New development incentive compensation for key employees
We have a $20 million new mixed use development project getting started shortly.  We wanted to come up with a long-term compensation structure for our CFO that’s tied to ongoing employment and the overall success of this project. 

All of our projects are 100% principal owned so we don’t want to share equity, but we do want to grant some kind of interest that vests over time and preferably gets long term capital gains treatment.   

Our outside counsel is going to send us some ideas to run past our accountants, but I thought I should check with my Reddit friends too ;). 

Has anyone faced a similar situation and come up with a clever solution?  

Thanks!

Edit: This person has been salaried for years with cash bonuses.  Looking for a longer term incentive.
[{"id": "ikxt6hl", "text": "Can't imagine any high caliber CFO with development experience working without an equity incentive. No one works in development for 5+ year without expecting a cut of equity. Principle needs to give up 1-3% of the GP profits or offer 2-3x salary in bonus.", "replies": [{"id": "ikxtz0l", "text": "Yes, was targeting 3% equivalent but not as equity.", "replies": [{"id": "ikxui1k", "text": "I work at a multifamily syndication shop. We dilute the LP equity by 5% to create GP equity that gets shared by our leadership team.", "replies": [{"id": "ikxvx6t", "text": "I have a couple of questions about MF syndication/ funds. Is it cool if I message you?", "replies": [{"id": "ikxw0mp", "text": "Sure", "replies": [], "depth": 5}], "depth": 4}, {"id": "ikzovw3", "text": "I was offered this exact model by a potential buyer for a project I have, but I don\u2019t understand completely. Can I also message you?", "replies": [{"id": "ikzvxzp", "text": "Or you guys could have your Q&amp;A on here so we could all learn \ud83d\ude01", "replies": [], "depth": 5}, {"id": "il0c2cl", "text": "Sure", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "il06h28", "text": "My boss was telling me it was a deal offer like this that sent him over the edge at his first job and made him decide to go out on his own. Percentage tied to employment was the part that upset him the most. Pretending he's a partner but not really.", "replies": [], "depth": 3}, {"id": "il16bs2", "text": "Why not as equity? Are you trying to hide some kind of windfall ? Lol. I mean, it\u2019s your CFO.", "replies": [], "depth": 3}], "depth": 2}, {"id": "ikyn35u", "text": "I second this. Unless a CFO prefers a very large fixed salary instead of equity/bonus it\u2019s going to be tough to keep good people if you are in full control of a deal and don\u2019t give them equity. At the very least carving out some of the LP position or creating special shares of the GP to let them buy in with bonus\u2019 would be expected. You generally need experienced C level talent more than they need you and it\u2019s not tough to find shops where a CFO can expect to make $300k-$500k year plus cash and equity bonus.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ikxtkks", "text": "This some real first world problem shit.", "replies": [{"id": "ikxy00x", "text": "What did you think the CRE sub would be about?", "replies": [{"id": "ikyn97i", "text": "*walks into a hospital*: \u201cDoctors\u2019 problems are not real problems since non-doctors outside the hospital don\u2019t experience them.\u201d", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iky1rrx", "text": "If you're not going to grant equity, then the only other option would be some kind of employment contract. Not sure how you get around ordinary income treatment in this situation.\n\nThe only way you're going to get cap gains treatment for the incentive is to either (a) give him a slice of the deal or (b) create a fund that he and other employees/executives are part of that are invested in the deals. Either way, you can't get cap gains treatment without an asset being owned.", "replies": [], "depth": 1}, {"id": "iky7rll", "text": "Profit interests Agreement. No taxable event as vesting. Taxed as LTCG. \n\nThis just came up with my clients CPA.", "replies": [{"id": "iky80ke", "text": "Perfect, thanks!", "replies": [{"id": "il14hpv", "text": "It\u2019s interesting and seems to fit your situation exactly https://www.sec.gov/Archives/edgar/data/934549/000093454917000019/ex10103312017.htm", "replies": [], "depth": 3}], "depth": 2}, {"id": "il0dzwu", "text": "Literally awesome!", "replies": [], "depth": 2}], "depth": 1}, {"id": "ikycrys", "text": "So owning, say 4% of a deal is a long term incentive, but I think there are better more effective ways to incentivize.  What would be more ideal is giving a 1%-5% fee of the amounts that are financed for the deal, or of the sold price, etc.  So if the deal gets construction financing, you share in the loan fees and add 1% for the CFO.  If the building is refinanced, another 1% of the new loan amount.  When the building is sold, give a 2% fee of the proceeds to the CFO.  This way, there\u2019s clear incentives and milestones to reach and there\u2019s a quicker reward for the CFO. You want long term incentives but you also want to make sure it actually motivates and rewards them.  Unless they need the losses early on or depreciation overall for a tax reason, or unless they have a specific reason for why they would want ownership in the deal, my recommendation would be to consider giving a % of the big financial milestones because they directly motivate the CFO to accomplish goals.  Yes, you could give 4% of the deal to the CFO.  It will be a few years though before there\u2019s any value realized and I don\u2019t feel it motivates the same way as a % of the loan or sale closings. \n\nLastly, if the CFO leaves and parts ways with your company, there\u2019s no mess to deal with. No equity that was committed that you have to untangle and recover. Very clean. \n\nLet us know what your outside counsel comes up with!  Would appreciate learning how others approach this sort of thing!!", "replies": [], "depth": 1}, {"id": "il0bkgo", "text": "$20m mixed use? So 30 units and 10k commercial?", "replies": [], "depth": 1}]