Board Compensation for Startups
Every startup should have a board of directors by the time that first non-shareholding non-founder is hired. In fact, according to the type of corporation being formed in support of taking some new groundbreaking innovation to market, chances are (and the rules are different per state or country) there will need to be at least three people sitting on the board.
Participating on a board (or even just advising) takes time out of potentially busy schedules. Attending board meetings can be costly (especially when travel is required to do so). There’s also a chance that being on a board can become a liability, given that board members who neglect their duties to act in the interest of shareholders can become personally liable for such a failure. Additionally, board members are often tasked with doing work outside of the boardroom, such as advising on sales and marketing, assisting with strategy, making introductions, reviewing financials, and much more.
Therefore, it’s common to compensate board members for their guidance growing a company. Compensation doesn’t always mean cash. Especially in a startup where cash can actually be somewhat scarce. Instead, we often see early stage companies bring on board members in exchange for equity, stock options, and other forms of potentially dilutive compensation.
Let’s start with a few factors that determine how board members might be compensated:
Position: Boards might have a chair, vice chair, secretary, and treasurer. For most companies, it’s best to have at least one person on the board who is a domain expert with the type of product or service and at least one angel or later stage investor. Those can be concentric but often are not. Investors likely don’t require compensation above and beyond the expected profit from the investment.
Size of board: Some boards grow and even form committees with the board. This is usually unnecessary for a startup, so we often see three to five board members.
Industry: Some industries work differently than others and some require highly specialized oversight, so ask around for a given market to see what is common with others in the industry.
Size of the organization: If there are 3 customers and 30 board members, that’s a weird look. But it also heavily impacts the type of board compensation that can be offered. If there are 30 members of the board getting equity, it piles up fast. If the company is a large public entity then the economics are completely different.
Company structure: Every state handles each corporation (or non-profit) type differently. It’s important to make sure we’re following any legal requirements with compensating appropriately based on the type of company created.
Impact: A board member can be impactful in a number of ways. Some household names will immediately increase the value of a company. Other times the impact is with the industry, sales, etc.
There are then a number of ways that a board member might be compensated:
Equity. A director on a board might require between .25 percent to 2.5 percent of equity, according to the above variables. Other board members might receive a little more or less compensation.
Hourly fees. This is more common with advisory boards but some board members receive a stipend per meeting (often between $1,000 and $3,000) or an hourly retainer (often $500 to $1,000). Most early stage startups shouldn’t need to provide this kind of compensation but it comes up from time to time, given the above factors.
Salaries. As a company grows, we see salaries for board members going from $25,000 to over $100,000. This might seem like a lot when a board member is not supposed to direct staff (that’s the job of the people that work at the company) or get too involved with the workings of the company. That’s why actual cash compensation for board members in startups is so rare. But when these come up, a board member might be acting more as a coach or consiliari to an executive.
One red flag is when compensation comes up in a conversation. Unless someone is a household name, we want them to want to be on the board and to contribute as much as possible. Board membership contributions in exchange for the equity provided can range - what’s important is that we be clear about the roles, goals, and expectations with each board member. Experienced board members will likely ask for this whereas people who are new to serving on a board and want to do it for a resume boost might not. Being clear about expectations helps ensure that no one walks away from the experience disappointed and gets he relationship between a board member and an the organization off on the right foot.
Some of the things we might ask for a board member to do include:
Contacts. Board members should be chosen based on (and so able to provide) contacts within a given industry that help with sales, finding investors, sourcing vendor relationships/supply chains, and key connections.
Advice. Whether it’s pricing or crisis management, we want people with experience we can call on to ask questions, receive formal advice from, and people who will help govern an organization created to support some innovation. These might be people with experience in starting companies, investing, or with key insights into a given vertical or horizontal market we serve.
Expertise. Deep financial backgrounds, knowledge of go to market strategies, and legal assistance. Effectively, many a bootstrapped organization will end up trading equity and/or a board seat away for access to free or reduced costs of expertise.
These can be dilutive and a good, sound business should have factored many costs to run the business into a budget prior to hiring, incorporating, etc. But a good board will just as we want to be clear about goals for board members, they should in turn help us be clear about our own goals and improve our operating efficiency to get profitable and build a long-term and sustainable company.
For more detailed information on given industries and details on what other organizations are doing, check out the Lodestone Global Annual Private Company Board Compensation Survey results at https://www.lodestoneglobal.com/single-post/how-much-should-i-pay-my-directors-in-2020. Just keep in mind that the earlier stage a startup, the more options we have for how to recruit, compensate, and leverage our board of directors!