Who should read this?
Startup and growth-stage founders and CEOs.
Why does it matter?
Effective board governance is a necessary element in building shareholder value.
How do you appropriately compensate board members?
When speaking with early- and growth-stage founders and CEOs, questions commonly arise around how to appropriately compensate board members.
For pre-revenue companies, the issue is academic. With limited investment, cash flow is a priority. Cash compensation is usually zero. That leaves stock or stock options as the only practical way to recruit, incent and retain experienced directors. I recommend granting options, at fair market value (FV), that vest at the end of each year. Options at FV don’t have tax consequences to directors.
I’d recommend issuing options to each independent director equal to 0.25–1% of the company’s overall shares, per year of service. Offer a premium to the chairperson, as they typically bear a greater burden of work as they prepare the board agenda and materials and manage the board meeting(s) proper.
After Series A, I’d suggest you add a cash component to compensation. I recommend an annual amount or an honorarium of
$1,000 to $2,000 per in-person meeting (perhaps half of that for telephone meetings). It’s common to pay the travel expenses of directors. Sometimes a per diem is established to dissuade directors from booking high-end accommodations.
Series B and beyond
Board compensation with later-stage companies (Series B and beyond) is a different story as it starts to vary at that point.
- Startup Boards: Getting the Most Out of Your Board of Directors, by Brad Feld & Mahindra Ramsinghani (2013)
- Recruit and build a board that might fire you!
- Building your board? Don’t build in mistakes
- What’s the right board size and structure?
By Gregory Phipps