Don’t pay startup board members in cash. Founders and investor directors are already compensated through their stock, so they get nothing extra for board service. Independent directors should get an equity grant, typically 0.25% to 1% of fully diluted shares, plus expense reimbursement, D&O insurance and an indemnification agreement.
Key takeaways
- Founder directors and investor directors don’t receive extra pay for board service.
- Independent directors get equity, vesting monthly over two to four years, usually with single-trigger acceleration.
- Cash retainers belong at later-stage companies, not early startups.
- Every director should be covered by D&O insurance and an indemnification agreement.
Which board members get paid?
A startup board has three kinds of members. Founder directors already hold stock and usually draw a salary, so there is no need to pay them for board service. Investor directors sit on the board to protect and guide their investment, which is compensation enough. Many seed investors take only an observer seat, and a board seat is a negotiated term, not an automatic right of every lead investor.
Independent directors are different. They are neither founders nor investor representatives, and they bring outside expertise and a neutral voice between founders and investors. Their independence is valuable. The problem is that without compensation they have no economic stake in the outcome, and you want someone with a director’s authority to share in the company’s success. That is what the equity grant fixes. See Building an Early-Stage Board.
Should we pay directors in cash?
Not at an early-stage company. Cash spent on director fees is cash not spent on growth, and a request for cash is a signal worth noticing. It often means the candidate doesn’t understand how startups work or isn’t focused on long-term value. Cash retainers are common at public companies and sometimes appear at later-stage private companies, but they don’t belong at seed or Series A.
How much equity does an independent director get?
Typically between 0.25% and 1% of fully diluted shares, similar to a significant advisor. Grants at an earlier stage or for a director who will do more tend toward the top of that range; grants after a Series A tend toward the lower end. Always express the grant as an exact number of shares.
The grant takes the same form as other equity at the time. While the company’s fair market value is nominal, that means restricted stock purchased at fair market value with an 83(b) election. After the first 409A, it means nonqualified stock options (NSOs), since directors who aren’t employees can’t receive ISOs. The board approves the grant, and the director receiving it should abstain. See Startup Advisor Compensation and NSO vs ISO.
How should director equity vest?
Monthly over two to four years. We prefer no cliff for directors, though some companies use a short one. Single-trigger acceleration is appropriate here, because a director’s role ends when the company is acquired and there is no ongoing service to reward. If a director leaves the board, they keep their vested equity and the company can repurchase or cancel the rest. See Single vs Double Trigger Acceleration.
What else do directors expect?
Experienced independent directors will ask for three things alongside equity.
An indemnification agreement commits the company to cover the director’s legal costs and losses from claims arising from their board service, to the extent the law allows. Your charter and bylaws usually provide some indemnification already, but a separate agreement gives the director a contract right.
Directors and officers (D&O) insurance pays for those claims when the company can’t. Most experienced directors won’t join a board without it, and investors usually require it at a priced round. See Startup Insurance and Accounting.
Expense reimbursement covers reasonable costs of board service, such as travel to meetings. A clear, written reimbursement policy avoids awkward conversations later.
Directors also owe fiduciary duties to the company and its stockholders, which is one reason these protections matter. See Fiduciary Duties of Founders.
Should we let directors invest?
Offering independent directors the chance to invest in a future round can deepen their commitment, and their participation can signal confidence to other investors. Keep it optional. A director’s decision not to invest should have no effect on their role.
What about non-monetary incentives?
Some companies also offer directors access to company events, products or industry contacts. These are a nice touch, but they don’t replace a proper equity grant and the D&O and indemnification package.
For more on running a board, see How to Run an Effective Startup Board Meeting. If you’d like help with a director grant or indemnification agreement, contact us.
