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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Compensation for Board Members

Comments (21)

Several people have recently asked me variants on the question “How should I compensate a board member in my young private company?” I’ve experienced this question from all sides, having been the entrepreneur with an early stage company, a board member of an early stage company, and an investor / VC in companies that had board members at early stages, so hopefully my answer is balanced and a function of the law of large numbers (I probably have over 100 direct data points at this point in my life).

In general, I have a set of simple rules for board member compensation:

  • 0.25% to 1.00% vesting annually over four years
  • Single trigger acceleration on change of control
  • Clear understanding as to how the vesting will work if the board member leaves the board
  • No direct cash compensation
  • Reimbursements for reasonable expenses
  • Opportunity to invest in the most recent financing

Following is a detailed explanation of each item.

0.25% to 1.00% vesting annually over four years: While the ask from sophisticated board members will vary widely here, I’ve found that most people will accept the argument that they are getting between 25% and 50% of what a typical VP will receive (1% – 2%).  It’s always better to grant more options that vest over a longer period of time then to do annual grants early in the life of the company – that way the board members’ incentives are aligned with all shareholders (presumably they are getting the options at a low strike price and will be motivated to increase the value of the stock while minimizing dilution over future financings).  These options should come out of the employee option pool and should be thought of equivalently to the employee base (e.g. if there is an option refresh due to a down round financing, the board member should be included in the refresh).

Single trigger acceleration on change of control: Acceleration on change of control is often a hotly negotiated item in a venture financing.  I’ll discuss it in greater detail in a future post in the term sheet series.  I rarely think single trigger acceleration in change of control is appropriate, but I’ll always accept it with regard to board members since 100% of the time they will not be part of the company post acquisition.  By providing 100% acceleration on change of control, you eliminate any conflict of incentives in an M&A scenario.

Clear understanding as to how the vesting will work if the board member leaves the board: In most cases, board members serve at the will of a particular constituency, which could range from a particular VC investor (e.g. the outside board member might be appointed by the Series A shareholders) to the entire shareholder base (e.g. chosen by a shareholder vote).  As a result, a non-VC board member is typically not contractually entitled to their board seat and often leaves the board (either because they chose to due to other responsibilities), is asked to leave (because he is not contributing actively to the business), or is replaced (by the shareholder group that has the contractual right to the board seat).  As a result, it should be clear – in advance – that the vesting on the options ends if the person is asked to leave the board or voluntarily leaves the board.  I’ve never had an issue with this when it was discussed up front; I’ve occasionally had issues when it wasn’t (e.g. the person wants additional vesting beyond their board service, which I think is inappropriate except in the case of the acquisition of the company – see the comment on single trigger above).

No direct cash compensation: Period.  If someone is asking for cash compensation for board service in an early stage company, they are not qualified to be a board member since they simply don’t get it.  If the board member is also doing specific consulting for the company beyond the scope of a typical board member, you’ll occasionally see some cash comp for the consulting services.  However, the bar for this should be high and well defined – a “monthly retainer” for “helping the company” is inappropriate.

Reimbursements for reasonable expenses: Board members should always be reimbursed for expenses they incur on behalf of the company.  However, these should be “reasonable”, should conform to the company’s expense policy (e.g. if execs travel coach, board members should only be reimbursed for coach tickets), and board members should be respectful of cash in early stage companies (for example, if a board member travels to several companies during a trip, he should only charge a company for the segment(s) pertaining to them).

Opportunity to invest in the most recent financing: I strongly believe that all board members should be given an opportunity to invest on the same terms as the most recent VC investment.  Depending on the characteristics of your most recent financing, this might be difficult (check with your lawyers) – at the minimum the board member should be invited to invest in your next round.  While I always encourage this investment, I don’t view it as mandatory – I think it’s a benefit an outside board member should have for serving on a board, not a requirement.

In seed stage companies – especially pre-funding – an early board member might receive founder status depending on his involvement in the company.  When I was making angel investments, I’d occasionally commit to a much higher role than simply “a board member” – occasionally I’d be chairman and/or an active part time member of the management team.  In these cases, I’d typically get an additional equity grant (usually founders stock) separate from my board grant.  As with other members of the founding team, I’d have specific roles and responsibilities associated with my involvement (usually financing, strategy, and partnership related) and – even though I was a board member – I was often accountable to the CEO for these responsibilities.

In addition to a board of directors, many early stage companies have an advisory board. I’ll dedicate a longer post to how to make sure these are effective (as they rarely are) – in any event, advisors typically have a much lower commitment to the company and, as a result, should receive a much lower equity grant.  In addition, advisory boards tend to come and go so it’s better to compensate members on an annual basis.  A good proxy for the amount is an annual grant of 25% to 50% of the four year grant you’d give a junior engineer (so 1x – 2x a junior engineer if the advisor stays engaged for four years).  Obviously, there are exceptions to this, but if you want to get meaningful, sustainable involvement from an “advisor”, consider giving him a more significant role.

Finally, VCs should never get additional equity for board service in private companies.  The VC has already purchased his equity and his board involvement is a function of his responsibilities associated with his investment.  I’ve been on the receiving end of this and it has always felt weird.  In a public company, it’s typical to compensate all board members – including the VCs – equivalently, but private companies are a different matter.

  • http://www.steveshu.typepad.com Steve Shu

    I have always thought that option allocation was a bit of black art. The matter is sometimes confused by the fact that when gathering data from one’s network (e.g., lawyers, serial entrepreneurs), there are so many qualifying questions needed to figure out what assumptions the other person is using (in terms of target cap table breakdown, stage of venture, provisions for any carve-outs, etc).

    For example, here is a stock option allocation chart from salary.com, but the bias here seems to be that the data is weighted more towards some later part of the company’s life given reference to the S-1 filings …
    http://www.salary.com/advice/layouthtmls/advl_display_nocat_Ser56_Par123.html

    Finance profs may say plan out a whole option tree of payouts and decide what is fair if the various outcomes play out. Other other hand, I have heard some VCs say that you can weigh options as if they were 1/8 of $1 of stock. Then go to get market comparables on wage rates and balance things out in case some key employees want to take more stock options. The method you describe in this post is similar to what I hear from law firms like Greenberg Traurig – what the full allocation (across CEO, etc.) looks like takes some extra digging to get a hold on.

    Nice bit of negotiation, mechanics, board process, market comparables, and finance to get one wrapped around the axle … and this is all provided that we’re only talking about time vesting and not something more complex.

  • bluedog

    sorry to remain anon but I have to. I am curious as to what you think about an A Series VC asking for he and his associate on the board to be paid a retainer and a per meeting fee, but no expense reimbursement? I found the disucussion inappropriate but I am not in a position to say anything. If they are not accepting options, would this be a fair trade-off in compensation?

  • http://www.feld.com/blog Brad Feld

    This seems odd. I’d ask the obvious question – why do they want a per meeting fee instead of expense reimbursement? It seems much more rational (and typical) for them to have their expenses covered and not get a per meeting fee. So – I’d first try to understand better what is going on.

    Obviously, if the retainer + per meeting fee is greater than the expense reimbursement (which it likely is), this is out of line (and atypical). A Series A VC shouldn’t be taking cash (that they invested) out of the company in the form of board meeting fees – they are already getting paid a management fee by their funds to sit on the boards so this is an odd (not illegal – but overreaching) form of double dipping.

    Also, in most funds, any board comp simply goes to reduce the management fee, so if this is a legit VC firm, this actually doesn’t really help them economically. In some cases, especially with small funds, VCs have negotiated terms with their investors so they can keep the board fees (while this is typical in private equity firms, this is the exception in VC firms).

    As with most things, context matters, but this sounds fishy and is not something that I (as a co-investor) would accept.

  • Manish

    Hi Brad,
    Interesting post! I have a question regarding valuations…how would the directors have faith in the valuation figures of the company? Are you suggesting that we have an external law or accounting firm do the periodic valuation?

    • http://intensedebate.com/people/bfeld Brad Feld

      Under the 409a rules, you should typically have an outside firm do a valuation analysis. I’ve written a lot about it on this blog in the 409a category.

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