Wednesday, December 4, 2013

Outside director compensation in VC/PE-backed businesses

This post is a little off-topic from where we've been (information services business analysis) - but I think it may be useful to many readers.

As I poke around the information services space looking for my next great gig, I'm increasingly receiving invitations to join the boards of both VC- and PE-backed businesses.  In evaluating these offers, I've tried to stay very selective - time is a limited commodity, and as I've said previously, many information businesses are actually quite lousy.

But I've recently joined the boards of two great companies - CallMiner and Buyers Lab, with a couple more waiting in the wings.  The former is a hot VC-backed company doing some amazing things in the call analytics space.  The latter is an example of a great information business.  Check 'em out.

When I contemplated joining these boards, I was a bit adrift in terms of nailing down market compensation for the role.  Given my background, I did what came naturally: I conducted some market research to find out the answer. 

I received over 40 data points from helpful folks in my network, including some recent (2011) benchmark data. All were from well-respected and experienced VCs, PE investors, startup CFOs, and the like.

While all the data points help understand the appropriate compensation range, it’s worth noting that many participants emphasized the specificity of individual situations. For example, outside directors brought in to offer specific expertise (access to their network, advice on operations, help in selling the company, etc) often received one-off compensation packages which fell outside these ranges.

Equity compensation. Not surprisingly, equity comp is the most prevalent (cited in 100% of individual responses and 93% of benchmark data). All those who used equity comp for outside directors employed up- front grants, while a substantial majority (84% in benchmark data) also offered some form of ongoing, annual grant.

  • Equity vehicles were heavily weighted towards options, with only about 15% offering restricted shares. Some experienced directors in the sample said they are trying to change this mix more towards restricted shares.
  • Size of initial grants ranged from 8 to 100 basis points of fully diluted company ownership. Three factors appear to govern where in this range the grant is likely to fall: size/stage of company, day-to-day involvement in the company, and committee assignments.
  • Across the board, the earlier stage the company, the greater the size of the grant. Median responses seem to cluster around 50 basis points, but that may be related to the nature of the sample.
  • Outside directors who commit to spending specific time with the company (e.g. a day a week) tended to fall on the higher end of the range as well.
  • Committee chairmanships among outside directors in the sample were few, but generally seem to merit an increase of 10-20 basis points.
  • Vesting schedules were weighted towards four-year vesting, with most vesting on a monthly basis (note that a substantial minority had a cliff vest at year one, with monthly vesting thereafter).
  • Vesting triggers were also relatively common – including full vesting upon change of control in nearly all cases. Experienced directors also noted that they seek – and often get – relatively long post-service exercise terms of a year or more.

Cash compensation. Here there were substantial differences between PE-backed and venture-backed firms. Very few early-stage venture- backed firms offered any cash compensation; in contrast, some later- stage PE-backed firms offered meaningful cash compensation. 
  • Overall, approximately 4 in 10 firms in the sample offered cash compensation. About half of those firms which offered cash compensation used an annual retainer alone; the remainder mostly some combination of annual retainer and meeting fees.

  • Annual retainers (when employed) ranged from about $15k to about $30k for VC-backed companies, and from about $25k to about $90k for PE- backed. Outside chairs of key committees – primarily Audit and Compensation – are likely to also have additional fees paid, though they seem to range widely.

  • Meeting fees (when employed) ranged from $500 to about $3k for in- person meetings, and about half that for telephonic meetings. Nearly all reimbursed direct meeting travel expenses for non-local board members. 
Other compensation. There was no clear pattern around other compensation categories. Some firms offered health insurance to directors, for example, while others offered more humdrum compensation like meals at board meetings. 

Other factors. Experienced directors and attorneys in the sample noted that outside directors certainly require firms to provide high-quality D&O insurance. In addition, some suggested the importance of specific indemnification arrangements for directors, separate and apart from those arising under corporate bylaws. 
Does your experience match the data above?  Please share!