Of all the areas of a company, I'm the least comfortable with substantial performance based equity for CFO. There should be some - but the CFO's integrity must not be swayed by personal enrichment.
I participated in Web 1.0 in the late 90s and there were too many "CFOs" (really just recent business school graduates) that were willing to say whatever it took to get funding- and the amount of fraud was staggering. As a Certified Fraud Examiner, it continues to be an area of fraud as the CFO rarely has anyone looking over their shoulder - and small businesses rarely get CPA reviews/audits.
Whatever strategy you use (money, stock, options...) make sure there is a clear measurable for performance, and the CFO cannot and will not bend financial rules to meet those targets.
As a business owner I feel everyone should be performance based right down to customer service employees.
I see the CFO as a "Value Multiplier" and not a "Value Adder" - unless core value is created by the business, there's nothing that Finance or the CFO can do to "create" value.
Performance can be measured only after business has created value - a situation which cannot exist in a start-up where the business has yet to create or is in the process of creating core value.
As far as the first couple of rounds of funding are concerned Finance / CFO can only be a facilitator / enabler / catalyst to the process. As such, while performance can be an "Incentive / Bonus / Reward" determinant, I don't believe it is a fair "sole" determinant of remuneration.
Every startup I have been involved with has tied equity grants to performance. I would think the same would apply to any CFO.
It is, along with the CEO and other key members of the team that contribute to the execution of the business plan.
getting the right people who share the passion of the startup and highly capable is very essential. bootstrapping tells us to try by all means performance based equity may be a good choice.
Equity financing is normally very expensive financing, I usually don't try this option if choice available. why a CFO is required at the early stage? I would prefer getting a virtual CFO. if you really need a full-time CFO but you can't even afford to finance a CFO ... than the key concern will be something wrong to the business model.
If the above is true, how to get fundraising then?
If other option possible and not affecting your burn rate much, try not to go for equity financing.
I support performance based of appraising CFO (actually anyone, in cash or benefit in kind other then equity in start up as far as possible) as long as we can measure the CFO's performance. Therefore the first thing to address is how much you can measure and this is where you build your fixed and variable compensation.
If the entire effort of measuring the CFO is too overwhelming, than there isn't much to talk about performance based ... just stick with service based reward.
I am a person strongly believe in simplicity over complexity action in resolving complex issue.
Good, if and when you keep the greater majority of stock and when you tie CFO equity to performance metrics. However, it is best that ask the CFO to define his needs and then "negotiate" win-win employment scenarios.
The question would be how well funded are you to-date and what type of revenue traction do you have? Are you self, F&F, Crowd, Angel, VC, etc. funded so far? I would agree that all compensation in the early stages should include performance-based compensation, equity or cash. Depending on where you are today in the company and revenue development, and what the CFO is actually responsible for (i.e. raising capital would be a good performance measurement, assuming they're skilled, experienced, connected in this area, but generating timely and relevant reports wouldn't be) company equity + cash/benefits is always a good combination to get employees and executives to buy-in to the company's success. Dave Cochran, Seattle
I agree with a lot of the comments already posted. There's an ethical question about basing a CFO's comp on performance. Also I agree with the question - why do you need a CFO so early on? If you have particular "holes" in the business plan or model, then use a consultant in those roles and only pay for the time used. Giving up a piece of an early stage venture for a full-time CFO feels like a mistake - unless there are particulars you didn't outline.