How to Calculate an Independent Board Member’s Compensation?
As your company approaches its series B, it’s not uncommon for a lead investor to reach out and ask you to add an independent director to your board.
An independent director is a member of a board of directors who does not have a material or financial relationship with your company or related persons. This person provides unbiased advice, perspective, and judgment while on your board of directors.
One of the questions many founders face after welcoming an independent board member is how to compensate them. When we were closing our Series D, our CFO completed a comprehensive analysis (with input from our investors, lawyers, and other late-stage companies) on how best to calculate an independent board member’s compensation. We wanted to share this information with our community to help as many companies as possible who may be going through a similar change.
Early to late stage, private VC-backed companies may get the most use out of this analysis, but it can be referenced at various stages of company growth.
So, what should you know when calculating compensation for this new board member?
Equity is royalty
Throughout the research we conducted, it was clear that options are the most common compensation in private-stage startups that are still burning capital. We learned that investors very rarely (if ever) see any cash compensation for EBITDA-negative companies.
There are two main reasons for this:
- Minimizing Costs: As a company still burning capital, you don’t want your board to become a cost center. Start-ups at all stages need to keep their costs contained, and offering equity vs. cash is an easy way of doing this for board compensation.
- Long-Term Returns: The amount of money an independent board member can make from options in your company is much higher than the amount you can reasonably pay them. That makes options the only logical choice.
That said, if cash compensation is something that an independent board member is looking for, you can offer them a nominal amount. This amount will vary depending on factors such as how well-established they are, the time they are willing to commit, etc. A good amount to start with is around $2,500 per board meeting in addition to a share of equity, but this share will be lowered in alignment with the increased cash compensation.
Regardless of the breakdown between equity and cash, it’s almost universal to compensate board members for general expenses such as transport and accommodation when acting in an official board member capacity. This should also be considered when determining a compensation package, as travel for a board member who lives across the country can become costly if they are flying in monthly for a board meeting.
How to calculate the right amount of equity
Now that we understand that equity is the most common type of compensation, the next question is how do we calculate it?
For later-stage companies (Series B and farther), the working assumption is that your independent board member will get a 3X return on their option grant. During our research, we have seen that around 0.1% -0.125% with monthly vesting over 2 years and acceleration on change of control is the market average equity compensation package in Canada and the US.
If a company is at a much earlier stage (pre-seed/seed), you may see up to 1% — 2%, but for a company valued at hundreds of millions of dollars, the average range would match the numbers above (0.1% -0.125%).
Regardless of the percentage, the best outcome is that your independent board members will have a payout of $1,000,000 — $2,000,000.
We created this template to help you calculate the proper compensation.
Here are some instructions and assumptions for the model:
Assumptions:
- Assume you are targeting a 3x share price uplift (Keep in mind — you are hoping for more than this, but this is a fair benchmark).
- Assume a number of options required for the desired monetary payout.
- Note: Sometimes we assume a large first grant and then a second grant after 24 months, assuming that things are working out well (often, we only do one large grant upfront, with standard 4-year vesting)
Instructions:
