Incentivising defence tech: short cycles, long horizons

According to research from the NATO Innovation Fund and Dealroom, European defence, security and resilience start-ups secured a record $8.7bn of venture capital in 2025, an increase of 55% on the previous year. For many businesses, that influx of capital has accelerated growth, increased valuations and intensified competition for talent.

The different timelines involved create a particular challenge for the defence sector. In short:

1. A funding round, strategic partnership or product breakthrough can reprice a defence technology business rapidly.

2. Government procurement programmes and value realisation timelines can, by contrast, take years.

3. The specialist individuals who create that value are often in short supply, meaning that companies need to move quickly to secure them, whilst retaining them over the medium to longer term.

This creates a particular challenge for remuneration and incentive design. Structures that appear effective at the point of implementation can quickly become disconnected from commercial reality as valuations move, procurement timelines extend or talent priorities change.

In our experience, successful incentive arrangements in the defence sector are those that recognise and accommodate the tension between these competing timescales. They need to remain credible through significant valuation movements, retain key individuals through lengthy periods before value realisation and adapt as commercial circumstances change.

Retaining talent when value realisation may be years away

More than 230 defence technology start-ups have been formed in Europe since 2022, including 52 during 2025. Competition for individuals with governmental, military, engineering and sector-specific commercial expertise has intensified accordingly.

The challenge for defence businesses is that the individuals most critical to future success are often expected to remain engaged throughout lengthy procurement, testing and deployment cycles before substantial value is realised. Traditional time-based vesting structures may therefore be insufficient on their own.

Increasingly, incentive arrangements are being designed to recognise both service and commercial achievement. Time-based vesting may be supplemented by operational milestones linked to matters such as successful trials or testing programmes, technical acceptance, contract or framework awards, regulatory or security approvals, or deployment milestones.

The important point is to distinguish between recognising an important commercial milestone and ending the retention period altogether. A contract award, for example, may represent a significant achievement without being the point at which the company has captured the resulting value. Incentive arrangements may therefore need to reward that achievement whilst continuing to retain the individual through subsequent delivery and value realisation.

Consultancy arrangements involving individuals with specialist governmental or defence expertise can present additional challenges. In those situations, bespoke vesting milestones and carefully calibrated leaver provisions can strengthen retention, whilst post-vesting or post-termination holding requirements may preserve longer-term alignment after the relevant services have been provided.

Managing incentives through rapid valuation changes

Whilst procurement cycles may be measured in years, company valuations can move significantly over a much shorter period. A successful funding round, strategic investment or major contract award may substantially increase enterprise value, whilst programme delays or procurement uncertainty may have the opposite effect.

This can create a disconnect between the economics originally envisaged when an incentive was granted and the commercial realities that subsequently emerge. Incentive arrangements that are highly effective at grant can lose their retention value if they become misaligned with the company’s strategic objectives or the value actually available to participants.

That distinction can be particularly important when successive funding rounds alter the company’s capital structure. A higher headline valuation does not necessarily mean that management participates in that increased value on the same basis, particularly where a new investment introduces additional preference rights or dilution.

Growth shares, options and other equity-based arrangements should therefore be designed with future capital raises and changes in ownership structure in mind. That means considering from the outset how dilution, preference rights and future financing rounds could affect the value actually available to participants, together with sufficient flexibility to respond where the original incentive economics cease to work as intended.

Ultimately, incentives need to be capable of surviving the mismatch between rapidly changing valuations and significantly slower value-realisation timelines.

When international growth outpaces remuneration infrastructure

For many defence technology businesses, international expansion is no longer a later-stage consideration. Capital investment, strategic hiring and targeted acquisitions can quickly create a workforce comprising employees, consultants and advisers operating across multiple jurisdictions.

Whilst a company may be able to recruit key individuals within a matter of weeks, implementing incentive arrangements that operate effectively across multiple jurisdictions can take considerably longer. Tax, securities, employment and payroll requirements often develop at a different pace from the commercial demands of the business.

For defence businesses, that complexity may be heightened by the circumstances in which individuals are recruited and deployed, including local security, regulatory and contractual requirements. The remuneration structure therefore needs to accommodate local constraints without losing sight of the wider incentive objective.

The risk is that remuneration structures become fragmented as growth accelerates. Individuals contributing towards the same commercial objectives may participate in materially different arrangements, creating complexity, inconsistent outcomes and diluted alignment. This is particularly relevant in defence businesses, where specialist personnel are frequently recruited from governmental, industrial and technological backgrounds and may be engaged as employees, consultants or advisers depending on local requirements and market practice.

Incentive structures should therefore be designed with international scalability in mind from the outset. Whilst local arrangements may be required to accommodate jurisdiction-specific legal and tax requirements, they should remain aligned with the group’s overall remuneration structure and strategic objectives. The legal form through which value is delivered may differ between jurisdictions, but the commercial behaviours being incentivised should remain consistent.

Businesses that successfully balance these competing timelines are typically those that view remuneration architecture as an integral part of growth planning rather than a compliance exercise undertaken after expansion has already occurred.

Conclusion

The rapid growth of the defence technology sector has created a distinctive incentive-design challenge. Funding can reprice businesses quickly, procurement and value realisation may take years, highly specialised talent can move at short notice and international expansion can outpace the development of remuneration infrastructure.

Successful incentive arrangements are therefore those that remain credible and effective as each of those commercial drivers moves at a different pace. Achieving that outcome requires more than selecting an appropriate instrument. It demands careful consideration of talent retention, valuation and capital structure, tax compliance, international scalability and the company’s longer-term strategic objectives.

The practical question is whether the incentive arrangements put in place today will still work following the next funding round, throughout an extended procurement cycle and as the business expands into new markets. Designing for those possibilities from the outset can materially reduce the risk of the remuneration structure falling behind the business.

At Burges Salmon, our market-leading defence technology team regularly advises both emerging and established defence businesses on designing incentive arrangements that support growth, retain critical talent and remain effective throughout the company’s investment and ownership journey.