Board Management Part 2 – Adding Independent Directors to Your Board
Adding Independent Directors to your Board
In my last post, I discussed how to manage your board of directors – things to do and not to do.
In this article, I discuss the advantages of bringing on an independent board member, when to do so and how to manage the process. From the prior post:
Do bring in an independent board member as soon as possible who is neither a part of your team nor an investor. 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. There is usually a cost to bringing on non-investor board members, but the potential benefits far outweigh those costs.
What is an independent board member?
An “independent” board member or director, also known as an “outside” board member, is one who is neither part of the investment team nor part of the management team. An independent board member has no material relationship with the company prior to joining as a director.
Are independent board members usually compensated by the company?
Unlike your officers (usually the CEO) and your investors who sit on your board, an independent director is 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.
Early stage companies should expect to pay $2,500 per meeting or $10,000 per year to your independent directors. That number increases the closer a company gets to an IPO and can be in the range of $30,000 per year for pre-public or public companies. Distinctions are also made for the specific role of a director. The chairman of the board or someone with relevant scientific or financial (e.g. audit committee) expertise might be paid more than a regular director.
Independent directors also expect to receive equity grants along with their cash compensation. The amount and frequency of such grants also varies 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 2 to 3 years. Additional annual grants are also expected.
What is the benefit of having an independent director on my board?
There are two primary benefits to having an independent join your board. The first is described by the title “independent” because an independent director is presumed to provide a level of objectivity that might be missing in a group of insiders. Management may struggle to view issues and challenges objectively because they are often in the center of these discussions and rely on the company for their livelihoods. Investors might be influenced by events, good and bad, in their portfolios and might not be able to separate those issues from the governance of the company.
The second benefit is the ability to leverage deep industry or scientific knowledge. An industry veteran who can help the company through a financing or a partnership discussion can significantly improve the company’s chances of success. While someone with specific sector expertise, whether it is science or finance, can play a critical role in helping to guide the company’s strategy.
When should I think about bringing on an independent director?
Obviously, you need the resources to compensate these individuals, but you must also have broad agreement from the rest of your board. Being able to articulate the issues you are trying to solve and the benefits of bringing on an outsider will be key to convincing your fellow board members that this is a commitment worth making. Some companies are opportunistic and bring on a new director if that person becomes available and is willing to work for the company. In general, sooner is better so the person can have a greater impact on decision making and the company’s success.
Where do I find independent directors?
Once you have made the decision to at least consider bringing on an outside director, then you need to do everything you would normally do to recruit talent. Write a job description with input from your other directors on the role and expected compensation. Use your network to identify qualified candidates and if you are not getting the traction you seek, then you may have to consider employing a recruiter.
In summary, inviting an independent voice to join your team can be a huge advantage for your company. Make sure you build a consensus before you act and take great care to define the role and ensure that your new director is a good cultural fit.
Chris Thomajan is TechCXO’s Managing Partner – Boston. See his full bio and contact information here.