© 2021 Copyright MaRS Discovery District. What should independent directors expect in the way of compensation for serving on a startup’s board of directors? An ‘ideal’ board of directors includes the CEO of the startup, investors, independent directors and other peer CEOs. What you want to kno… It’s common to pay the travel expenses of directors. Board compensation for start-up companies is as much art as science, and the above guidelines are just the thoughts – albeit based on 25 years in and around these deals with multiple experiences as an Inside, Independent and Investor Director – of one man. Sign This or Lose Your Job! A company may choose to compensate either a director or an advisor in cash, with options, a combination of cash and options, cash only, or the company may even choose not to compensate such directors. Advisors - No voting rights, usually are experienced or well-connected business people, guide the founders. Board compensation with later-stage companies (Series B and beyond) is a different story as it starts to vary at that point. Small Private Companies – Either a per-meeting fee, an annual retainer, and/or a small equity grant. Board observers and lawyers can also be useful additions. A good board will bring important knowledge to founders in areas they may not have experience in, such as regulation and compliance. I recommend granting options, at fair market value (FV), that vest at the end of each year. In the interest of governance and to the satisfactio… This means they can be subjected to lawsuits from disgruntled stakeholders or others. The board is responsible for things like setting high-level goals for the company, hiring the CEO, issuing stock, and clearing dividends. Only outside directors get compensation specifically for serving on the board. However, to actually develop the Board of Directors takes work. At the other end of the spectrum, a startup company more likely can offer options for compensation. Companies often set aside 2-6% of the equity, shared amongst key board members who can help them make inroads in specific ways and scale the business. Let’s go straight to the bottom line, and then backtrack to the thinking. Additional resources. They aren‘t the scotch-and-cigar-filled rooms where the rich divide assets up among themselves, especially not in a startup. Think of your board as your extended executive team, but without the executive level compensation. All of the partners are directors of the company and have significant shares (more than 20%). All of the partners are directors of the company and have significant shares (more than 20%). Having a board of directors is a legal requirement for all companies, including The earlier on the business is, the harder it is to decide what the appropriate value is; as soon as the company has the validation of outside investment to set a price per share, the calculation of board compensation can be straight math, determined by the board member’s normal hourly rate and multiplied by the time they are putting aside for your meetings including preparation time, and possibly a premium for the profile that they add to your business. The following is based on a survey of startup lawyers, investors, and personal experience as an independent board member since 2003. To put this in context, this is about double the 20% equity pool typically allocated to the trust for future employees. • Eighty-four percent of lead directors receive additional compensation, generally ranging from $17,500 to $30,000 at the median across all size and sector groups • Prevalence of cash deferral programs remained steady year-over-year with roughly 60%, 40%, A board of directors is an integral part of every company and can play an important role in the success and growth of an early stage startup. Average annual compensation per advisor generally ranges from $1,000-$6,000. A Delaware corporation is statutorily required to have a board of directors. Commercial Leases & The Overholding Clause – How To Hold On To Your Space After Your Lease Term Ends. Exclusive use clauses: A classic real estate newbie mistake, Consulting Contract Should Include Standard of Care that is Reasonable for the Particular Profession of the Consultant. Or the director may be able to provide other intangible support - credibility and reputation, as well as business advice in period board meetings. The other directors/partners are now requesting to be paid $50k per year as a director fee for serving on the board and attending 4 meetings annually. Current trends support governance by moving away from paying directors in similar ways to senior executives. Many of the companies I've advised have come out of a startup accelerator program, which sets the structure of the advisor-for-equity relationship. As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. As noted above, in a large organization, the directors are in place to “guide the ship” and protect the shareholders. Beware the Continuous Operation Leasing Clause. Startups – Almost always equity compensation. At the other end of the spectrum, a startup company more likely can offer options for compensation. Companies often set aside 2-6% of the equity, shared amongst key board members who can help them make inroads in specific ways and scale the business. Startup and growth-stage founders and CEOs. Small Private Companies – Either a per-meeting fee, … Whilst no one will expect you to be an expert Board facilitator from day one, the way you manage your Board will be (to your investors) a reflection of how you manage your business. President), with hands on day-to-day operational activities. But as a starting point, I think they will serve startup companies well. Regulatory bodies and industry associations are narrowly defining best practices for improved governance within every industry. one or two days of work each week, or should be a cash investor. The board of directors What is a “permanent” full time position? There is a theory that an Advisor does not require compensation. Here's everything you … Finding great advisors can be as difficult as finding great investors. Startup Boards: Getting the Most Out of Your Board of Directors, by Brad Feld & Mahindra Ramsinghani (2013) Building a Board, and managing it effectively, is a key task for a startup CEO and founding team. This is not a critical factor for choosing a board of advisors over a board of directors or vice versa. The Mistake: Tenants Need to Know About Estoppel Certificates. The Final Wrap-up on Board of Director Compensation . Serving on the board of directors carries some different attributes than just being an advisor. How Enforceable is a Non-Competition Clause in an NDA? I’d recommend issuing options to each independent director equal to 0.25–1% of the company’s overall shares, per year of service. Samer has been on five startup … Minority shareholders have little voice or visibility with which to protect their investment and therefore the board can assist in providing both. Share your ideas based on your research with fellow company founders, advisors or your counsel to make sure you’re on the right track. Startups that are backed by professional financial investors almost always have a Board of Directors that consists of some set of founders, investors and sometimes independent directors. Sometimes a per diem is established to dissuade directors from booking high-end accommodations. When to Set Up a Board of Directors for Your Startup (and What It Should Look Like) The right board members can have a huge impact on your company's growth. They aren’t necessarily expected to serve as an active advisor in between quarterly board meetings, but for seed-stage and Series A funded startups, it is typical for board directors to engage in some advisory fashion between board meetings. This article and the embedded Khan Academy video. The board can help introduce standards and expectations early in the lifecycle of a company that can help it evolve as it rapidly grows. What rights can you not sign away in a contract? At the other end of the spectrum, a startup company more likely can offer options for compensation. As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software. The goals can be tied to effort and/or leads or connections, and such goals can be documented in an option grant certificate, or within an advisor/consulting agreement. In a startup company, all the investors will know each other and are likely very close to the company’s day-to-day affairs. Many of the companies I've advised have come out of a startup accelerator program, which sets the structure of the advisor-for-equity relationship. Cash compensation is usually zero. Effective board governance is a necessary element in building shareholder value. This article and the embedded Khan Academy video provides good insight on planning out the next several years of the business’s growth and allocating appropriate compensation to the board as well as to other stakeholders. To find out more, please visit our Privacy Policy. Who is responsible for payments if a contract is terminated? Options at FV don’t have tax consequences to directors. Below is a sample of non-investor board member compensation, divided by type of company. Public company board of director positions can receive seven-digit compensation. One of the areas where best practices have evolved in recent years relates to board of directors’ compensation. There isn’t a lot of data available for Startup Board Compensation, especially for early-stage companies. A good practice for a startup company is to allocate 10% of the total number of shares after around the third round of financing (or at the second angel round) to a trust for the directors. While the management of a startup company deals with the day-to-day decision-making within the company (strategy, budgets, goals, tasks, compensation) ultimately the Board of Directors has the legal … Here's everything you … Most entrepreneurs avoid setting up a board of directors for their new business unless or until they sign up an investor who demands a seat on the board. 7.2 Conflicts in Directors Making Direct Loans to Companies; 7.3 8 Tips for Effective Boards; 7.4 Running More Effective Board Meetings at Startup; 7.5 How To Communicate with your Investors between Board Meetings; 7.6 The 4 Types of Advisers Every Startup Needs; 7.7 The Board’s Role in Facilitating and Supporting a Fundraising Process The people you will ask to serve on your company's board of directors are busy people, with their own businesses. The Scope of your Confidential Information: Too Broad, Too Narrow, or Just Right? Board directors have oversight, governance and fiduciary responsibilities. All Rights Reserved, Startup Boards: Getting the Most Out of Your Board of Directors. An advisory agreement is useful because it normally includes a list of responsibilities, and if those responsibilities are not fulfilled it can be terminated. Biotech and medical device companies tend to compensate board members with annual cash and one-time equity, while their tech counterparts more commonly go with both annual and one-time equity, with no annual cash. The board of directors at your startup exists to guide your company. When speaking with early- and growth-stage founders and CEOs, questions commonly arise around how to appropriately compensate board members. Can My Employer Really Do This? The board is also most instrumental in planning and guidance of exit strategies such as IPOs or acquisition. When offering option-based compensation consider the following: Start-up company advisors should be hustling to help the company. 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