How To Pay A Board of Directors: A Practical Guide
Written by Dave Berkus, Angel investor
David Berkus is an American angel investor and venture capitalist from California. He is one of America's most prolific angel investors with over 200 early-stage technology investments.
What is a Board of Directors?
A board of directors serves to manage the company’s business, which is filled with (usually up to five) board members who make decisions related to the day-to-day running of the company.
A board meeting usually is once a month and available phone time as the CEO requests. That's what you give for what you get about one meeting a month. The typical board meeting is two hours in length. The longer than that you lose the attention span and the quality of the meeting begins to degrade.
If a chairman is appointed, the chairman often spends more time with the CEO than the individual board members and the chairman has a responsibility that goes beyond the board member's responsibility. The chairman determines, for example, the agenda for the meeting, speaks to the CEO about the issues before the board members sees them, and often helps in funding and other ways that members of the board aren't involved in.
How much do board members get paid?
Here's a question people often ask me, how do you pay an early-stage Board Of Directors?
Well, cash is nice, but for early-stage boards, it's very rare. We end up using stock grants, but those are taxable events in most places, most countries. So, we end up with stock options. We align the board with the management team because then there is equity in the hands of the board as well as obviously in the hands of the entrepreneur and sometimes in management as well.
Well, how much of the company does a board member get in the form of a stock option? Typically, it is 1% over two to four years which means the vesting period for the option is two to four years. If a board member leaves after one year and there's a two year vesting period, only half of that 1% is available. And, by the way, in typical option plans, those options have to be exercised within 60 days after completion of an assignment.
These are non-qualified options at least in the United States. Non-qualified means they're taxable at the point in which they're exercised. So, the transaction must be priced very specially. We'll talk about that next and in the tax of those options, it is very careful that the options not be exercised too early.
The chairman gets usually an additional one half of 1% if that chairman is active in the way we just discussed as a CEO and coach.
Consulting fees are okay for board members if there are more days of service required. I've seen times in which a board member is an expert in sales and marketing, and the company uses that board member as the consultant after board time is usually given.
For instance, sometimes a corporation CEO will ask a board member who's expert in a particular function, like finance or marketing or sales or SEO, or anything of the kind to spend an extra couple of days.
If the board is informed of the board members extra participation and the fact that the board member is going to charge, that is completely legitimate. It is important though that the board be informed when a member does receive compensation.
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What is an Advisory Board?
How about a board of advisors? Well, that fills out areas of need that couldn't be found otherwise from the five usual board members. It creates a list of known names to validate the company vision.
Sometimes the board of advisors is composed of well-known names in an industry and it allows for a convenient way to move the persons off of the corporate board when they are no longer appropriate are useful for the board as they had been when the board was first done.
How much do advisory board members get paid?
Which leads to the natural question, how do you pay a board of advisors? Well, stock options again are typical for standards of service. Those standards are first about a quarter of a percent to a maximum of a half a percent over a period of two to four years investing. In the same way that a 1% grant is given to a board member, a quarter of a percent grant is typically given to a board of advisors member. These two are also non-qualified options. They have to be priced at the last transaction if there's only one type of stock or an evaluation in which it's done by a professional advisor or appraiser.
Typically, a board of advisors member gives a couple of visits or less and about 24 phone calls a year. If more, then once again, consulting fees are appropriate. It is okay to offer advisors an observer right in a board meeting or a selected board meeting when the time is right for advisors to be able to help the board understand issues. Advisors can be observers at board meetings as well.
One thing I would always want is an indemnification agreement between the members of the board individually and the corporation. In an indemnification agreement, the board knows that the company will use all of its assets if necessary to protect the members of the board in the case of a lawsuit. That kind of agreement is important, especially if the corporation has assets. If the corporation has none, it is perhaps a piece of paper with no value, but it is a reminder to everybody that the corporation and the individual board member are linked.