Director pay in emerging firms: a snapshot of board compensation appropriately tailored to the organization's stage of development, industry, and size.

AuthorRich, Joseph R.
PositionDIRECTOR COMPENSATION

FLEDGLING COMPANIES today must focus not only on obtaining the financial backing and technical expertise necessary to get their initiative off the ground, but also to put it on the right path from the standpoint of heightened new governance standards. In terms of attracting potential investors, firms may even find that there is an advantage to "acting public" when they are still private, even though they are not yet bound by new mandates.

Among the key initial challenges is the selection and compensation of a board of directors to best serve the emerging needs of the organization and, ultimately, of its shareholders. This article outlines board compensation practices and levels for emerging firms--those preparing for an initial public offering (IPO)--as well as pay practices and levels for newly public firms.

Preparing to go public

The recruitment, responsibilities, and composition of an emerging firm's board of directors must evolve to accommodate the company's changing needs, with corresponding adjustments to the level and structure of members' compensation, as outlined in Exhibit 1.

Let's examine each stage in the emergence of a new company:

Bootstrapping. There is usually not a formal board of directors in place at the very earliest stages of a company's formation. Angel and friends and family investors bring a keen interest in its success and may serve in an advisory role but have no expectation of compensation.

Professional Investment. Initial professional investors will expect to serve in a major advisory role (and possibly as directors) to protect their interests but, like the earlier investors with a personal relationship to the founders, are not paid.

Market Validation. During this phase, some firms may recruit one or two outside directors with specific skills in the company's market or product area. The outside members may receive a very modest cash retainer, but the majority of their compensation will be in the form of stock options or, in some cases, as an opportunity to co-invest.

Preparing for an Offering. As the company anticipates its IPO, the specific composition of the board becomes more critical. Many organizations will recruit more experienced, "marquee" directors to add credibility and stature to the venture, as well as to bring the board in line with the stricter requirements for director independence that apply to public companies. The main carrot for attracting such candidates is the opportunity to participate in...

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