Board compensation for directors of large, publicly traded U.S. companies has passed a threshold of $325,000 per year in total fees. What’s less clear is how directors at private companies and startups are compensated — a key consideration in your Board Management and compensation committee.
Elements of Board Compensation
Total compensation for all public and private company board directors can have any number of elements that may include:
- cash retainers
- per-meeting fees
- full-value stock awards
- stock options
- signing equity grants
- ownership grants, and
- deferred compensation.
Large Company Board Comp vs. Small Public Companies and Startups
The differences in directors’ packages at publicly traded S&P 500 and Russell 3000 companies versus private companies and startups are significant. For example:
- Cash Retainers and Per-Meeting Fees – Publicly traded companies generally have richer cash payments and annual retainers of $200,000 or more. In contrast, private companies and startups may either pay a per-meeting fee or a much smaller retainer. (See chart 1)
- Equity vs. Cash – Equity represents the majority of total fees for public company directors — about 60% of total compensation versus 40% cash on average. Some startups may forego cash payments altogether and instead attract board directors with “real equity” in the form of stock options or restricted stock/units.
- Forms of Equity – Public companies primarily provide equity in the form of full-value stock awards (i.e., fully vested stock, deferred stock, restricted stock/units) and, perhaps, small stock option grants. Private companies and startups, whose stock is generally not liquid and whose value realization depends on an event, such as an IPO or the sale of a company, will grant restricted stock or stock options.
According to Chris Thomajan, TechCXO’s Managing Partner in Boston, and author of The Board of Directors Management Guide for Startups, compensation for private companies and startups is considerably lower, as those directors face less risk and fewer disclosures and regulatory hurdles than their public counterparts.
“Early-stage companies should expect to pay $5,000 per meeting or $25,000 per year to your directors. That number increases the closer a company gets to an IPO and can be in the range of $40,000 per year for pre-public or public companies,” said Thomajan. “It’s worth noting that investor directors — your VCs — do not get compensated at private companies.”
Early-stage companies should expect to pay $5,000 per meeting or $25,000 per year to your directors. That number increases the closer a company gets to an IPO and can be in the range of $40,000 per year for pre-public or public companies
Investor directors — your VCs — do not get compensated at private companies.
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Non-Executive Board Members’ Median Compensation
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|
Company |
Cash/Retainers | Per Meeting Fees* | Full Value Stock Awards | Stock Options | “Real Equity” or Long-Term Incentive Equity Grants |
|---|---|---|---|---|---|
| Large Cap Public | $200,000 | $2500* | $190,000 | 1% | |
| Mid Cap Public | $80,000+ | $2000* | $140,000 | 1% | |
| Small Cap Public | $70,000 | $1500* | $120,000 | 2% | |
| Private $251M – $500M | $50,000 | $5000 | 1.2x cash retainer | ||
| Private $51M – $250M | $40,000 | $5000 | 1.2x cash retainer | ||
| Private Up to $50M | $30,000 | $5000 | 1.2x cash retainer | ||
| Startups | $25,000 or ** | $5000 | 0.1%-.5% |
All the Ways Board Members Receive Compensation
Board members receive compensation in the form of cash, equity, stock options, and, for startups, ownership equity grants. According to an FW Cook report, the average mix of compensation of cash to equity is 40% cash and 60% equity. Technology firms skew higher with equity representing more than 70% of total compensation.
- Cash Compensation / Retainers – This is direct cash paid to each eligible director for their service. Most companies prefer a retainer-only structure versus paying a retainer plus meeting fees. As many as 85% of mid-size to larger companies prefer to have only retainers. Startups, however, may tend to prefer the cash plus meeting fee model.
- Meeting Fees – Just as the name implies, board members are paid for a pre-set number of meetings per year (see averages below), and additional payments for more meetings may exist. Startups may only pay either a small retainer ($25,000 on average) or a per-meeting fee of approximately $5,000.
- Equity Compensation / Stock Awards & Stock Options – Overwhelmingly, mid and large-cap companies grant an “equity retainer,” which is a full-value stock award annually. Most do not issue stock options to directors. However, some sectors, such as technology, provide both full-value stock awards and stock options.
Pay Differences Between Board Directors Based on Role
If you are an independent board member of a private company or you are a lead director or committee chair, more compensation can be expected in the form of additional retainers and/or meeting fees.
“Distinctions are certainly made for the specific role of a director. The chairman of the board or someone with relevant scientific or financial expertise, like an audit committee, might be paid more than a regular director,” according to Thomajan.
Independent Directors at Startups
Chris Thomajan, who has sat on more than a dozen boards, many of which are for biotechnology firms, is a strong advocate for attracting independent board directors as quickly as possible.
Unlike a company’s officers, such as a CEO, and their investors who sit on your board, independent directors are typically paid a combination of cash and equity for his/her services.
There are several ways to structure the cash compensation, but in general, the director is either paid a flat fee per meeting or a flat fee per year (paid quarterly) that assumes a certain level of commitment. He also said that while there is a cost to bringing on non-investor board members, the potential benefits far outweigh those costs.
“Independents can be an invaluable source of industry knowledge, but perhaps more importantly, can inject some much-needed objectivity into an environment that can become insulated,” Thomajan said. “Independent directors also expect to receive equity grants along with their cash compensation. The amount and frequency of such grants also vary by the stage of the company. However, an early-stage company should expect to grant 0.1% to 0.25% of equity with a vesting period of two to three years. Additional annual grants are also expected.
