As soon as you start inviting individuals to your corporation's board of directors, you will be asked about compensation. Startup and growth-stage founders and CEOs. 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. How Enforceable is a Non-Competition Clause in an NDA? Share your ideas based on your research with fellow company founders, advisors or your counsel to make sure you’re on the right track. Who is responsible for payments if a contract is terminated? Startups – Almost always equity compensation. This article and the embedded Khan Academy video. I had previously written in this article that whether a company has a board of directors or a board of advisors, compensation is flexible. All of the partners are directors of the company and have significant shares (more than 20%). The Scope of your Confidential Information: Too Broad, Too Narrow, or Just Right? Best practices for corporate governance have adapted to meet the changing needs of corporations. As noted above, in a large organization, the directors are in place to “guide the ship” and protect the shareholders. 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 … Similarly, given the large equity component, total compensation for public company directors ($170,000) dwarfs private company director pay of ~$43,500. The board is also most instrumental in planning and guidance of exit strategies such as IPOs or acquisition. Legal Tips and Tricks: Deal Negotiations Using an LOI/MOU. 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. 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. You may unsubscribe at any time. The board of directors at your startup exists to guide your company. After Series A, I’d suggest you add a cash component to compensation. 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. 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. The following is based on a survey of startup lawyers, investors, and personal experience as an independent board member since 2003. What is the Difference Between a Contract and a Memorandum of Understanding? 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. 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. The following is based on a survey of startup lawyers, investors, and personal experience as an independent board member since 2003. The short answer: Delaware law. Think of your board as your extended executive team, but without the executive level compensation. What you want to kno… Sometimes a per diem is established to dissuade directors from booking high-end accommodations. one or two days of work each week, or should be a cash investor. 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. What is a “permanent” full time position? Minority shareholders have little voice or visibility with which to protect their investment and therefore the board can assist in providing both. 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 … Samer has been on five startup … What legal rights do I have where an employer promised shares but did not deliver? If properly structured, any options associated with that agreement would terminate at the same time. Public company board of director positions can receive seven-digit compensation. Compensation is important because an engaged and experienced board adds value to a company. When offering option-based compensation consider the following: Start-up company advisors should be hustling to help the company. Inside directors, such as C-suite level executives, don’t receive additional compensation. 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. To put this in context, this is about double the 20% equity pool typically allocated to the trust for future employees. 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 Only outside directors get compensation specifically for serving on the board. Similarly, given the large equity component, total compensation for public company directors ($170,000) dwarfs private company director pay of ~$43,500. 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. At the other end of the spectrum, a startup company more likely can offer options for compensation. I’d recommend issuing options to each independent director equal to 0.25–1% of the company’s overall shares, per year of service. 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. What should independent directors expect in the way of compensation for serving on a startup’s board of directors? 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 … That leaves stock or stock options as the only practical way to recruit, incent and retain experienced directors. 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. Finding great advisors can be as difficult as finding great investors. When offering option-based compensation consider the following: Start-up company advisors should be hustling to help the company. 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 outside directors get compensation specifically for serving on the board. There is a theory that an Advisor does not require compensation. 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