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July 26, 2012

More private companies, particularly those that are closely held, are creating corporate advisory boards as a means of gaining an independent outside perspective on their business and to utilize the collective points of view to move the enterprise forward in this current economic climate.  As with any new trend in the corporate world, there is a learning curve – a time for which best practices and processes can be determined and communicated to the business community at large and this is certainly true for advisory boards for private companies.  One of the more challenging issues confronting private companies who embark on the path to establishing an advisory board is the compensation structure for the advisory board members.  Unfortunately, there is no published formula or sliding scale which can serve as a resource for private companies in this regard.  Nevertheless, there are some tendencies which are developing in this space which can be beneficial.

Although advisory boards are utilized extensively in the start-up world, their compensation is rarely in cash, and more often than not through shares of equity in the business.  For the purpose of this blog, let’s remove from the discussion the topic of start-up ventures (if you are looking for some information for start-up advisory board compensation, check our Brad Feld’s post from several years ago as it is still very relevant: http://www.feld.com/wp/archives/2006/05/how-many-stock-options-should-i-give-an-advisor.html).  The more complex issue is what to compensate the advisory board members for established companies. It is a common question I receive from business owners.  First and foremost, let’s establish that advisory board members should absolutely be compensated for their service.  Remuneration demonstrates to the advisory board members that you value their time and efforts on behalf of the company – and furthermore, the advisory board members are much more likely to approach their service with the appropriate level of commitment that is expected of them. 

Now that we have established that advisory board members should absolutely be compensated for their service, what is the fair amount?  Answer:  it depends.  Probably not what a private company wants to hear, but it is the reality, and it depends on a number of factors.  First, there is the size of the company in question.  Does the private company have annual revenues of $50MM and a workforce of 300, or is it more akin to annual revenues of below $1MM and 10 or fewer employees.  Second, who are the advisory board members?  Are they titans of the industry from all corners of the globe or are they more regionally-based experts?  Third, what is expected of the advisory board? Are they meeting 4 times a year or are they meeting 12 times a year with conference calls in between?  Obviously, the larger the company, the more experienced the advisory board members and their responsibilities on behalf of the company, the more they should be compensated.  To give an idea of the potential range of compensation, I have heard figures of $200/meeting for each advisory board member, to in excess of $5000/meeting (including travel expenses, as out-of-pocket travel expenses should always be reimbursed by the company).

The owner of one private company recently asked me if he was paying his advisory board members enough, to which I responded, “if they aren’t complaining, don’t go looking for trouble.”  Although he appreciated the answer, I told him that he should, if possible, increase the amount each year.  Furthermore, prior to increasing the amount, he should ask them if they believe they are being fairly compensated.  The advisory board will appreciate the candor and if they are valuable advisory board members they will certainly be open and honest in their response.

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