In a perfect world the value of equity would go up in excess of the theoretical value of the various inputs.

This is the point of a growth-oriented business. Often, when you pitch a potential investor you are trying to sell them on a base value that is hopefully more than you and the other Grunts have put into the business. Successfully negotiating a high valuation is very motivating for Grunts and it breathes more life into the business.

However, you can set a new Theoretical Base Value (TBV) earlier in a start-up's life with a slightly different purpose: adding Grunts to the herd.

Sometimes, if you and other Grunts have worked hard on the company for a period of time, you may want to "harvest" a little of the value for yourselves before allowing others into the herd. This is fair, early Grunts take on more risk than later Grunts. I call this "Calibration".

Pretend that you and two other Grunts have each put in $30,000 worth of theoretical value into a company. You have been working for six months and you need to bring on more people. The company has a little traction now so you would like to reap some of the benefits for your hard work. You allocate the equity at 33% each on a TBV of $90,000. If you think the company is now "worth" $300,000 you can move the base to $300,000 and move forward as if you had all contributed $100,000 each. On paper your investment of time and whatever else you put in has grown threefold.

Now, when other Grunts enter the herd they will be earning against a base of $300,000 instead of $90,000. So, if they contributed $100,000 in value and the rest of you did nothing, they would have earned 25% of the company ($100,000/$400,000) instead of over 50% of the company ($100,000/$90,000). This allows early Grunts to keep a higher percent for themselves. Keep in mind, however, that the new work the original Grunts contribute will be calculated against this new TBV so they will consume pie at a slower rate.

The other thing to keep in mind is that if you calibrate too high you run the risk of exceeding the value you can sell to an investor, which would mean that when you do find an investor, newer Grunts will actually realize less value than they contributed which is a good way to anger a good Grunt. I could tell myself and the other Grunts that the company is worth $1 billion, but if I can only convince an investor it's worth $1 million I will have disappointed my Grunts.

It's best to calibrate only when enough value has been built that an early herd deserves to benefit from the higher-risk work.