Board compensation

Recently I got a call from a CEO who asked me a question about options for a Board member.  This got me thinking about some of my build-stage company experiences in the world of Board compensation.

Generally, build stage companies do not compensate their Board members who represent the early investors.  These directors usually represent their general partnership’s interest on the Board so their compensation comes indirectly that way.  Or, if they are Board observers, they had to negotiate for that right and so winning the right also to be compensated for it would have been pretty challenging.

They will all almost always have their travel reimbursed.  I have seen this run the gamut, from very successful senior partners at top firms who fly inexpensively and try to split the costs among portfolio companies, to Board observers who appear allergic to any hotel other than the Four Seasons.  Ironically, these are often the ones who want startups to remain “scrappy”, meaning cheap.

I’m making a joke, but they are onto something – build stage companies don’t have a lot of resources.  This also goes for options, for which there is a fixed pool.  Occasionally, I’ve seen a Board member who spends a lot of his or her time actively helping the company receive an options grant.  Unfortunately it happens more when the Board tends to be “clubbier”, meaning the investors all know each other.  Or, it happens more with first-time CEOs, and/or management doesn’t feel it has clout to push back.

Usually these grants top out around 0.5%, although more often I have seen closer to 0.25%, which is about where many advisory board members’ grants land.  Startups have a limited option pool and granting them to a Board member who is there to represent his or her fund’s interests takes those options out of circulation for others.

It is not the end of the world, but once this cycle starts, it is hard to stop.  Better not to start it at all.  If you do, try to signal that this is going to be rare.  I usually recommend a polite, professional and protracted discussion that is not over in an afternoon.

I also recommend that instead of doing one grant for X% that vests over 4 years, do it as a smaller grant of (X/4)% that vests in a year.  Continued service is a requirement for continued vesting.  The signaling of this is important — plus, it is nearly impossible to shut off vesting for someone on your Board even if that person is missing most meetings and falling asleep in the others.

I’ve seen options grants for Board members that vest in 3 years instead of the more standard 4, so in this case, just divide by 3.  Close enough.

One final note: outside Board members, on the other hand, usually do receive some compensation in the form of a monthly stipend.  Usually this is on the other of $1,000 per month in the build stage.  An options grant on the order of 0.25% usually accompanies this.  By the time an independent Board member is added, the company is usually closer to “scale” mode,  0.25% is a more significant grant than it was a short time ago in the company’s life.   Which, despite how much this might hurt, is a sign of success.  Enjoy the high class problems when you have them.