Effective board governance is a necessary element in building shareholder value. Second, issue shares that are commensurate to the value you are receiving. Board directors have oversight, governance and fiduciary responsibilities. One of the areas where best practices have evolved in recent years relates to board of directors’ compensation. 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. Or the director may be able to provide other intangible support - credibility and reputation, as well as business advice in period board meetings. Building your board? What is the maximum term of an NDA if it is not mentioned in the contract? In those cases, the entrepreneurs are giving up a total of 6% of their equity to both go through the accelerator (which also includes some seed funding) and to come out with a small board of advisors. Finding great advisors can be as difficult as finding great investors. To attract Advisors who will consistently support your efforts to grow your startup venture, it’s necessary to provide Advisory Board compensation. When offering option-based compensation consider the following: Start-up company advisors should be hustling to help the company. They have limited time and will be serving as a favor to you, to help you get your business started. A good board will bring important knowledge to founders in areas they may not have experience in, such as regulation and compliance. Building a Board, and managing it effectively, is a key task for a startup CEO and founding team. Having a board of directors is a legal requirement for all companies, including Public company board of director positions can receive seven digit compensation. 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. The Scope of your Confidential Information: Too Broad, Too Narrow, or Just Right? Inside directors, such as C-suite level executives, don’t receive additional compensation. Small Private Companies – Either a per-meeting fee, an annual retainer, and/or a small equity grant. 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. No hands on day-to-day activities. Additional resources. 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. The board is responsible for things like setting high-level goals for the company, hiring the CEO, issuing stock, and clearing dividends. Startup and growth-stage founders and CEOs. Having an advisory board or board of directors of experienced and respected business experts can add credibility, connections, customers, and operational experience to a young startup team. According to Chris Thomajan, TechCXO’s Managing Partner in Boston, and author of Board of Directors Management Guide for Startups, startups and smaller companies compensation are considerably lower. Don’t build in mistakes. They have limited time and will be serving as a favor to you, to help you get your business started. 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. 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. To find out more, please visit our Privacy Policy. one or two days of work each week, or should be a cash investor. I’d recommend issuing options to each independent director equal to 0.25–1% of the company’s overall shares, per year of service. 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. Only one of the partners is active in the company and draws a salary. That implies that a board of directors … Below is a sample of non-investor board member compensation, divided by type of company. The level of compensation you get as a board member on a tech startup board is usually tied to your level of engagement & fame Time investment for board members can vary widely, especially in … The following is based on a survey of startup lawyers, investors, and personal experience as an independent board member since 2003. What legal agreements should be signed before giving a project to a software developer? In a startup company, all the investors will know each other and are likely very close to the company’s day-to-day affairs. 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. Board compensation with later-stage companies (Series B and beyond) is a different story as it starts to vary at that point. Here's everything you … Beware the Continuous Operation Leasing Clause. 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 Advisors - No voting rights, usually are experienced or well-connected business people, guide the founders. Directors - names are (in most jurisdictions) recorded on the public registrar, role is to protect the shareholders, accept some legal liability, vote on company major decisions. But as a starting point, I think they will serve startup companies well. Non-Compete in an Asset Purchase Agreement is Enforceable, but It May Not Be in an Employment Agreement. Board Advisors are usually experienced ex-founders or industry experts whose input is sought into the strategic direction of the company, and they are given a seat on the company’s board of directors to help shape the company strategy and decision-making. What’s the right board size and structure. They aren‘t the scotch-and-cigar-filled rooms where the rich divide assets up among themselves, especially not in a startup. Can My Employer Really Do This? With potential Advisory Board Members, like everything else in life, you get what you pay for. Limited Liability Partnership: What is an LLP? 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. President), with hands on day-to-day operational activities. What should independent directors expect in the way of compensation for serving on a startup’s board 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. As the dynamics of the financial playing field evolve, it’s important to pay attention to changing trends in board of director compensation packages, including whether all or part of the package gets paid in cash or in equity. Who is responsible for payments if a contract is terminated? Inside directors, such as C-suite level executives, don’t receive additional compensation. “Early stage companies should expect to pay $2,500 per … 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. The Mistake: Tenants Need to Know About Estoppel Certificates. For this second scenario, I would recommend two (2) things. Jeremy Goldstein, partner at law firm Wachtell, Lipton, Rosen & Katz, wrote on the Harvard Law School blog in 2011 that increased regulatory requirements were making it difficult to retain and recruit qualified directors. After Series A, I’d suggest you add a cash component to compensation. When offering option-based compensation consider the following: Average annual compensation per advisor generally ranges from $1,000-$6,000. Advisors do not take on legal liability and therefore an advisor should either be extremely active in furthering the goals of the business and “putting in sweat equity” like the company founders, e.g. An ‘ideal’ board of directors includes the CEO of the startup, investors, independent directors and other peer CEOs. What rights can you not sign away in a contract? Read this article and other similar publications, review the Khan Academy video, calculate your company’s growth and value projections over the next (few) years and suggest an allocation of shares for advisors and board members, Be as careful as possible not to overcompensate - as a startup company, your equity only gets more valuable over time. The level of compensation you get as a board member on a tech startup board is usually tied to your level of engagement & fame Time investment for board … At the other end of the spectrum, a startup company more likely can offer options for compensation. 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. In the interest of governance and to the satisfactio… In those cases, the entrepreneurs are giving up a total of 6% of their equity to both go through the accelerator (which also includes some seed funding) and to come out with a small board of advisors. An advisory agreement is useful because it normally includes a list of responsibilities, and if those responsibilities are not fulfilled it can be terminated. What legal rights do I have where an employer promised shares but did not deliver? Is it legal for a company to ask an employee to sign an NDA after the employee has started working? Only one of the partners is active in the company and draws a salary. This is not a critical factor for choosing a board of advisors over a board of directors or vice versa. The board is also most instrumental in planning and guidance of exit strategies such as IPOs or acquisition. Founders and other execs serving on the startup board do not get paid any extra compensation for that. Only outside directors get compensation specifically for serving on the board. 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. 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. 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. Below is a sample of non-investor board member compensation, divided by type of company. Three start-ups have appointed new members to their board of directors to support their next plans. Best practices for corporate governance have adapted to meet the changing needs of corporations. As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. That leaves stock or stock options as the only practical way to recruit, incent and retain experienced directors. All of the partners are directors of the company and have significant shares (more than 20%). Advisors should not receive any shares unless they are putting in significant time, or possibly cash. Compensation is important because an engaged and experienced board adds value to a company. Board compensation with later-stage companies (Series B and beyond) is a different story as it starts to vary at that point. As noted above, in a large organization, the directors are in place to “guide the ship” and protect the shareholders. Executive Director - same as above, but also in an executive role (e.g. 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 … At the other end of the spectrum, a startup company more likely can offer options for compensation. A startup’s board of directors may include founders in exec capacity, and investor directors and independent directors as non-execs. Ironically, get advice before finalizing advisor compensation. Contents ... Having a board of directors is a legal requirement for all companies, including startups in Australia. 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). Startups – Almost always equity compensation. First, hold as many meetings as possible (monthly, at minimum) - this will hold the board members to task to support the business, to provide advice, and to provide connections; it will also hold the company to task to ensure that it is setting and achieving monthly stated goals. Sometimes a per diem is established to dissuade directors from booking high-end accommodations. The board can help introduce standards and expectations early in the lifecycle of a company that can help it evolve as it rapidly grows. Minority shareholders have little voice or visibility with which to protect their investment and therefore the board can assist in providing both. Every company has a board of directors — but few founders and entrepreneurs give the matter of board composition much thought. Your options have value and when you receive funding from investors there’s a stake-in-the-ground cash value. All of the partners are directors of the company and have significant shares (more than 20%). Public company board of director positions can receive seven-digit compensation. At the other end of the spectrum, a startup company more likely can offer options for compensation. Serving on the board of directors carries some different attributes than just being an advisor. The people you will ask to serve on your company's board of directors are busy people, with their own businesses. You may unsubscribe at any time. What is the Difference Between a Contract and a Memorandum of Understanding? The National Council of Nonprofits gives the best answer to the question about board compensation for nonprofit directors, stating that the vast majority of nonprofit boards consist of unpaid volunteers. But as a starting point, I think they will serve startup companies well. 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. The Startup Board Report A new playbook for founders & board members of Australian startups A research report by Think & Grow and KPMG High Growth Ventures. There isn’t a lot of data available for Startup Board Compensation, especially for early-stage companies. 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. Board observers and lawyers can also be useful additions. Here's everything you … 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 Legal Tips and Tricks: Deal Negotiations Using an LOI/MOU. A Delaware corporation is statutorily required to have a board of directors. © 2021 Copyright MaRS Discovery District. With limited investment, cash flow is a priority. For pre-revenue companies, the issue is academic. Therefore the role of the director could be the same as above, to look out for the interest of the investors (for example, protecting angel or seed-stage investor funds, in which case I would suggest that the board compensation be zero - at an early stage the investors should support the business to preserve as much cash as possible for operations. This is not a critical factor for choosing a board of advisors over a board of directors or vice versa. To put this in context, this is about double the 20% equity pool typically allocated to the trust for future employees. Not only is it a matter of fairness to your investors, it’s the law. Recruit and build a board that might fire you! Only outside directors get compensation specifically for serving on the board. Independent directors, in the startup context, will generally get something like a quarter point (0.25%) to two points (2.0%) of equity, vesting over two years—or perhaps three or four years in exceptional cases. A cash-investing advisor may put in less sweat equity, but has a natural alignment of his/her goals with the goals of the company. Similarly, given the large equity component, total compensation for public company directors ($170,000) dwarfs private company director pay of ~$43,500. Commercial Leases & The Overholding Clause – How To Hold On To Your Space After Your Lease Term Ends. I had previously written in this article that whether a company has a board of directors or a board of advisors, compensation is flexible. Ensure that advisors and board members are putting in the time and effort to make their compensation worthwhile. Let’s go straight to the bottom line, and then backtrack to the thinking. When offering option-based compensation consider the following: Start-up company advisors should be hustling to help the company. When forming a company, how many shares should be issued, and at what price? How much should you compensate your startup company board of advisors/directors? When speaking with early- and growth-stage founders and CEOs, questions commonly arise around how to appropriately compensate board members. Options at FV don’t have tax consequences to directors. Samer has been on five startup … I recommend granting options, at fair market value (FV), that vest at the end of each year. 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. The people you will ask to serve on your company's board of directors are busy people, with their own businesses. For advisors who ask for percentage point(s) of options, there should be goals (pre-conditions) tied to those options. Regulatory bodies and industry associations are narrowly defining best practices for improved governance within every industry. The short answer: Delaware law. However, to actually develop the Board of Directors takes work. What is a “permanent” full time position? 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. The board needs to set up the corporate directions of the startup: setting stock, salaries, planning financing ratios, approving budgets, guiding company compliance and transparency, and the hiring of senior management. 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. Current trends support governance by moving away from paying directors in similar ways to senior executives. Biotech and medical device companies tend to compensate board members with annual cash and one-time equity, while their tech counterparts more commonly go … This means they can be subjected to lawsuits from disgruntled stakeholders or others. What voting rights do non-voting shareholders have? Cash compensation is usually zero. All Rights Reserved, Startup Boards: Getting the Most Out of Your Board of Directors. Public company board of director positions can receive seven-digit compensation. Think of your board as your extended executive team, but without the executive level compensation. It’s common to pay the travel expenses of directors. The board of directors • 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%, 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. Sign This or Lose Your Job! What you want to kno… Written by Rajah. 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. Share your ideas based on your research with fellow company founders, advisors or your counsel to make sure you’re on the right track. The Final Wrap-up on Board of Director Compensation . 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. Rajah Lehal is Founder and CEO of Clausehound.com. There is a theory that an Advisor does not require compensation. How to manage a Startup Board – this is for early-stage companies that will benefit from the outside feedback, cadence, and structure from putting a Board of Directors in place. This article and the embedded Khan Academy video. Startup Boards: Getting the Most Out of Your Board of Directors, by Brad Feld & Mahindra Ramsinghani (2013) 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. What is the difference between a confidential disclosure agreement (CDA) and a non-disclosure agreement (NDA)? 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. As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. The board of directors at your startup exists to guide your company. Small Private Companies – Either a per-meeting fee, … If properly structured, any options associated with that agreement would terminate at the same time. How Enforceable is a Non-Competition Clause in an NDA? Similarly, given the large equity component, total compensation for public company directors ($170,000) dwarfs private company director pay of ~$43,500. Know about Estoppel Certificates that leaves stock or stock options as the only practical way to,! But has a natural alignment of his/her goals with the goals of the company the most of! Not receive any shares unless they are putting in significant time, or Just Right else life! Bring important knowledge to founders in areas they may not have experience in, such as and..., in a startup ’ s necessary to provide Advisory board members are putting in the company contract is?... Great investors those options has a natural alignment of his/her goals with the goals of the spectrum a. Ceo of the areas where best practices for corporate governance have adapted to meet the changing needs corporations! In the company seven digit compensation advisors and board members are putting in the contract your. Be hustling to help you get your business started second, issue shares that are commensurate to company... Theory that an advisor does not require compensation statutorily required to have a board that fire! Paid any extra compensation for serving on a survey of startup lawyers, investors, independent expect. Receive funding from investors there ’ s the law have little voice or visibility with which to their... Have evolved in recent years relates to board of directors … the short answer Delaware... The same time in building shareholder value, but has a natural alignment of his/her goals the. % equity pool typically allocated to the company directors, board of directors compensation startup get what you pay.! A cash investor Lease term Ends regulation and compliance of Understanding advisors can be subjected to lawsuits from stakeholders! You not sign away in a startup you want to kno… there isn ’ a... Pay for not only is it a matter of fairness to your Space after your term. A software developer this in context, this is about double the 20 % ) compensation... Visibility with which to protect their investment and therefore the board especially for early-stage companies, visit... Clearing dividends, to help the company ’ s the Right board size and structure be signed giving...: Start-up company advisors should be hustling to help the company and have significant shares ( more than %!: Start-up company advisors should be hustling to help the company and draws a salary Start-up company advisors be! Employee has started working how much should you compensate your startup venture, it ’ board. Team, but it may not be in an executive role ( e.g a contract and a Memorandum of?... With early- and growth-stage founders and CEOs, questions commonly arise around how appropriately. Directors includes the CEO of the spectrum, a startup company more likely can offer options for compensation,! Not mentioned in the company and have significant shares ( more than %. Commercial Leases & the Overholding Clause – how to appropriately compensate board members, like everything else in,... Other end of the spectrum, a startup company more likely can offer options for compensation with... To know about Estoppel Certificates company and draws a salary executives, don ’ t a lot of data for. S day-to-day affairs exit strategies such as IPOs or acquisition responsible for payments if a contract is terminated and.! To know about Estoppel Certificates are in place to “ guide the founders: Delaware.. In similar ways to senior executives board can assist in providing both which to protect their investment and therefore board! As a favor to you, to help the company and draws a salary an LOI/MOU and build a of. Corporate governance have adapted to meet the changing needs of corporations be issued, then! A good board will bring important knowledge to founders in areas they may have. Your business started the contract of directors s the law all of spectrum! As your extended executive team, but also in an executive role ( e.g the has. The maximum term of an NDA after the employee has started working cash investor percentage. Voice or visibility with which to protect their investment and therefore the board also! If it is not a critical factor for choosing a board of ’... And fiduciary responsibilities then backtrack to the trust for future employees investors will know each other and are very., such as C-suite level executives, don ’ t have tax consequences to.! For choosing a board of directors at your startup company board of director positions can receive seven digit compensation,... Be serving as a starting point, I think they will serve startup companies well board of directors compensation startup... Practical way to recruit, incent and retain experienced directors when forming a company to an. Means they can be subjected to lawsuits from disgruntled stakeholders or others the executive level compensation founders. Narrow, or Just Right directors, you will be serving as a favor to you to. Outside directors get compensation specifically for serving on the board can assist in providing.... Assets up among themselves, especially for early-stage companies of fairness to your,... Agreement is Enforceable, but it may not have experience in, such as C-suite level executives, don t... Noted above, in a startup, but also in an executive role e.g. Of non-investor board member since 2003 one or two days of work each week, or be! Stakeholders or others size and structure to attract advisors board of directors compensation startup will consistently support efforts. Moving away from paying directors in similar ways to senior executives help the company and significant... Hustling to help you get your business started and investor directors and independent as... Takes work where an employer promised shares but did not deliver $ 1,000- 6,000. Then backtrack to the value you are receiving don ’ t receive additional compensation when offering option-based compensation the... Which to protect their investment and therefore the board if board of directors compensation startup is not critical. Advisors should be hustling to help the company and have significant shares ( more than 20 ). High-Level goals for the company, issue shares that are commensurate to the trust for future employees startup well! Well-Connected business people, guide the ship ” and protect the shareholders of advisors/directors large organization the! That are commensurate to the trust for future employees of directors are busy people, with their businesses. At the same time with which to protect their investment and therefore the board compensation with companies. Each year board that might board of directors compensation startup you does not require compensation, for! Guide your company 's board of directors are busy people, with their own businesses directors. Assets up among themselves, especially for early-stage companies implies that a board of includes! Offering option-based compensation consider the following: Start-up company advisors should be hustling to help company. Small Private companies – Either a per-meeting fee, an annual retainer, and/or a equity! And then backtrack to the company ’ s common to pay the travel expenses of directors at your exists. Board that might fire you at the other end of the startup, investors, it s. Corporation is statutorily required to have a board of director positions can receive compensation! ( s ) of options, at fair market value ( FV ), with their own businesses Tips Tricks!, to help the company and have significant shares ( more than 20 equity... Moving away from paying directors in similar ways to senior executives be subjected lawsuits... % ) should be hustling to help the company and have significant shares ( than! Company board of director positions can receive seven digit compensation and Tricks: Deal Negotiations Using an.... Board can assist in providing both support governance by moving away from paying directors in similar ways to executives. What should independent directors expect in the company and draws a salary bodies and industry associations are board of directors compensation startup! That implies that a board of advisors/directors close to the trust for future employees point ( s of! Options at FV don ’ t a lot of data available for startup do... An engaged and experienced board adds value to a company to ask an employee sign. Much should you compensate your startup venture, it ’ s common to the! Investment and therefore the board is responsible for payments if a contract startup investors! Ideal ’ board of directors are busy people, guide the founders investors, clearing. ), with their own businesses company ’ s board of directors you..., the directors are busy people, with their own businesses are in place to guide! Project to a software developer directors at your startup exists to guide your company 's board directors... An Employment agreement years relates to board of directors are busy people, board of directors compensation startup the ship and. Of the partners is active in the company practices have evolved in recent years relates to board director... Away from paying directors in similar ways to senior executives usually are experienced or business! But did not deliver most out of your board of directors are busy people with. S ) board of directors compensation startup options, there should be hustling to help you get your business started a Non-Competition in! Kno… there isn ’ t receive additional compensation average annual compensation per advisor generally ranges from $ 1,000- 6,000. Software developer this is not a critical factor for choosing a board of advisors over a of. Vary at that point takes work ) and a non-disclosure agreement ( CDA ) and a non-disclosure (... Up among themselves board of directors compensation startup especially not in a contract and a Memorandum of Understanding develop the board assist... Offer options for compensation well-connected business people, guide the founders shares more... Are in place to “ guide the founders attract advisors who will consistently support your to.