Paying Your Board Members: How and How Much?
Did you expect qualified people would join your board for their own edification? You’re not alone in that thinking, but that’s not how it typically works. When you’re hiring board members, they’ll generally expect some kind of compensation, which will change over time as the company matures. The stage of your company is a big driver of how you’re paying your board members — and how much.
The first thing to ask yourself is what stage your company is in and where that fits in the timeline of company maturity. If you have an early-stage startup on its seed round, for example, that’s generally a time when you’ll be looking for board members who want to take mostly equity and little or no cash. “For startup boards, the rule of thumb is ‘equity first, cash follows,’” writes Dan Byrne for the Corporate Governance Institute.
As a startup, you are conserving cash and trying to build a team that believes in the vision — which might be pre-product and pre-revenue. Equity would be the right type of compensation at that stage. One caveat: Balance this type of compensation with not giving away too much equity in your company.
Comp being given to board members can be quite opaque when compared with employee salaries — especially for privately funded startups. If you’re a big public company, you must disclose that, but for private companies, it can vary by industry and even by the specific board member. It may be a negotiation, but it’s important to know upfront what makes sense for the company before you even start looking for board members.
If the company is VC-funded, there’ll be board members coming from those venture capital funds. The good thing there is they are generally not compensated, because they’re investors in the business, and they want to have some guardrails on their investments. At the same time, they can be valuable board members for the company’s CEO.
For industry experts or specialists in operational areas, a typical pay range might be .5%–3%. Generally, as your company grows and gets more funding, there’ll be more dilution, so you would expect to pay a lower percentage of equity to the board members. Right at the beginning of your first round, you might be paying 2%–3%. As you get more funding, however, you might expect to pay half a percent to your board members, because you’re creating value in the company.
Also remember that it is typical for board members to get reimbursed for their expenses. If board members are geographically dispersed, and you’re all traveling to meetings, then that’s going to be something that comes out of pocket. Create policies in advance to guide the board members. For example, do you want them traveling first class or economy class? Think about that as a separate cost. Another cost is directors and officers (D&O) insurance. Board members may ask you to have that in place to cover them, with is fairly standard — just make sure the cost is factored into your budget.
- Per-meeting fees, which occur independently of reimbursement for travel or accommodation. Usually, these fees range from $1,500 to $3,000 per meeting.
- A ‘retainer’ fee acts as an incentive for the board member to continue with the startup. Typically, these range from $5,000–$10,000.
- A bonus. It doesn’t always happen, but if it does, the company will tie it to any bonus the CEO gets.
“The above is often in addition to a share of equity, but this share will be lower than previously mentioned — often only up to 0.5%.”
There are lots of moving parts to hiring a board, including how and how much to compensate them. Please reach out to me. I can help you figure it all out.