In service to the shareholders of a private company, board compensation should be structured to create directors’ vested interest in the success of the enterprise along side the shareholders whom they serve. This is the case even though there are many motivations for directors joining boards.
Private Company Board Variety
To the extent possible then, compensation should be a combination of cash and equity. How much of either is due to many factors: company size, life-cycle stage of the business, type of board (fiduciary or advisory), etc. Startups often can only afford equity while mature companies with no liquidity events on the horizon tend to favor cash over equity.
Cash compensation is associated with meeting fees, period fees (quarterly or annual), retainers, or some combination thereof. Period fees or retainers tend to provide companies with better access to expertise in these volatile times. They reinforce ad-hoc discussions between formal meetings as the business dynamics change and the needs arise. This is especially the case with startups and distressed companies, but today mature companies are not excluded from frequent disruptions. Even so, some companies prefer to pay meeting fees, whether scheduled or ad-hoc. This usually requires participation in some kind of reward program, equity or other, to bolster on-going director commitment beyond simply meeting preparation.
Boards as a Unit
Compensation should also be the same for all private company board members. This eliminates complexity and pulls the board together to serve as a unit. That said, issue dates and strike price of equity will naturally favor directors who joined a venture earlier.
It all comes back to what the company can afford in attracting the right director expertise and aligning directors’ interests with the shareholders.