You get what you pay for

So, there are still many a VC as well as entrepreneur out there that thinks that with a few options on common stock that you will entice an experienced well-connected (and thus busy) person to take the time to be on your board.

Maybe the entrepreneur thinks, "Well, I don't really want them on my board. That would be giving them too much control. Just some advice when I need it would be fine"

Some free advice can be worthwhile, but it is not repeated. You want them to be there over a longer time period -- years even. To get true value out of the relationship, the advisor or board member will need to get to know all about you and your company -- all the warts, worries etc. You need to structure the relationship.

Whether you create an advisory board or a full fiduciary board depends on a variety of issues such as number of shareholders, and whether you're seeking new funding. In either case you should plan on compensating that person for their time, just as you pay yourself some level of a salary (when the business is established). You can be creative, as Susan Stautberg does when she handles an advisory board; for a luxury hotel group, the advisory board members get to stay at one of the hotels for free. You can add options to add icing to the cake, but common share options alone can lose their appeal if layers of other preferred shares are piled on top. Generally advisory boards are paid per meeting, if it is the kind which is holding planning or strategy sessions.

The fiduciary board role has added risks and responsibilities (see legal issues). You need it to be there in fair weather and foul. When you have other shareholders besides you and other managers, a board with non-executives is an essential part of doing business properly. 

For what it is worth, here are some benchmarks. From the annual NACD's study small public companies (revenues from $50 to $200 mln)  range in total compensation for board members from $14,000 to north of $100,000 per year both cash and stock-related.  Valuing the stock portion for private companies is much harder, so to give you and idea on the cash portion, it ranges, depending on the industry, from $10,000 to $40,000 . These numbers include both annual cash retainer and board meeting and committee fees. I would lean toward the annual cash retainer with, if applicable, additional fees for serving on committees and not the board meeting fees so that no one is tempted to cut back on board meetings as a way to save money. In tough times, the board will need to meet more often.

What really gets paid for those lonely independent directors of VC-backed company boards? Too little for them to stick around when the going gets tough.  Any company that has attracted venture money and pays a CEO tens if not hundreds of thousands can and should pay the outside/independent director who does not represent a venture firm or class of stock.  A ratio to CEO pay of 1:10 would be in the right ballpark.

Also, popular but not headed in the right direction is the tendency to create a consulting contract for the outside director. That tends to make the consultant director part of the management team delivering certain work -- a fine arrangement if you need more management but not what a board of directors should be in the habit of doing. 

A better way to recognize that independent directors are often more involved would be to create a board committee or working group in that area -- say Sales and Marketing -- and pay the director(s) in that group a higher committee fee for their greater time committment. As a board committee it reports to the full board, thus keeping the line between management and board intact. Remember, you can't judge you own work.

Comments

[John Vornle]

The best board compensation structure I have seen includes two parts: a) walkaround money between $10,000 and $120,000 per year plus; b) an incentive that rewards the board, as a whole, for a percentage value increase in a set-aside specific number of shares that represents a fair amount of the company in question. How everything gets divided is a question of individual personality. I have found this compensation structure keeps the boards focused on the issues of "governance," issues of "how to communicate with the CEO," and the primary issue of operating strategically within a competitive market environment. Your subject matter is dear to my heart. Good luck.