A Toolkit for Private Company Performance Awards

Over the years, I’ve had many conversations in which performance awards consistently emerge as an area of concern. Common questions include: What are performance awards? How do I manage them? What targets should I use? More broadly, companies often struggle with determining the best approach for issuing and administering these awards. In this blog, we’ll discuss what performance awards are and provide foundational guidance on how they are commonly used in private companies.

Before diving in, it’s important to address the why behind performance awards. As private companies scale, investors expect discipline, executives expect upside tied to outcomes, and boards want incentives aligned with genuine value creation. Performance awards help bridge these expectations by tying compensation to defined events, milestones, or performance outcomes. While they can add complexity, their purpose is to ensure alignment between rewards and results.

With that context, let’s explore how performance awards work, when they make sense, and what leaders should consider before implementing them.

What Are Performance Awards?

Before defining performance awards, it’s worth noting that not all performance awards are the same. As the saying goes, performance awards come in many “flavors,” and companies have significant flexibility in how they are designed. As a result, it’s important to recognize that there is no single structure that fits every organization.

At a high level, performance awards are equity grants that vest or pay out only if specific performance conditions are met. Unlike standard time-based awards, performance awards tie compensation directly to company milestones, such as growth targets, profitability, or liquidity events.

Private companies typically use performance awards to:

• Retain senior leadership through critical growth phases
• Incentivize IPO or exit readiness
• Align executive outcomes with investor expectations
• Encourage behaviors that support company objectives
• Manage dilution by limiting reliance on purely time-based grants

Common Types of Performance Awards in Private Companies

While structures vary, most private-company performance awards fall into a few common categories.

Performance-Based Vesting Awards

These awards vest only if a defined performance goal is achieved. The underlying equity may be stock options or RSUs, but vesting is contingent on meeting a specified milestone.

Common triggers include:

• Achieving a target company valuation
• Reaching revenue or ARR thresholds
• Completing an IPO or other liquidity event

These awards are often granted to senior executives where alignment with outcomes is particularly important, though they can introduce additional administrative and valuation complexity.

Event-Based (Liquidity) Awards

Event-based awards vest upon the occurrence of a specific corporate event, such as an IPO, change in control, or approved secondary transaction. Many companies pair the event trigger with a minimum service requirement.

These awards are popular because they are straightforward to communicate and closely tied to liquidity. However, they are often binary in nature—the event either occurs or it does not.

Performance Stock Units (PSUs)

PSUs are RSUs that vest based on the achievement of defined performance metrics. While commonly associated with public companies, PSUs are increasingly used by late-stage private companies preparing for life as a public company.

Metrics often include:

• Revenue or ARR growth
• EBITDA or profitability targets
• Valuation milestones

PSUs are familiar to many executives but require careful design in a private-company context, particularly when liquidity timing remains uncertain.

Market-Based Awards

Market-based awards tie vesting to market outcomes, such as exit valuation or share price at liquidity. These awards are typically valued using Monte Carlo simulations and involve more complex accounting considerations.

They are most effective when companies want objective, market-driven alignment, but they require close coordination with valuation and accounting advisors.

Choosing the Right Performance Metrics

For performance awards to be effective, participants must clearly understand the metrics being used. Overly complex structures with too many metrics can dilute focus and reduce motivational impact. Simplicity is key.

The success of a performance award program depends heavily on selecting metrics that are objective, measurable, and closely tied to value creation.

Common pre-IPO metrics include:

• Company valuation thresholds
• Revenue or ARR targets
• EBITDA or profitability
• Exit proceeds or investor return multiples

Vague or subjective metrics are a common source of disputes and should be avoided whenever possible.

Key Design Decisions to Make Upfront

Before issuing performance awards, companies should address several foundational questions. It’s also important to consider the audience—who will receive these awards and whether the structure effectively incentivizes the intended behavior.

Key questions include:

• Is vesting based solely on performance, or on performance plus continued service?
• Are outcomes binary, or do awards scale with partial achievement?
• How are terminations handled before targets are met?
• Does acceleration apply upon a liquidity event?
• Who determines whether performance conditions have been satisfied?

Once these decisions are made, they should be clearly documented and communicated to participants. Clear definitions upfront help minimize confusion and disputes later.

Legal, Tax, and Accounting Considerations

Performance awards intersect with multiple disciplines, making early coordination essential.

From a tax perspective, companies must consider the implications of issuing options versus RSUs, including 409A valuation considerations and the timing of taxable events. From a legal standpoint, award agreements must clearly define performance conditions and align with the equity plan and required board approvals.

From an accounting perspective, companies must determine whether awards are classified as service-based, performance-based, or market-based, as this classification affects expense recognition and valuation methodology. Market-based awards often require Monte Carlo valuations, and award modifications can trigger additional compensation expense.

Administration and Ongoing Management

Performance awards require more active administration than time-based equity. Companies should be prepared to:

• Track progress against performance goals
• Reassess probability assumptions over time
• Document committee determinations carefully
• Communicate status updates thoughtfully to participants

Strong operational discipline is especially critical as companies approach an IPO or other liquidity event.

Common Mistakes to Avoid

Late-stage private companies commonly encounter challenges by:

• Reusing public-company PSU templates too early
• Drafting unclear or overly subjective performance conditions
• Overlooking post-termination treatment
• Overpromising liquidity timing
• Failing to involve auditors and advisors early

Avoiding these pitfalls can save time, reduce costs, and prevent employee frustration.

When Performance Awards Make Sense

After reviewing the complexity involved, some companies may conclude that time-based awards are sufficient. While that may be true in certain circumstances, performance awards can be highly effective when thoughtfully designed and implemented.

Performance awards are most effective when:

• The company is truly late-stage (often Series C or later)
• An IPO or exit is a realistic 12–36 month possibility
• Executive retention is critical to value creation
• Time-based equity alone no longer provides adequate alignment

Bottom Line

Performance awards are not one-size-fits-all. However, for the right private company at the right stage, they can effectively align incentives, manage dilution, and focus leadership on creating durable enterprise value. Given their complexity, it is often prudent to seek guidance where needed. Tax, legal, and accounting considerations in particular benefit from expert input, helping companies avoid missteps and support long-term success.

For more resources for private companies, check out the Private Company Stock Plans section on NASPP.com