Directors & Advisors

Board Compensation Guide

2012

Purpose of this document:To provide guidance to early stage technology companies for determining:

1. If you need a Board of Advisors (BoA) or Board of Directors (BoD)

2. How a BoA or BoD is typically compensated using real-world examples.

Contents:Why have a Board? (slides 3-6)How much? (slides 7-8)Examples and Resources: (slides 9-14)

Purpose of a Board of AdvisorsThese individuals are usually industry experts who provide expertise that is complimentary to your team. Typically they would have technical expertise: e.g., a physician for a medical device company, or a senior programmer for an internet start-up.

Purpose of a Board of DirectorsTo provide guidance and oversight to the company as well as be accountable for governance and fiduciary responsibility: e.g., experienced executives, and/or your investors.

In the simplest case, a founder who incorporates his/her company can function as President, Board, and Employee. All priorities are in alignment, but it’s hard to do it all yourself.

Do you need a Board of Advisors?

This is often free advice from industry experts. Everyone in a technology company should seriously consider a Board of Advisors and/or a Mentor.

For early stage companies, this is often an informal arrangement. You may wish to offer a Limitation of Liability agreement, or they may ask for one.

Do you need a Board of Directors?This depends on the stage of your company.

Start-up: Probably not. You have no product, you have no customers and you have no investors. Remember, a BoD can fire the CEO-Founder (you), but a BoA can’t.

External Investment: Maybe. With increasing investment there is increasing chance that an investor will demand a BoD position as a condition. They want to make sure you are meeting your objectives and legal requirements.

Commercial Phase: Almost certainly. We assume you have income, debts, customers, competitors, investors etc. It can be comforting to know you have a BoD helping to make sure you have not missed anything.

Board Compensation: How Much $$$$$?

The variables include:

1. Stage of the company2. Ability to pay3. Private or Public4. Director Profile (Investor vs. Expert vs. Reputation)

Stage of the company: Start-up/External Investment

Founder(s): $0. When the company is founded, you are probably the only director, and you are compensated $0 for your position as a director (you have founder’s shares right?).

Internal Director(s): $0. (e.g. significant investor) who demands a BoD position is compensated $0 as a director. They probably just bought 10-30% of your company: that is their compensation.

External Director(s): $0. You don’t want one. If they are willing to do it for free because they love your company, maybe. Remember, a BoD can fire the CEO-Founder (you). This is one way many founders find themselves removed from their companies.

Stage of the company: Commercial

1. Now you have potential liability, and so do the directors. You may be asked to obtain Directors and Offices liability (D&O) insurance.

2. Directors and Advisors will likely want financial compensation in the form of expenses, fees, equity, or some combination.

3. The following pages give real-world examples (and opinions) of what the compensation packages are like.

SUMMARY:Start-up (pre-revenue) = $0Early Commercial = 0.25% equity/year, limited expensesCommercial/Public = Retainer, meeting fees, committee fees, expenses, options.Meetings fees are decreasing due to increased use of ‘virtual’ meetings.

FeldThoughts

Summary: 0.25% per year per director for a four year term (total 1%). If the Board member wishes to invest further (cash), that investment is handled separately and like any other investor. No expenses paid until the company is in revenue.

Quora

Summary: Hired senior executive compensation. CTO 3%, COO 0%,VP 1 – 3%, Director 0.25 – 1%.

Each of these examples includes a hyperlink to the original source

Angel BlogSummary: Stated in this blog, an “…outside director might be 1.5 to 2.5% of the outstanding shares, and active Chairman might be 5 to 6% of the outstanding shares depending on the amount of additional time contribution…”.

Consulting Company ReportSummary: In addition to an average $15,300 annual retainer fee, directors receive an average fee of $1,100 a meeting. They generally attend six meetings and three subcommittee meetings, at $750 apiece, each year, according to the Coopers & Lybrand study. Total average pay is $24,150.  "Some time ago, it may have been viewed as a friendly club," Lew said. However, it is not that way today. The economic and legal environments today make it necessary for every director to prepare well, to ask the right questions, to be aware."

Each of these examples includes a hyperlink to the original source

Beginners InvestingTiffany & Company, for example, pays directors an annual retainer of $46,500, an additional annual retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-attended fee of $2,000 for meetings attended in person, a $500 fee for each meeting attended via telephone, stock options, and retirement benefits. Microsoft Business ResourceSummary: Size, frequency, and other variables dictate how much you pay your board of directors. Look to pay a ‘per meeting’ fee of several hundred dollars plus an annual retainer. Rule of thumb: The bigger the company, the greater the importance of a board member's role so you'll have to pay them more. Even relatively small companies which ask a fair amount of their board members can expect to pay upwards of $30,000 a year per member.

Each of these examples includes a hyperlink to the original source

Industry Week articleSummary: The study showed that six companies offered their full board a cash bonus based on company performance, and the practice of establishing stock ownership guidelines for directors is growing. 

ForbesSummary: Very nice info-graphic of CEO compensation packages for comparison. Note that this interactive graphic rendered better in some browsers than others.

Each of these examples includes a hyperlink to the original source

Public Company (in revenue) Board CompensationSummary: Cash retainer, plus meetings fees, committee fees, in some cases equity and performance based compensation. There is a wide range of compensation in this sector depending on stage and success of the public company. Bank of Montreal Board of Directors CompensationSummary: >six-figure board positions.

Fortune 500 CompaniesSummary: companies with revenues over $10 billion, the median director total compensation increased by 1% over last year to $216,186. Two notable trends:- The prevalence of stock options is decreasing - The prevalence of meeting fees is slightly decreasing as communications become increasingly sophisticated and the definition of a "meeting" begins to blur.

Each of these examples includes a hyperlink to the original source

Other Resources

Articles of Incorporation Resource for your Board (Appendix A, Table 1).Maintaining your BC Company Documents for reporting.www.Crownpub.bc.ca for official documents in BC.BC Laws Free public access to the current laws of British Columbia.Business Law for Technology Companies U Calgary.Corporate Registry Information Packages (BC).Setting up a Board of Directors Useful resource created by David Rowat.