Private Company Board Director Compensation

In the dynamic landscape of private companies, board compensation is a topic that is both complex and nuanced. Drawing from extensive experience and conversations with various board directors and venture capital teams, this guide aims to provide a comprehensive understanding of private company board compensation.

October 28, 2024

In the dynamic landscape of private companies, board compensation is a topic that is both complex and nuanced. Drawing from extensive experience and conversations with various board directors and venture capital teams, this guide aims to provide a comprehensive understanding of private company board compensation. It is essential to note that the insights shared are not legal or tax advice, and the variability in the private company space necessitates individual consultation with legal counsel or tax advisors.

 

Private company board compensation lacks the clear guidelines and transparency found in public companies. This makes it crucial for individuals to carefully read their documents and consult good advisors. The nuances and unique elements of each situation underscore the importance of understanding the specifics of one’s compensation package.

 

Key Elements to Consider

  1. Wide Range of Compensation: Unlike public companies, private company board compensation does not follow a standardized approach. While the Venture Capital Association provides rules of thumb, compensation can vary widely.
  2. Cash vs. Stock: Generally, private company boards do not offer cash compensation. However, exceptions exist, particularly in late-stage companies, private equity-backed companies, or when securing high-profile individuals. Stock is typically determined on a percentage basis, which can be translated to a cash value and associated with time commitment.
  3. Vesting and Term: Vesting for stock is increasingly tied to the term of the board role. It is important to ensure that the vesting schedule aligns with the term specified in the company’s by-laws.

 

Methodologies for Determining Compensation

Several methodologies can be employed to determine private company board compensation:

  1. Market Basis Points (BPS): Typically, the market looks at 25 to 50 BPS for Series B/C rounds. This can vary based on the amount of capital raised and the perceived risk of the investment.
  2. Internal Compensation Alignment: Aligning board compensation with the company’s internal employment equity practices can provide a benchmark. This involves looking at the target grant for a Senior Director or VP and multiplying it by 50% to 100%.
  3. Value of Time: Calculating the value of time spent on board duties can provide another perspective. This involves multiplying the hourly rate (typically $250 to $1,000) by the annual commitment (150 to 250 hours).
  4. Rule of Thumb Value: A rough market value of time in the pre-IPO market is around $60,000 annually. This can be translated into a grant based on the company’s valuation and preferred stock considerations.

 

Preferred Stock Considerations

The value of common stock is generally less than that of preferred stock. This difference can be significant, especially in early-stage companies. It is important to understand the preferred stock price and the relationship between preferred and common stock to negotiate a true-up in the grant value.

 

Vesting and Refresh Grants

Vesting schedules typically align with the term of the board role, with four-year terms being the most common. Refresh grants become relevant once the initial grant is largely vested and the relationship is being re-evaluated.

 

Change of Control and Exercisability

In the event of a change of control, such as an acquisition or IPO, it is crucial to negotiate single trigger acceleration to ensure full acceleration of the grant. Additionally, understanding the exercisability of options and the post-term exercise period can maximize the probability of realizing value from the equity grant.

 

Additional Considerations

  1. Directors and Officers (D&O) Insurance: Ensuring the company has D&O insurance is essential to protect against potential legal liabilities.
  2. Travel Expenses: Negotiating coverage for reasonable travel expenses is important, especially for directors who are not local to the company.
  3. Consulting Roles: Occasionally, directors may take on specialized consulting roles. It is important to ensure these roles are acceptable and do not conflict with the director’s primary responsibilities.

 

Pre-IPO Considerations

As companies approach an IPO, they begin to operate more like public companies. This includes structuring compensation to align with public company practices, such as introducing cash retainers and shorter vesting periods. Board members may also be expected to contribute more time, particularly during critical issues or crises.

 

Contracts and Agreements

Contracts for independent directors are typically structured as independent contractor relationships, with additional language around fiduciary responsibilities. It is advisable to have these contracts reviewed by legal counsel, especially for first-time directors.

Timing of Compensation Discussions

Compensation discussions should occur once there is a clear fit between the director and the company. This ensures that compensation is not the primary driver but rather a fair alignment of interests and time investment.

 

Private company board compensation is a multifaceted topic that requires careful consideration and negotiation. By understanding the various methodologies for determining compensation, considering preferred stock implications, and ensuring alignment with the company’s internal practices, board directors can navigate this complex landscape effectively. It is essential to approach these discussions with a focus on fairness, alignment, and the long-term success of the company.

 

**Disclaimer**: This guide is for informational purposes only and should not be construed as legal or tax advice. Always consult with legal counsel or tax advisors for individual situations.

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