Connecting a Technical Director's Pay to Company Performance ( In Addition to Equity Offering)

I have a friend, who was involved in a startup part time, and he got shares in it.

Now he was offered to join the startup as a technical director ( the rest of the founders are sales and marketing) full time. His partners would like to offer him fix salary, in addition to the shares he already has. But he would like his salary to be tied to the company performance. In this way if the company is doing badly, he would receive a lesser pay than his current salary, but if the company is doing well, then he would also do better, much much better.

He doesn't know how to put this to his partners, mainly because we have never seen such a precedence for software developers to tie their income to revenue company generated. Also, the fact that he already has a share in the company complicates the matter because his other partners would use it to say that his income is already somehow tied to the company performance.

Are there any existing plans/ examples out there that connect a technical director's pay to company performance?

Part of the problem is he would be tying his pay to not only his performance but the performance of the other founders as well. If the marketing guy doesn't bring in prospects the sales guy has no one to sell to. If the sales guy can't close there is no one to use the product. Really once the system is built and running his main job should be to make sure it keeps running while making improvements. I would say he has a smaller role in the growth of revenue at that point and a performance based pay doesn't make as much sense.

If he wants to be able to profit due to the company's success he should try to negotiate a smaller base pay for a larger equity stake. That would make more sense to me, and most likely, the other founders as well.

I am all for "pay for perfomance" but how exactly performance is measured in this case? That's the crucial question.

Since this is a startup it would probably take quite a long time to build a product and iterate it until the customers start flowing in. The only reasonable performance indicator might be a "development milestone", e.g. reaching specific points in product development lifecycle: first public beta, first user signup, major new feature launched, etc.

Again, in a startup things can change dramatically in a matter of weeks. So the reward system may get counterproductive, rewarding for things that are no longer top priority.

Since the guy gets some shares he's already in a "pay for performance" game. If he receives a reasonable amount of shares this might be enough incentive. If he's more like employee than a founder than I would create some "development roadmap". Just do not overdo it, things can change in unexpected way (hmm, I already said that).

Well, let him define the success metrics he is comfortable achieving.

Basically your time * an agreed amount per day/week = your direct contribution that is comparable to you earning else where.

Eg.
You agree that you normally get paid $9000 per month = ~$108,000 per year.

You agree on a target point per quarter or half year (year is too long). You agree on a bell shaped curve with your target as the centre point.

If it goes really well, your money is not quite double.
If it goes badly, your money is not quite half.

Put in multipliers as you see fit.

... all that said, I wouldn't give you as much shareholding as you have your immediate return rather than longer term, higher risk return ... good if you can drive the short to medium term (3 months to 2 years) but aren't good with the longer term.

This needs breaking down... The guy already has shares for his part in helping to start the business. They are his already. These have to be taken out of the remuneration equation for any future employment opportunities and shouldn't even come up in conversation. He's earned them already and because the company has already given them to him, they cannot use them as leverage for future work.

Now that's out of the way... I would pitch for a mix of pay and share options. The employee can choose to exercise these options and pay the exercise price (the value of the shares at the time the option was granted). So the risk is low to the employee because they aren't sacrificing much pay, and they will benefit from any upside in the shareprice rising. He can build up his share-holding thru share options and the founders are more likely to go for it because it is a common mechanism for incentivizing staff. The tricky bit is how many share options - and this is going to depend on how good he is at negotiating, and how much they want him to join the team.

Technical directors and company performance... Clearly the correlation between performance and the role of the Technical Director is highly dependent on the company/business model/industry. If this is a Technical Director that is an IT guy responsible for IT infrastructure and development then the argument is that for the company to be successful it needs to be able to scale effectively, and his role ought to be pivotal in this objective. Incentivizing him by linking part of his remuneration to performance is therefore a good idea if the other guys in Sales and Marketing want to be able to go full throttle. These days with more online/techy industries and business models the Technical Director plays a more business-oriented role and there the argument linking their role to company performance is even easier to make.

Hope that helps.

What specific competitive advantage does he bring to increase probability of success?
is it worth creating performance pay? If he was on the board would he hire him? If so why?
Can he be bonuses on a tier method at years end?
If sales hit this and uptime reliability is this then he gets another level of agreed compensation?
Perhaps something tied more to his core competency.

I do not believe everything with a startup is based off a manual or what worked for this company will for ours. It is just that a startup and if that core player already has a incentive in place then why bonus for reaching target? Being at target is going to raise his/her share value anyway. Coudn't he just ask for more shares with fixed salary? There are options to save the cash for growth not payroll unless they have a huge budget... most startups I know recycle coffee grinds and are cash strapped though..Best of luck.

This is a dangerous route. If revenue falls and it affects him personally, he may have trouble recovering. If it skyrockets, it may cause partners to view the situation unfairly.