Give one percent equity to each outside board member vesting over four years of service.
Many early stage CEOs and board members have asked for some guidance regarding pay and time commitments for board members. Here is my best advice, based upon many boards and many years. Pay early stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over four years of service. You do not pay professional investors who are serving on behalf of an investment company or VC and paid by that company.
The option price should be set by appraisal under IRS rule 409a, and certainly should be 
low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter. Further, the option should contain a special clause that accelerates vesting to 100% upon a change of control in the corporation, which aligns the board member with the best interests of the corporation itself. Otherwise, you might picture an event in which the sale of a company to be consummated a few months before full vesting could cause a board member to find ways to vote for delays or even against a sale of the company, awaiting full vesting of his or her options.
[Email readers, continue here…] For lifestyle companies or later stage companies, board members should be paid on a per-meeting basis in cash. Typically, this payment amounts to $1,000 per meeting of the board, adjusted upward for public corporations to $3,000 per meeting on average, with special pay for committee chairs and special meetings. These payments recognize that board members are not working for equity but for the equivalent of consulting fees plus the attendant risks of board membership.
To be clear, venture investors with investments from their funds are not typically ever offered pay for board service, which is expected as part of the investment. Inside board members, CEO and any other paid employees are not paid for board service in either stock options or cash.
Expenses for travel are often reimbursed by the corporation. VC board members sometimes request this, other times do not. It should not be offered to the VC members unless requested.
Next week, we’ll cover what should be expected of a board member in the way of time allocated to the company.
That makes sense Dave. Seems like a balanced approach…thanks!
– Bob
Dave, do you feel that a board member who gets involved with a startup and its early days should have their stock options increased to address the dilution effect of subsequent funding rounds?
Thanks!
Bob Wallach
Bobwallach@comcast.net
Bob,
I would never make a side agreement with a board member to allow any form of anti-dilution, which is what you are asking about. Board members, like the founders, are diluted with each round… What you can do is: upon completion of a two or three year vesting period of continued good service, consider a new grant of an option for a small amount to bring the board member back to the original percentage of the first grant, but vesting for another 2-3 years of service. Consider this: Granting 1% for 2 years of service each two years to three outside board members would equal 3% of equity every two years – and after ten years, your outside board members would own a claim upon 15% of the company. No outside investor or founder would accept that. With the method above, the three outside board members would at most still have access to 3% of the fully diluted equity for their continued board service…
-Dave