Board of directors

To attract strategic board members how much equity do you allocate & what commitment do you ask for?

Chicke Fitzgerald

June 24th, 2016

I have someone that I am trying to attract to my board that would lend significant credibility and experience and help me attract the kind of executive team that I need to get the company to the next level.  I am willing to give 1% equity to him and think that he would only need to devote 1 hour per month to me and a 4 hour meeting in person once a year.  Does this sound reasonable?  This is the Board of Directors not an advisory board role.

Ed Berde .

June 24th, 2016

1% is a normal amount for strategic advisors and board members. Depending upon the stage your startup, or if you have revenue, it could be less. But they should bring more to the table than "1 hour per month and a 4 hour meeting per year". I would expect them to be available for advisory calls, provide contacts, intros, etc. In short, they should be available when you ring their phone, but don't abuse it.

Andrew Jiranek Managing Attorney at Jiranek & Company, P.A.

June 26th, 2016

In paying equity, one must always consider its purpose.  Is it meant to compensate, incentivize or retain the executive, be it a board member, officer, key employee or key contractor?  The rest of the management team should have expectations for this executive, it is their duty to the other stakeholders in the company.  You should first define your management objectives for this board member, and then tie the equity awards to achievement of these objectives.  You need to consider the value of this equity, and then make sure that this value is equivalent to the management objectives this executive is delivering.  If the value of this equity is much higher than the value to the company of the board member's engagement, then you are diluting shareholders.  As a President, you want the addition of the new board member to accrete value to the company.  So, I encourage you to consider the value of your equity award, not to focus on the percentage of the equity awarded to all other equity.

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 25th, 2016

I always get curious on how the math will play out. Let's say 1% ... times how many key advisors/board members? Then there are key executives / cofounders / employees. What percentage do they get? How many of them are there? Are you still at the "I want 51% stage". That means you have 49% to "play with". With you keeping 51% and let's call it a 20% attraction and retention pool (will all the advisors, board members, co-founders, and key employees fit in 20% ?), that leaves 29% for investors. Will that work at this stage? What will happen when you need to readjust (how will dilution impact morale). What will happen when a VC looks at your cap table?

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 26th, 2016

The unfortunate truth about the "value" of startup equity is that there is a greater than 80% chance that it will never be worth anything. Pre-money valuations vary widely and don't really matter since they are difficult (if not impossible) to convert into real cash. 

Equity (especially early stage and/or restricted equity) is a "bet" on what will happen in the future. It's value is largely in the faith that the recipient has in the ability of the enterprise to grow. That's a good thing, and it serves a different purpose than direct compensation. 

Bottom line, initial and growth funding is not a single deal. They are a series of deals in which the details of each deal facilitates or inhibits the next deal. The pie has 100 slices - distribute them wisely.   

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 24th, 2016

I've posted several times about issues of compensation vs. equity. Let me try an analogy this time.

I need to get a new roof on my house. I really don't have the money to pay someone to do it. Do you think that offering 1% of the equity in my house sounds reasonable? This is not a labor only deal, they would have to provide all of the supplies as well as any permits, liability insurance, and other items that I may not even know about. 

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

June 25th, 2016

Serving on the board of a startup is relatively light lifting in terms of a time commitment. A percentage point or two of equity should suffice, and I'd question the passion for your project of anyone who needed a cash fee in exchange for board service.

Bert Wank Power Management Technologist ► Start-up executive ► Product Innovator

June 25th, 2016

0.5 to 1.5% sound reasonable of likely a 15-20% restricted stock pool you may have reserved. It really is for lending their name and thus credibility, perhaps some governance if actively participating in Board meetings, asking the right questions. Contrary to the first offered analogy, which I like in principle, not for building the house, but to make sure your general contractor contracts are sound with reputable and vetted firms your house is built on. This signals to subcontractors they are watched by someone who knows key stakeholders in the industry, preventing  underperformance.

Chicke Fitzgerald

June 25th, 2016

Thanks Neil.  I agree on the "light lifting" comment.   And you are right, at this early stage, cash isn't appropriate.  However, if we expect the board members to travel for a meeting, compensating them for their travel is the right thing to do.  If you can't afford an in person meeting with your board, just keep doing phone meetings.

Andrew Jiranek Managing Attorney at Jiranek & Company, P.A.

June 27th, 2016

Although there are tax considerations to address, you may want to tie equity awards to a vesting schedule and achievement of milestones.  As for equity, 1% of start-up Google carries a lot different value than 1% of WashMyPet.com.  If the board member is asked to join the board of Google, 1% is overpaying, if he/she is asked to join the board of WashMyPet.com, he/she is probably being underpaid.

Mike Moyer

June 27th, 2016

What if he misses a meeting or isn't as valuable as you think he will be? Instead of trying to guess what to give him, use the Slicing Pie model. It will tell you exactly what he deserves relative to the other participants and it will tell you how to protect yourself from equity mistakes.

Send me an email through SlicingPie.com and I'll send you a detailed overview.