9

The Magic of Mutipliers

For the Slicing Pie model, I recommend a non-cash multiplier of two (2) and a cash multiplier of four (4). Non-cash contributions include time, ideas, relationships and anything else that can be contributed without spending actual cash. Cash contributions include cash (when spent) and un-reimbursed expenses.

These numbers are set based on my personal experience with the model and they are important. I encourage you to resist the urge to change them! The multipliers make the model work. Without them, you will be less successful in achieving a fair split. There are two main purposes of the multipliers:

First, the multipliers assign a risk premium for the contributions. In a startup, the risk that you will never get paid is extremely high (almost 100%). To reflect that extremely high risk, for non-cash contributions the risk premium is twice what you put in.  For cash it’s four times the contribution. Cash is given a higher premium because it’s much harder to save a dollar than it is to earn a dollar. Additionally, non-cash contributions are calculated at pre-tax rates while cash is calculated after taxes. On a global scale, tax rates hover between 30% – 60%.

The multipliers recognize the difference in scarcity between cash and non-cash contributions. This is critical to attract important investments of seed-stage cash. Savvy investors know that a person’s time at $100/hour isn’t quite the same thing as their crisp $100 bill.

Sometimes people think that the multipliers should change over time to reflect the possibility that risk goes down over time. Early contributions, they argue, are riskier than later contributions so the risk multiplier should go down over time. I completely understand the logic, but in practice startups are much too volatile to definitively ascertain a level of risk. Risk may appear to go down as traction is gained and revenue is generated. If a major customer cancels, however, risk may go up. Similarly, if a company grows so fast that they can’t provide a meaningful level of service risk could go up. Startups have so many ups and downs that trying to predict risk at any given time is futile. In the Slicing Pie model you have to measure what you can measure. Because of this I keep the multipliers constant.

The second purpose of the multipliers is to protect the company and the individual contributors from decisions one may make that adversely affect the other. This means that the multipliers effectively act as a retention program for the company and a severance program for employees.

If the company makes a decision that adversely affects an employee the result will be termination without good reason or resignation with good reason. In these cases, if the company wants the slices back they must pay the full amount with the multipliers. That means if you put $1,000 in the company has to pay $4,000 to get you out. This forces companies to think twice about pushing employees out.

In contrast, if the employee makes a decision that adversely affects the company the result will be termination for good reason or resignation without good reason. This means the employee loses slices received from non-cash contributions and loses the benefit of the 4x multiplier on cash contributions. This forces individual employees to think twice before quitting or slacking off on the job. Without the multipliers you lose this built-in protection for both parties.

Multipliers are a key part of why the Slicing Pie Model works so well for so many companies. They are the secret ingredient that makes the pie so delicious!

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  • Terrence Williams

    Is it feasible that you can take back someone’s slices/multiplier if you terminate them for good reason or they resign without good reason? It seems that they would still want their slices, thus why they were working on the project to begin with. I like the idea of a retention tool, but can it actually work that way that they could lose their slices?

    • Yes. A traditional equity split would use time-based vesting usually starting after one year to provide an evaluation period. During that year, if the employee gets terminate for any reason they would not get equity. (This leaves employees vulnerable to unscrupulous managers)

      In Slicing Pie, losing slices provides a consequence for employees if they slack off. Startups need protection from such employees and Slicing Pie provides it. Without this consequence people could just bail out and leave the company hanging.

      It’s not fair to slack off or quit and expect to benefit from the hard work of others.

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  • Harald Stelzer

    After the pie is grown a little bit – mostly by time contributions – how can I be motivated to make a cash contribution by any other way than change the cash multiplier. In my case a 10.000 $ contribution would almost make no difference (+0.2%) allthow hardly anyone in the team could come up with this amount of money nor anybody else is willing to. My Idea ist that the cash multiplier could be negotiated from time to time and it depends on how much the grunt is in need of money. What do you think?

    • Hi Harald,

      I don’t recommend changing the multipliers, it isn’t really fair and it does not address the underlying issue. The issue you’re describing is a question of confidence in the business from you and your team. You view the investment as high-risk because you are losing confidence in the business. If everyone was confident in the future, they would be willing to invest more. I’m not sure where you are from, but a confident team should be able to raise $10K between them (credit cards, loans, mortgages, selling things).

      Let’s pretend you, or your teammates, invested $10K at the outset of the venture. The contribution would have made a big difference. However, that same contribution gets you the exact same amount of Pie as the new contribution. The only reason it would get you more is if the company is worth less. There’s no practical way to determine a value so wanting more simply reflects the team’s sentiment that the company must be worth less than it used to be.

      If the team thought the company was worth more (showing confidence) the multiplier should decrease, not increase.

      Therefore, the fairest approach is to keep the multiplier constant. If you don’t think it’s a good investment, don’t do it. Everything is optional. You are under no obligation to invest, but you are obligated to be fair.

      I hope that helps put it in perspective.

      -Mike