Independent Director Compensation

I got this question yesterday and answered via email and thought I’d share that discussion with all of you:

I enjoyed your article on Board Diversity (https://avc.com/2020/06/board-diversity/ ) and am planning to implement it at my company. I was hoping to get some guidance on the following:

* How would you define the role of the independent director / what is their job? 

* How would you compensate them for this job? 

I believe the role of the independent directors is to represent “the Company” in all board discussions. Founders and investors can and do think about what is best for the Company, but they also think about what is best for them. An independent director can and should represent the Company in Board discussions. Also, an independent director should have experience operating a business and should actively share that experience with the leadership team.

For compensation, I like the use an annual amount of $100,000. That is substantially less than public company directors make (which is more like $200,000 per year), but being a public company director is more time consuming and exposes a director to more liability. So I feel like $100,000 a year is reasonable compensation for a private company director. The spread between private company board compensation and public company board compensation narrows as a Company gets closer to being public.

Private company directors are usually compensated in stock, not cash.

I like to use the following approach for stock based compensation:

• For companies valued below $40mm enterprise value, pay an independent director 0.25% of the Company per year served on the Board.
• For companies valued above $40mm of enterprise value, pay an independent director a percentage of the Company per year served equal to ($100k/enterprise valuation). For example, if your Company is worth $100mm, then you would pay 0.1% per year served ($100k/$100mm).
• It is typical to make a “front-loaded” grant of four years of value and vest it over four years. So in this second example, where the Company is worth $100mm, the independent director would be granted an option for 0.4% of the Company, worth $400k, and vest that over four years.
• However, for very early stage companies where the annual grants are quite large (0.25% per year), it is more common to make those grants annually so that the dilution from these grants comes down as the Company’s value increases. That said, front-loaded four-year grants are made for directors of early-stage companies as well.

As I said in the blog post on Board Diversity linked to above, I believe getting independent directors on your board from the very start is a good move. It will make your Board meetings better and it will make your Company better. And make sure to strongly consider diverse candidates when you add independent directors to your Board.