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!