Startup Boards, 2nd Edition

Chapter 11Compensation

Assuming you've managed to attract some awesome board members, how do they get paid? The answer is: it depends.

VCs and Management

You should never pay a VC who sits on your board representing an investment. Their firms are paying the VC to make investments and sit on boards. This is their job. Most VCs have provisions in their agreements with their limited partners (LPs) that either expressly forbid payment or require the VC to remit any compensation they make as a board member back to their funds or as an offset to management fees.

Occasionally, a VC will ask for additional compensation for sitting on your board, usually in the form of a stock option grant. If this is early in the life of your company, it should raise a red flag about that particular VC. If there was a specific agreement negotiated at the time of the investment, that's fine, but a request after the fact is inappropriate. The one exception is after a company has gone public, where some VCs will request a standard board options grant to continue serving on a public company board.

While there should be no board compensation for investor directors, we've seen situations where private equity (PE) firms come into deals, either as minority shareholders or control investors, and want director compensation. Beware of this. If they are coming into an existing syndicate as a minority shareholder and asking for a director fee, tell them no, that isn't your model. If they buy a controlling interest ...