How to Compensate Board Members for Your New Company

Top 4 tips for attracting and compensating board members for startup and growth oriented companies.

Q.   I am seeking angel funding for my business. I think it would be a good strategy to have a few board members in place to impress potential investors. Right now I am a management team of one. What should I offer to potential board members? What compensation do they expect?

A.   Sometimes you can learn a lot about the mindset of an entrepreneur by paying attention to how he or she asks questions. Self-involved entrepreneurs are easy to identify. They measure the value of mentors, board members and other advisors in terms of how fast they turn over financial contacts for the entrepreneur's use.

I like your approach better. You've asked what you should offer prospective board members, not just what prospective board members can offer you. This is the kind of mature thinking that will help you attract a devoted, well-respected board. Well done!

There are four factors that high caliber business people consider when asked to join the board of directors of a promising startup company.

1. Personal Integrity. Experienced business people understand that there will be unforeseen problems associated with developing first products and generating meaningful revenues. What they don't accept is any delay in learning about brewing company problems from management. Early stage entrepreneurs who promise to deliver the bad news just as fast as the good news in an honest, straightforward way will impress prospective board members.
2. Skilled financial management. Most first-time entrepreneurs don't appreciate that board members of privately-held companies assume certain financial liabilities for management screw ups. For example, if a company fails to pay wage taxes, board members can be held personally liable for the tax payment shortfall including interest and penalties. For this reason, many knowledgeable business people turn down board seats until the company can afford directors and officer's liability insurance, have reliable financial systems in place and have raised a certain amount of money to pay monthly operating and tax obligations.
3. Willingness to collaborate. Short-sighted entrepreneurs tend to look to their boards for fast approvals rather than purpose-driven discussion. The best board members can help entrepreneurs avoid costly mistakes, provided of course, that they are willing to pay attention to constructive criticism and guidance.
4. Compensation. Cash-starved companies offer prospective board members stock options or common stock to compensate them for the contingent risks and time associated with board membership. It is not uncommon for sophisticated directors to receive a non-trivial sign up award of 1% to 4% of a company's outstanding shares plus subsequent annual stock option awards. Once a company reaches a comfortable level of cash flow and profitability, board members may receive a cash fee for board meeting attendance.

Mick Fleming, a law partner of Lane Powell and veteran board member of several non-profit and for-profit companies says, "Once I become comfortable with a company's financial controls and business goals, I like to consider the overall makeup of a board. Ideally, each board member should bring a different area of expertise to board level discussions. If I don't think I can make a meaningful strategic contribution to a board, then I don't join."

Yes, the most valuable board members are always thinking about what is in the best interests of a company. Early stage company board membership is not about ego or compensation. It's about building companies in a responsible, productive way. To the extent that you represent these values, board members will be pleased to support your cause.

Do you want to find reliable investors for your business? Write to Susan at susan@takecommand.org for great funding references and tips especially designed for startup entrepreneurs, sole proprietors and fast growth companies.

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