To stimulate discussion, we
propose the following guidelines for Angel Groups to use in compensating Angel
Group members or others who serve as outside (non-employee) directors.
·
Angel Group
members should be compensated when serving as outside directors,
·
Compensation
should be common stock options vesting
over two to four years,
·
0.25% to 1.50% of
stock on fully-diluted basis,
·
Single trigger acceleration
on change of control,
·
Clear
understanding as to how the vesting will work if the board member leaves the board.
·
No direct cash
compensation,
·
Reimbursements
for reasonable expenses,
·
Opportunity to
invest in the most recent financing,
·
Advisory Board
members to receive 0.25%,
·
Board observers
not compensated unless they have specific company building duties,
·
VCs and state
sponsored fund directors are paid by their employers and should not also be compensated by
the company,
·
Exceptions for
Angels filling management roles.
Background
From our Editor: roughly a
decade ago, I decided our group, the eCoast Angels Investment Network, needed
some guidelines for compensating Directors serving as board members for our
portfolio companies. Through the
still-emerging Angel Capital Association, I had a number of contacts around the
country with angels whose experience was greater than mine. I asked the advice of Luis Villalobos (Tech
Coast Angels), James Geshwiler (Common Angels), Ralph Wagner (Walnut Ventures),
and Rick Holdren (Houston). Among VCs I recalled conversationswith Bill Congleton
(AR&D, Palmer), Stu Greenfield (Oak), and George Middlemas (Apex),as well as documents posted online by VC and author Brad Feld.
After a few years of keeping
this document up to date, I posted a final version in February of 2006 which
was also posted on the ACA web site for many years.
Lately I have been getting
inquiries again. The number of angels
and angel groups having increased dramatically, I find that the number of opinions has
increased even more quickly.
The following is a rationale for
each item proposed above.
Our general rule is that our
members are not compensated for locating deals, performing due diligence,
negotiating terms, or pulling together the financing. As a group, we all share
these burdens. After we close a financing, however, we expect to contribute
significantly to the value of the investment. The individuals who assume this
task should be compensated.
Granting common stock
options aligns the board members’
incentives with all shareholders (presumably they are getting the options at a
low strike price and will be motivated to increase the value of the stock while
minimizing dilution over future financings). These options should come
out of the employee option pool and should be thought of equivalently to the
employee base (e.g. if there is an option refresh due to a down round
financing, the board member should be included in the refresh). I favor making
the vesting parallel to the employees vesting: typically, 25% on the first
anniversary, with the remainder vesting monthly thereafter.
There are two key ways to
determine the amount of the options to be granted. Brad Feld, a VC who writes
extensively, recommends 0.25% to 1.00%. James Geshwiler supports this range. At
one of our first NE Regional meetings that I attended Ralph Wagner mentioned
that Walnut allows compensation to Angel Board members; typically one per cent.
We here at eCoast Angels have been using the one per cent as a guideline.
From other advisers I hear varying
opinions, but not a percentage. The late Luis Villalobos favored picking
a value. Thirty years ago Stu Greenfield from Oak Investment Partners told me
that a director should have the opportunity to make $250K over five years,
assuming success. George Middlemas
from APEX told me ten years ago that $500K was more appropriate. I feel comfortable that today a proper range
would run from $750K to $1 million.
Our problem as Angels is that
in seed deals the VC amounts would cause the directors to own too much of the
company. Assuming good VC returns, an
investment of $150,000 today would be valued at 5X in five years, or $750,000.
Therefore if the post money value of the company at the most recent financing
is $10,000,000, 1.5 per cent satisfies
both our percentage and value guidelines. Higher valuations are even
easier. Our problem as Angels lies in
seed deals. Assuming a post-money valuation
of $1,000,000, $150,000 per director is
unrealistic.
Today, many new companies
coming out of accelerators such as Techstars are raising less money than previous
companies and are using convertible debt as an investment mechanism. This makes it hard to determine the current value
or to impute a future value for the stock. At the start there may be very
little stock authorized, making our original one per cent guideline a bit low.
Thus I propose the following:
For post money evaluations of
$10,000,000 or less, director compensation should be about one to 1.5 per cent,
but can vest more quickly, say two years. Assuming the value of the company
increases after two years, compensation can be revisited then.
For valuations above
$10,000,000, the guidelines above apply.
Please note that the
discussion above relates only to the potential value of the stock in the
future, not its value today. I’m
recommending that the director be offered options to purchase restricted common
stock on a basis similar to the
employees, but that the number of these options be such that they would represent
$150,000 if the same number of preferred stock shares were purchased
today (assuming 1:1 conversion).
Single trigger acceleration
on change of control: Acceleration on change of control is often a hotly
negotiated item in a venture financing. Feld thinks single trigger
acceleration in change of control is rarely appropriate for management, but will
always accept it with regard to board members since 100% of the time they will
not be part of the company post acquisition. By providing 100%
acceleration on change of control, you eliminate any conflict of incentives in
an M&A scenario.
Clear understanding as to how
the vesting will work if the board member leaves the board. In the case of Angels who guide and build a
company up sufficiently to attract a VC round, they are very likely to be replaced
although still willing and available to serve. In these cases, I believe their
vesting should accelerate: I recommend full acceleration. Since Director Options are non-qualified, and
the Directors are unpaid, they should be allowed the full term of the option
plan (approx. 10 years) to exercise them.
In other cases it should be
clear – in advance – that the vesting on the options ends if the person is
asked to leave the board or voluntarily leaves the board. This seldom
creates an issue when it is discussed up front.
No direct cash compensation
for directors before a company is cash positive. If someone insists on
cash compensation for board service in an early stage company, they are not
qualified to be a board member since they simply don’t get it
Reimbursements for reasonable
expenses: Board members should always be reimbursed for expenses they incur on
behalf of the company. However, these should be “reasonable” and should
conform to the company’s expense policy
Opportunity to invest in the
most recent financing: I strongly believe that all board members should be
given an opportunity to invest on the same terms as the most recent Angel round. Looking backwards, this might be difficult,
but at a minimum the board member should
be invited to invest in your next round. While we should always encourage
this investment, I don’t view it as mandatory – I think it’s a
benefit an outside board member should have for serving on a board, not a
requirement.
Advisory Board members should
be compensated near the lower range of the guidelines about, say 0.25%, vesting
as described above.
The involvement of board
observers varies greatly, from company to company as well as from person to
person. Some observers essentially function as a full-fledged board
member except for voting privileges. Thus compensation for observer roles
should be expected to vary accordingly.
VCs and state sponsored fund
directors are paid by their employers
and should not also be compensated by the company
Exceptions for Angels filling
management roles; we all know of cases where Angels have filled in and played
an active working role in their companies.
In seed deals, this is often required for the company to be successful. Feld’s thoughts are as follows. “In seed stage
companies - especially pre-funding – an early board member might receive
founder status depending on his involvement in the company. When I was
making angel investments, I’d occasionally commit to a much higher role than
simply “a board member” – occasionally I’d be chairman and/or an active part
time member of the management team. In these cases, I’d typically get an
additional equity grant (usually founders stock) separate from my board
grant. As with other members of the founding team, I’d have specific
roles and responsibilities associated with my involvement (usually financing,
strategy, and partnership related) and – even though I was a board member – I
was often accountable to the CEO for these responsibilities.”
---
As is our custom, we have run
this post informally by a few colleagues.
James Geshwiler (Common Angels) and Christopher Mirabile (Launchpad Venture
Partners) have been comfortable with one percent for Directors. Jeff Hermann (Walnut Ventures), comments "the ranges you give are reasonable and justifiable,
but you may be a bit too dogmatic in tone. Everything is adjustable based
on the specifics of a situation, including the valuation of the company, the
expected contribution and involvement of the board members, the amount of
"adult supervision" that the company will require, the anticipated
timeframe to exit, etc."
What do you think?
What do you think?
 |
| The original DEC Board, with Bill Congleton fourth from left. My recollection is that he was very well compensated for his service. To his left is Harlan Anderson, perhaps the first of our modern Angel Investors. |
