Startup Board Compensation

Startup Board Compensation

How much should you pay a startup Board Member? Who can you get as an independent startup Board member for the amount you have to pay and the stage of the company? When do you need an independent board member for your startup and what’s the difference between an Advisory Board Member and a real Board Member?

There isn’t a lot of data available for Startup Board Compensation, especially for early-stage companies. The following is based on a survey of startup lawyers, investors, and personal experience as an independent board member since 2003.

First, a note about the Board’s role. The Board’s fiduciary duty is to represent all shareholder’s best interest in hiring and firing the CEO, reviewing the annual plan and budget, and generally supporting the CEO and team. Though Board members have an obligation to all shareholders, they vote for their own class of stock. For example, the Founder will vote for common shares. If a VC does a Series Seed Preferred shares, they will vote that class of shares. On through the Series A, B, and later. Strategic investors are typically keeping an eye on the company for a future acquisition, so be aware that even with the duty to all, Board members do have self-interests. Whether they are “enlightened” self-interest or not.

If you’re looking for information creating a less formal Advisory board, I’d suggest a great post by Adeo Ressi and the team at Founder Institute, including a Founder / Advisor Standard Agreement template. Advisors are informal compared to a Board’s role. It can be a good way to test future Board members.

There are three types of Board Members.

  1. Founders or insiders, those that own stock in the company, usually since the formation of the company and usually Common shares. These Board members are compensated with their original shares, especially at the early stage. They don’t get additional compensation at the early stage other than granted shares and salary.
  2. Investor Board members are either Angel or VC investors that are on the Board because they have invested in the company. Though they generally want to help the company, they are also there to watch their money. These Board members are typically not compensated by the company, because they are compensated as part of their role as an investor. For example, the VC is getting paid by her fund and Carried interest (Carry) on the fund. For that reason, they don’t get additional compensation.
  3. Independent Board Members are just that. Typically you are looking to fill a role that you don’t have on your executive team. For example, a revenue role like VP Marketing or VP Sales. Don’t expect them to do sales and marketing for you, but you’ll want their help on the strategy as well as governance. We’ll talk about special projects below.

Why do you need or want an independent board member? You’re looking to shore up your management team and bring balance to the Boardroom. An Independent Board member is usually aligned with the founder or founding team vs. a proxy for the investors. Finally, you should also be looking to bring diversity and inclusion to your Board. Like all recruiting, it’s important to recognize the data that diverse teams produce the best results.

Adding an Independent early will be an area that institutional investors (VCs) have historically discouraged bringing on an Independent Board Member. My guess is that they don’t want conflicting voices to the founders. As the Founder and CEO, the question is how does the Board serve you and the company best?

To keep an odd number, it may mean replacing the co-founder with the independent. So it would be Founder/CEO, Independent and Lead Investor. Each round of new funding, will likely have a lead investor and they will expect to join the board to watch their capital. You may look to have two independents, two VCs and yourself on the Board as you move to five members.

Board Schedule

Board meetings are usually quarterly. You should get them on the calendar well in advance. Monthly or every other month Board meetings should only occur if you’re in the middle of a transaction, pandemic, or running out of cash.

Regular Board calls can happen monthly if required or as needed. But a meeting is too much prep and overhead for a monthly cadence.

The meeting itself is usually a half-day. If it’s scheduled in the morning, there may be a Board dinner the night before.

Startup Board Compensation

Board compensation will change over time as the company matures. Early-stage will be higher stock and no cash, later stage the percentage of the stock grant will go down and cash will become a factor. Assume that the company will be covering all travel expenses associated with Board travel and take that into consideration when choosing your Board members.

You’re also going to need to have Directors and Officers Insurance in place before an outside Board member would consider joining the Board. This protect them (and you) should you get sued. As an independent Board Member, I don’t want to get named in a wrongful termination claim from an employee you fired and have to pay the legal fees. That’s why you pay for insurance.

Keep in mind, the following numbers are heuristics or guidelines. You may be able to get a Board member for a small percentage of equity, you may not get the Board member you want. Especially if you’re going after a Brand Name Board member.

Early Stage – Pre-Series A

Cash is king. So almost all compensation will be in the form of options. These stock options typically carry the same terms as your employee stock options, e.g. four-year vesting, a one-year cliff vest, and current market strike price (for a discussion on 409A Valuations, go here). The one difference is by default, they will have vesting at the change of control clause. This means if the company sells, they will vest all of their shares at the close. This is a practical matter, the acquiring company won’t want your board to continue and they are going to be your advisors in the process.

1-3% of equity, with standard vesting. Keep in mind, after two rounds of funding with standard dilution, your Board members 1% ownership is likely to be closer to 0.50% or 50 basis points or BPS.

Middle Stage – Series A+

The percentages of equity are going to start going down as the startup matures.

0.125-1.5% of equity, with standard vesting. Again, keep dilution in mind over the future rounds of funding.

Additional grants for early Board members might happen as you bring new Board members on, or the term comes to maturity. If you have a good Board member, keep them incented. Unlike public company Boards, don’t expect an annual grant.

You’ll start seeing cash introduced in the later stages. For example, there may be a per Board Meeting fee of $1,500-2,500. It can overlap with the private company mechanics below. Depending on your stage and

Private Companies – no exit path

A family business or company that has been around for a long time has to create a different incentive for Board members. This is usually cash in three categories:

  • Per Meeting Fee $1,500 – 2,500
  • Annual Retainer – $5,000-10,000
  • Annual Performance Bonus – $5,000-10,000

The retainer is paid in advance. This covers all of the calls, meetings, and projects throughout the year. The annual bonus is tied directly to the CEO bonus structure. If the CEO earns 100% of their bonus, so does the Board member. If it’s zero, the same and if it’s 250% it’s the same.

Granting Shares

The mechanics of granting the options will be completed in a Board Resolution, either in person or with a Consent in Lieu of Meeting. The resolution will include start date, number of shares, and the strike price of the shares. Make sure that you have the shares available in the pool to grant.

Board Special Projects

From time to time, you may need a board member to take on a project. For example, run the recruiting process to hire a new VP or build a sales compensation plan. This scope of work is going to be outside the regular Board duties. I would suggest you put a project plan in place with a Scope of Work document including timeline to deliver and budget.

If you are expecting a Board member to help put hours into your investor deck, make introductions and participate in pitches. Or you want to use their industry contacts to help recruit key employees. Pay them for the work. Having a cheap Board member is like having a cheap Brain Surgeon.

References

In addition to talking with Startup Attorneys and Board members. Here are some additional source/reference material.

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