Director compensations have risen dramatically over the past few years. There is still not much data available, especially for early and mid stage companies, but many people believe director compensations have increased by several hundred percent since the governance debacles of the late 1990's.
This is happening because:
- boards are more important than ever before
- the time commitments to fulfill directors' responsibilities are increasingly onerous
- director liabilities have significantly increased
- director and officer's liability insurance provides less and less protection.
It's also becoming much more difficult to recruit and retain experienced, engaged directors.
Early Stage Board Compensation
Most early stage companies compensate directors entirely with equity. This is ideal because cash is in short supply, and using equity maximizes alignment between founders, directors and investors. (The same thinking applies to the CEO.)
A good practice for a startup company is to allocate 10% of the total number of shares after around the third round of financing (or at the second angel round) to a trust for the directors. To put this in context, this is about double the 20% equity pool typically allocated to the trust for future employees.
Another benchmark is that this 10% is roughly equal to the amount typically allocated to a non-startup CEO.
Mid Stage Angel-Backed Companies
Mid stage, angel-backed companies have valuations in the $10 to $50 million dollar range. By this stage, companies usually start compensating directors with cash as well as equity.
Public companies are more work for directors because of the additional compliance and regulatory burdens. They also create significantly higher risk for directors.
As a result, director cash compensation for public companies is usually about 50% higher than for similar private companies. Equity compensation is usually similar due to the limitations on granting new options.
The CEO does not usually receive any additional compensation for being a director. The director job is included as a regular part of their CEO compensation package.
Current Director Compensations
For early stage companies where director compensation is 100% equity, a typical initial allocation for an:
- outside director might be 1.5 to 2.5% of the outstanding shares, and
- active Chairman might be 5 to 6% of the outstanding shares depending on the amount of additional time contribution,
calculated around the end of the third round. The third round is typically the second angel round. VCs would usually call this the 'pre-seed' stage .
Equity for directors should vest on the same terms as the employees.
It's important to keep in mind that these percentages will decrease, possibly quite quickly, as the company raises more capital. Where dilution is a factor, boards have to grant additional equity, usually as options, to the management team and board to maintain alignment and thereby maximize shareholder value. Two examples of director equity allocations in very different dilution environments are summarized here.
As the company grows towards being a mid sized company, directors' compensation will usually evolve to include the cash and option compensations below.
Summary of Current Director Compensations for Private and Public Companies
This table summarizes our survey results for current annual director compensations for mid-stage companies that have reviewed their board compensation recently:
*Note: the shares or options above are shown normalized to a percentage of the fully diluted outstanding number of shares per year. In practice, when a director joins, they are usually allocated all of their equity at the outset. This is typically an amount assuming they serve for four to five years. This is done to set the price at the beginning of their tenure and thereby minimize dilution. This is why it's essential that this equity vest.
Comparison to CEO Compensations
Another way to look at director compensation is to compare it to the compensation for the CEO. A model to do that is located here.
Recent Trends and Our Survey
These director compensation numbers often seem high to someone who has not looked at board compensation recently. This is not surprising considering the rapid increase in board compensations over the past few years.
If you have some recent data on director compensation that you can share, as part of putting something back into our community, we would really appreciate it.