There's a game Kongregate (anybody, feel free to jump in with the name) where its essentially a roguelike. You pick a class and race and go down the floors, leveling up.
When you die, you lose everything (gold, weapons, etc) but you unlock an 'epiteth'.
When you start a new character you can use 2 or 3 epiteths (provided you've unlocked them) and they alter your initial skills and stats.
Essentially, you have to die 3 times to get the best epiteths and add them to your final character.
Maybe that could help?
Thanks! Sounds like an awesome game. Does anyone know the name? Would love to try it!
However, I am more concern with how to explain it storywise, rather than the game mechanics of it. Even though it is multiplayer, I am going to follow roguelike RPGs and not explain anything. Just let the player die and respawn fresh with the same name without reason.