<aside> <img src="/icons/book_blue.svg" alt="/icons/book_blue.svg" width="40px" /> Source This is a direct excerpt of Startup Boards by Brad Feld and Mahendra Ramsinghani. p. 101-102

</aside>

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

You should never pay a venture capitalist (VC) who sits on your board representing his investment. VCs are getting paid by their firms to make investments and sit on boards. This is their job. Most VCs have provisions in their agreements with their LPs that either expressly forbid payment or require the VC to remit any compensation they make as a board member back to their investors. VCs already have plenty of skin in the game since they have purchased equity in your firm—they don’t need board compensation as well.

Occasionally, a VC will ask for additional compensation, usually a stock option grant for sitting on your board. If this is early in the life of your company, it should raise a red flag about the 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, at which point some VCs will request a standard board options grant to continue serving on a public company board. Outside board members are an entirely different matter, as it is expected that they will be compensated in some way. An option grant of the company’s stock in the range of 0.25 to 1 percent of the company that vests from two to four years is the normal range. The absolute amount varies, and grants are larger earlier in the life of the company. One way to size the grant is to think of it as 25 to 50 percent of what you’d give to a VP-level hire.

Until your company is profitable you should never use cash as board member compensation. Board members should be willing to take stock and play for the upside. A board member who feels your cash is better off with them rather than invested in hiring another engineer or salesperson is probably not focused on the right things.

Like VCs, members of management who sit on the board should not be compensated specifically for their board service.

You should reimburse each board member for reasonable expenses incurred on your company’s behalf, either for attending board meetings or for specific work done that was approved in advance. However, make sure that you have a direct conversation early on about what the definition of “reasonable” is. For some, this means Motel 6, and for others, this means the Ritz. For some it means flying coach; for others, it means buying a first-class ticket. Either way, don’t let yourself be surprised after the fact.

Feld, Brad; Ramsinghani, Mahendra. Startup Boards (Techstars) (pp. 101-102). Wiley. Kindle Edition.