deciding upfront, you let contributions speak for themselves.
But is that avoidance or wisdom?
Trying to predict future contributions on day one is a guessing game. Research from Harvard Business School found that nearly 40% of startup teams spend a day or less deciding their equity split. That’s not a thoughtful conversation. That’s a guess.
Dynamic equity replaces the guess with data. You still have hard conversations, just about actual contributions rather than hypothetical ones.
The Legal Concerns (And Whether They Hold Up)
Let’s address the specific objections lawyers raise.
Tax complications
Some attorneys worry that issuing equity on a rolling basis creates unnecessary tax consequences.
The response from experienced practitioners: “Slicing Pie companies face exactly the same tax issues faced by any other equity model.”
The key is proper structuring. Many implementations use a fixed grant of restricted shares at formation (with an 83(b) election), then vest those shares according to the dynamic split at conversion. Same tax treatment as traditional equity, with the benefits of contribution-based allocation.
Administrative burden
Yes, dynamic equity requires tracking contributions. That takes discipline.
But so does running a startup. If you can’t track who’s contributing what, you have bigger problems than your equity structure.
Modern tools make this straightforward. A shared spreadsheet works. Dedicated software works better. That’s why we built a Slack integration for logging contributions in seconds, right where your team already works.
Enforceability
Under both US and UK law, dynamic equity agreements are enforceable when properly documented.
Fairsquare LLP notes that “a letter of intent can be enforced by a court if the essential terms in it are certain.” The key is having clear written agreements that specify how contributions are valued, how the split is calculated, and what triggers conversion to fixed equity.
Unfamiliarity
This may be the real issue. Many attorneys simply haven’t encountered dynamic equity before.
UK lawyers who implemented it describe having to “hack through a veritable forest of laws” the first time. But once they understood the model, implementation became routine.
If your lawyer’s objection is “I haven’t done this before,” that’s not a reason to avoid dynamic equity. It’s a reason to find a lawyer who has.
When Dynamic Equity Makes Sense (And When It Doesn’t)
Based on what lawyers say, here’s when dynamic equity works best:
Good fit:
- Bootstrapped startups where founders are contributing unevenly
- Teams where roles and commitment levels may change
- Situations where it’s too early to know what fair looks like
- Companies that want to avoid the problems of 50/50 splits
Less ideal:
- Companies raising VC immediately (though it can still work)
- Teams with attorneys who refuse to learn the model
- Founders who won’t commit to tracking contributions (though tools like ours make this much easier than spreadsheets)
The lawyers who love dynamic equity tend to work with bootstrapped startups. The lawyers who hate it tend to work with VC-track companies where standard structures are expected.
Neither is wrong. They’re serving different clients with different needs.
What Legal Documents Do You Need?
If you decide to use dynamic equity, here’s what lawyers recommend:
1. A founders agreement or letter of intent
This establishes that you’re using dynamic equity, how contributions will be valued, and what triggers conversion to fixed ownership.
2. An operating agreement (LLC)
This formalizes the equity structure and includes standard provisions around transfers, voting, and exits. LLCs are the preferred structure for dynamic equity because of their flexibility in allocating ownership. You can always convert to a C-Corp later if you raise institutional funding.
3. Contribution tracking records
Not a legal document per se, but essential for enforcement. If you ever need to prove what someone contributed, your records are the evidence. This is exactly why we built Equity Matrix - to make tracking effortless and create an auditable record from day one.
4. Conversion documentation
When you convert from dynamic to fixed equity (usually at profitability or funding), you’ll need board resolutions, updated cap tables, and potentially new share certificates.
Most of this is standard startup paperwork with modifications for the dynamic model. An experienced attorney can draft it in a few hours.
Frequently Asked Questions
Will investors accept dynamic equity?
Most experienced startup attorneys report no investor pushback when the model is properly implemented. By the time you’re raising money, you’ve typically converted to a fixed cap table anyway. Investors see the result, not the process.
When does the dynamic equity period end?
Usually when the company reaches profitability (breaking even) or receives sufficient investment to fairly compensate contributors. At that point, the dynamic split converts to fixed ownership.
What happens if a cofounder leaves during the dynamic period?
This depends on your agreement. Standard practice: if someone leaves for a “good reason” (life circumstances, mutual agreement), they keep their accrued slice. If they leave for a “bad reason” (joining a competitor, breach of agreement), they may forfeit some or all of it.
Should we use an LLC or C-Corp for dynamic equity?
LLCs are the better fit for dynamic equity. They offer more flexibility in how you structure and adjust ownership, which is exactly what dynamic equity requires. If you later raise institutional VC, you can convert to a C-Corp at that point. Many startups follow this path: start as an LLC with dynamic equity, then convert when the equity structure is ready to be fixed.
How do we value non-cash contributions?
Use the fair market rate, what you’d pay a professional for the same work. Many implementations apply a multiplier (2x-4x) to unpaid contributions to account for the risk of working without salary.
Can we retrofit dynamic equity to an existing company?
Yes, though it’s more complex. You’ll need to agree on how to value past contributions and potentially restructure existing ownership. An attorney experienced with dynamic equity can help navigate this.
The Bottom Line
Lawyers are split on dynamic equity because they serve different types of clients.
If you’re raising VC next month, standard vesting may be simpler. Your investors and lawyers already know how it works.
If you’re bootstrapping, building with uncertain roles, or trying to avoid the equity disputes that kill startups, dynamic equity solves real problems that traditional structures don’t.
The critics’ concerns, investor perception, complexity, tax issues, are real but manageable. The lawyers who’ve actually implemented dynamic equity at scale report that these concerns rarely materialize in practice.
“I have yet to encounter an investor who takes issue with the model or cites it as a reason to pass on an opportunity.”
That’s not theory. That’s over a thousand consultations of experience.
Ready to explore dynamic equity for your startup? Our equity calculator helps you model contribution-based ownership, and Equity Matrix makes tracking contributions automatic.
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