Is performance based equity vesting possible?

I wouldn't give a part timer that big of a piece of the business. He's not an founder and hasn't taken the risks you have. Hire him on commission, with perhaps a portion paid from the intial sale and a portion paid over an appropriate time based collections/additional revenue so he doesn't bring you 'garbage' customers. (but have an attorney draw the plan up)

If his job is bizdev and sales, then pay a generous commissions from the profits. If you can't make profitable sales, then he isn't doing his job.

If you give him equity, then his job is to make the company look good in hopes of getting a valuable exit, and that doesn't always line up with building a profitable business.

If you are the developer and have already identified the market, and built the product, then you are the company, even if that sales guy has the MBA and experience. (By the way, startup experience in sales and marketing is very different from selling & marketing in an established company).

I mentioned this in another answer (http://answers.onstartups.com/questions/1760/when-do-you-split-up-the-equity/1768#1768), but I'll repost a piece of it here:

At our first full-team meeting (I'd met my co-Founders individually, but not all three of us together), we came to an informal agreement on the percentage split. However, I wanted to make sure they would do their work, so we also came up with a vesting plan.

I wasn't worried about the Developer, so he got 10% to start, and 5% for each of three milestones. The third partner was the one who seemed like he might need some extra motivation, so we started him at zero, and gave him 5% for each of three milestones - each harder to attain than the previous one.

When I took this to our law firm during the incorporation process (S-Corp), it took some explaining, but eventually he was able to make the vesting work out.

That third partner is basically in sales and business development, and his three vesting milestones are all based on sales. So the short answer is "YES, it's possible." :)

The same caveat applies: By default, any shares that don't vest for the other partners revert to the company, which means they are split among the owners. If you want them to revert to YOU, make sure the lawyer puts in a clause that states that you have the right to purchase any unvested shares from the other partners, either at a certain time, or in the event that they leave the company. That way, you prevent your share from becoming diluted.

It is possible but will it be enough to motivate him to actually dedicate the time and commitment required to get your startup off the ground?

If I were to put myself in his shoes chances are that I would have very little incentive to really work hard under an arrangement where my equity is vested against sales. Doing business development and selling at a startup is one of the biggest challenges that makes or breaks the company. If I am not incentivized enough would I put in those extra calls or send more emails out in the day. Highly doubtful.

You must really focus on how you can make your friend eventually transition full time into the company. This needs to be done by cutting down the barriers and making it easier for him to feel that this is also his company.

The short answer is yes, you could, but it is not recommended.

Vesting is a tool that a company uses in order to ensure an alignment of incentives with employees. An employee would naturally want to be fully vested asap, but that does not ensure loyalty in the long run.

Vesting over time is the industry practice for vesting, and sales lead to commissions rather then accelerated vesting. It makes sense, since it is easy to pay someone with the money they bring in directly.

Also, vesting based on milestones might lead to increased expenses on the part of the company as far as the accountant is concerned (which would lower profitability) and the recipient of the stock might need to pay income tax on the stock, despite the fact that they got no money (I am no CPA, but that is what I understood at a Wharton course I took). Talk to a CPA before you come up with a new vesting plan. Also talk to a lawyer (they always see what is wrong with any contract, and are willing to fix it for a fee).

Compensation based on commission is, of course, a standard business model, so of course it can work.

However, in this case this guy isn't a co-founder is he? He's just an outside sales guy. Which is great, and deserves a nice cut, but "founder" implies "working for stock," which commission isn't, nor should it be.

For sales, the simple, proven way is to pay on commissions. Good sales people don't care much about owning stock long-term. Rather, show them the dollars.

If the job was less sales-oriented, vesting is what would save you: if you perform, you keep vesting. If you stop performing, you're out and you lose whatever stocks were not vested. It doesn't allow you to modulate based on the amount of performance, it's all or nothing, but it works well.

In your case, I'd go with a major commission plan, with a small amount of stock-options with vesting. This way, there is a major immediate cash upside for the person joining, with some long-term feeling of being a co-founder.

Is it possible? Certainly. You would want to draw up very clear terms for how his equity is calculated, though, and have it vetted by a lawyer.

Do be aware that certain incorporation structures (S-Corporations in the US, notably) have stricter regulations about how ownership and equity must be calculated/divided.

With C-Corporations you have more leeway to determine equity and ownership.