Technology Boards Compensation & Composition - Entrepreneurial Boards

8/8/2019 Technology Boards Compensation & Composition - Entrepreneurial Boards

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ENTREPRENEURIAL BOARDS

TECHNOLOGYBOARDSSURVEY

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Material in this book is or educational purposes only.

For legal advice, please consult your lawyer.The views expressed by individuals (or companies)

in this book do not necessarily reect

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ENTREPRENEURIALBOARDS COMPOSITION

& COMPENSATION SURVEY

Findings rom the Vell Executive Search

Published byVell Executive Search

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Vell Executive SearchVell Executive Search www.vell.comii

Dora Vell, PresidentVell Executive Search

Dora Vell is Managing Partner o Vell Executive Search, a

boutique executive search irm in Boston. Ms. Vell has

successully completed numerous board member and C-level

executive searches including CEOs, COOs, CIOs, and Vice

Presidents at both public and VC-unded companies.

Ms. Vell was a partner in the Heidrick & Struggle s technology

practice or seven years. Prior to her career as a search

proessional, Dora Vell successully managed both a

100-person development project and a $150 million sales

organization at IBM. Her sales and P&L experience at IBM has proven useul in sales and

marketing searches as well as with GM, CEO, and COO searches.

As the holder o seven worldwide patents, Dora has an unusually technical background ora search executive, but one that helps her better under stand the needs o technology clients

and technical executive roles as well as probe candidates or the depth o their technical

experience and expertise.

Ms. Vell has published and been quoted in numerous articles including the Wall Street

Journal, Global CEO magazine, Mass High Tech, the OPUS or the World Economic Forum,

Boston Business Journal, Globe and Mail, CIO.com and IEEE. She has been a eatured

speaker on leadership at numerous conerences.

Ms. Vell currently serves on the advisory board o garage.com in Canada, and is a membero the Boston Chapter and board o Entrepreneurs Organization. She is a member o the

Boston Club and the NACD, having completed the NACD director proessionalism class.

She previously served on the boards o Goodwill, Mary Centre or developmentally

handicapped individuals, and on RBC Capital Partners Telecommunications Practice.

Ms. Vell received an MBA rom the University o Toronto, a Master in Computer Science

rom the University o Waterloo and a Bachelor in Computer Science rom Carleton.

Contact Ms. Vell at [email protected].


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Vell Executive Searchwww.vell.com iii

Boston-based Vell Executive Search, a premier retained executivesearch frm, specializes in fnding high-level, top-ight technology

executives. Each o the frms proessionals bring a distinctiveknowledge o and experience in the technology industry. Vell ExecutiveSearchs credentials, experience, and unrelenting ocus on satisaction

and execution empowers the frm to connect exceptional leaders, withproven track records, to the best companies.

Vell Executive Searchs mission is to build the best leadership

teams in the world in the technology and IT services

marketplace. Whether large or small, private or public,

global or local, every company requires an effectiveleadership team at the top.


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Vell Executive Searchwww.vell.com 1

List o Illustrations ........................................................................................................2

Acknowledgements........................................................................................................3

Foreword ........................................................................................................................4

Introduction ..................................................................................................................5

Executive Summary .....................................................................................................7

About the Survey ...........................................................................................................10

Demographic Characteristics o Sample Firms .........................................................11Global Geographic Concentration .............................................................................11U.S. State Geographic Concentration ........................................................................11Canadian Province Geographic Concentration ........................................................12Industry Concentration ..............................................................................................13Years in Operation ......................................................................................................14

Revenue o Sample Firms ........................................................................................... 14

Survey Results ...............................................................................................................15Characteristics o Boards & Members ........................................................................15Board Composition o Private Companies .................................................................15Board Composition o Public Companies .................................................................. 17Director Tenure ...........................................................................................................18Directors Highest Liquidation Experience ................................................................18Director Experience Industry Specialty ..................................................................19Size o Board ...............................................................................................................20Proportion o Boards with Empty Seats .....................................................................22Board Involvement .....................................................................................................22Number o Board Meetings ........................................................................................23Director Remuneration ..............................................................................................23The Relative Importance o Cash and Equity ...........................................................23Cash-Based Meeting Attendance Fees ........................................................................24Annual Cash Retainer ................................................................................................26

Equity-Based Remuneration ......................................................................................27

Conclusion ....................................................................................................................31

Appendix Survey Questions ......................................................................................34

Entrepreneurial Boards Composition Survey

CONTENTS


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List o IllustrationsFigure 1a: Global Geographic Concentration ...............................................................11

Figure 1b: State Geographic Concentration ..................................................................12

Figure 1c: Canadian Firm Geographic Concentration .................................................12

Figure 2: Industry Concentration ..................................................................................13

Figure 3: Number o Years Since First Incorporated ..................................................... 14

Figure 4: Size (Revenues) ..............................................................................................14

Figure 5a: Board Composition o Private Companies: Spread in Representation ....... 16

Figure 5b: Board Composition o Public Companies: Spread in Representation ........ 17

Figure 6: Director Tenure Number o Years on Present Board..................................18

Figure 7: Directors Highest Liquidation Experience ....................................................18

Figure 8: Director Experience Industry Specialty ...................................................... 19

Figure 9: Board Size by Company Size ..........................................................................21

Figure 10: Proportion o Boards with Empty Seats ......................................................22

Figure 11: Number o Board Meetings...........................................................................23

Figure 12a: Director Remuneration:Cash/Equity or Private and Public Companies ...............................................24

Figure 12b: Board Meeting Fees.....................................................................................25

Figure 12c: Distribution o Board Meeting Fees Among Firms that Pay Such Fees ..... 25

Figure 13: Distribution o Additional (Non Chairman) Committee Feesor Firms That Pay Such Fees ............................................................................26

Figure 14: Board Member Annual Cash Retainer ........................................................27

Figure 15a: Equity Award Structure and Vesting ........................................................... 28

Figure 15b: The Structure o Equity-Based Remuneration .......................................... 29

Figure 16: The Percentage o Companies o Full Value Stock in theEquity Portion Compensation ...........................................................................30


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Vell Executive Searchwww.vell.com 3

AcknowledgementsI extend special thanks to Karen Dumaine, Vell Executive Search, or

coordinating everything; David Maber, Harvard Business School, or statistical

analysis and insights o the data; Jennier Leclaire, Revelation Media, or herwriting and editing skills; Heather Maxey, Maxey Interactive, or advice on

running the survey; and Ozzie Ciliberti, Vision Design & Advertising Inc.,

or the design and layout.


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FOREWORDOur goal with this survey is to oer a pivotal guide or leaders who are considering a

change to the structure o their board and corporate governance activities. There is a bona

fde shortage o qualifed, executive board members to fll the seats o growing companies,

especially as the private sector unveils vital issues that impact executive board director

searches or companies o all sizes.

It is important to note prior work in this area, so we can compare and contrast changes

in the entrepreneurial board landscape. In 2001, the National Association o Corporate

Directors (NACD) joined Ernst & Youngs Emerging Growth Markets practice to study thegovernance practices o entrepreneurial boards.

The NACD study oered valuable perspectives on executive board directors. However, the

market or board directorships has changed over the past six years. By painstakingly

fnding and analyzing new acts about entrepreneurial boards, we have brought you the

latest thinking on this topic at a time when executives want to careully examine the value

and make-up o boards.

The 2001 NACD study measured the extent to which board practices at entrepreneurial

companies dier rom board practices at more mature companies and, more importantly,it defned the most pivotal reasons or disparities.

The Vell Entrepreneurial Boards Composition Survey oers a narrower ocus and an

updated perspective relevant or todays business climate. The results corroborate what

some widely experienced corporate directors and advisors have been saying or some years:

The boards o entrepreneurial companies are dierent in many ways rom the boards

o large public companies. Surprisingly, the Entrepreneurial Boards Composition

Survey on which this report is based showed that even within the ranks o entrepreneurial

company boards, there are notable dierences between private and public boards.The fndings are relevant to corporate directors serving entrepreneurial companies with a

talent shortage that aects rank-and-fle workers, the executive suite, and board members.

The results will also be helpul to many directors serving mature companies, as well as

companies seeking to fnd the best and brightest board members who add real value to

the companys bottom line.

We invite your comments or uture entrepreneurial board o directors surveys.

Dora VellVell Executive Search


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INTRODUCTION

Only about one-hal o Inc. 500 companies report active, engaged boards o directors.

Yet, in my experience, boards o directors are a critical success actor in ast-growing

companies. So says William Payne, o the Kauman Foundation.

Payne would know. Hes an entrepreneur and an angel investor. He ounded an electronic

materials company in 1971 and sold it to DuPont in 1982. Hes made angel investments

in 30 early-stage companies and served on the boards o a dozen such frms.

When the CEO runs into an obstacle hes never aced beore, a quick call to the board odirectors can oer invaluable advice. Board directors can turn difcult situations into

opportunities, steer CEOs clear o legal liabilities, and mediate disputes among leadership

with the companys best interest at heart. Far rom being a burden, boards composed o

the right directors are an asset to an entrepreneurial company.

Indeed, board directors spell success and there are business gurus out there who are

willing to fll a vacant seat. How then do you compete or top talent that will take a

company to the next level? There are some common denominators among boards o

directors that are worth noting. TheEntrepreneurial Boards Composition Survey willoer you insights.

One key area that aects all boards is compensation. Barbara Hackman Franklin, a

corporate director and ormer U.S. Secretary o Commerce, said: While there is no

prescriptive answer to the right ormula or a CEO pay package, we believe there is an

identiiable set o practices that boards can apply to their deliberations. Coupled

with a spirit o courage and rigor, these practices can help ensure that we motivate and

retain the best talent while minding the long-term interest o the organization and its

shareholders.

Another area: How can you build a board with a diversity o experience to gain the broadest

knowledge base? Jeremy Curnock Cook and Georey Vernon, directors o Rothschild

Asset Management Ltd., an investment banking group headquartered in London, agree:

appointing only recruiting directors rom a small, amiliar circle o associates is a common

mistake early-stage companies make. This practice, they assert, tends to create a cozy club

rather than a decisionmaking group that adds real value.

Tenure is another area o concern or a board. How much board experience does a director

need? The Vell Entrepreneurial Boards Composition Survey not only investigates this


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topic but also concerns about the size o the board, how requently the boards meet, what

percentage o the board is independent, cash and equity compensation, and the prevalenceo empty board seats.

By employing best practices in corporate governance, companies can assemble and

maintain boards that help corporate executives drive greater profts and growth.

Governance oers a level o accountability that keeps entrepreneurial companies on

target with unbiased advice, insights into new and changing market opportunities, and

warnings o potential pitalls. The board o directors becomes the CEOs personal advisor.

Directors help level the playing feld or entrepreneurial companies seeking to compete

with larger frms. Indeed, board directors have never been more important to a small,growing company as they are in todays global business environment.


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EXECUTIVE SUMMARYThere is little research to help companies develop best practices or attracting, retaining,

rewarding and drawing value rom their boards. Oten, chie executives are unsure o

the appropriate: intervals or board meetings, compensation, and diversity o the boards

members.

As a way to cogently and concisely answer these questions, the Vell Entrepreneurial

Boards Composition Survey identifes trends in boards o directors. We surveyed 150

CEOs, venture capitalists and vice presidents o human resources and board directors rom

various industries more than 18 in total with a special ocus on small sotware and

technology companies in the United States. Approximately 50% o responding companies

had average annual revenues o less than US$10 million and have been in operation

between fve and 10 years. Most are privately held.

To put these trends in context, where appropriate, we benchmarked our fndings against

the National Association o Corporate Directors (NACD) Effective Entrepreneurial

Boards 2001 Survey. We also drilled down into our data to expose dierentials based on

size, ownership structure, length o time in business, and revenues. By comparing fndings

to the NACDs survey, and by comparing private and public companies where possible,

we were able to highlight board practices at entrepreneurial frms, especially small

technology companies. We also discovered a diversity o remuneration structures worth

noting.

The ollowing oers key indings rom the Vell Entrepreneurial Boards Composition

Survey, and provides eight recommendations or entrepreneurial boards.

Entrepreneurial Board Composition

The median proportion o independent directors is 20% at private companies. Thatnumber skyrockets to nearly 70% at public companies. Venture capital representation is

much more prevalent at private companies.

Industry Specialties

Approximately one ourth o all directors represented in the survey reported signifcant

experience in the sotware industry. More than 20% came rom the fnancial services

sector, while more than 10% came rom telecommunications. Consumer products and

service experience represented less than 5%.


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Director Tenure and Experience

The median director in the surveys sample o small technology frms reported a 3year tenure. In 2005, the median director among S&P 1500 frms had six years tenure.

Althoughless than 10% of respondents reported greater than US$100 million in

revenue, the median director has at least $100 million in liquidation experience.

Entrepreneurial Board Size

The average board represented in the survey hosts six members. The median number o

directors at the smallest frms within our survey (i.e., frms with less than US$5 million in

annual revenue) is fve. The median number o directors at the largest frms within our

sample (i.e., frms with greater than US$25 million in annual revenue) is seven. When

we compare public and private companies with the same revenue, we fnd similarly sized

boards.

Entrepreneurial Board Vacancies

Roughly 1 in 3 private companies have at least one empty seat on the board.

By contrast, only one in six public companies has a vacant board seat.

Board Involvement

The number o board meetings at respondent companies ranged between one and 28meetings per year. 80% o companies had between 4 and 12 meetings. The median

(mean) number o meetings among respondent frms was six (seven) meetings per

year. The median number o ace-to-ace meetings was 4 per year.

Cash and Equity Overview

Private companies are much more likely than public companies to either not pay their

directors, or rely exclusively on equity awards, such as annual awards or awards upon

appointment. Only 27% o our survey respondents pay a board meeting ee. Nearly

50 % o the irms that pay or board attendance pay exactly US$1,000 per meeting.

60% o frms that pay board member meeting ees also pay additional ees to non-chair

committee members. The median cash payment among companies that make such

payments is US$1,000.

Annual Cash Retainers

There is a strong association between a companys revenues and the dollar fgure o the

annual cash retainers they pay to board directors. Specifcally, among the size-matched

public frms that pay a cash retainer to board members, the median retainer is US$12,500or public entities, and US$20,000 or private ones.


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Equity-Based Remuneration

In 44% o private companies, board members receive equity awards only upon joiningthe board. Only 4% o public companies employ the same policy. The board receives an

annual equity award and equity upon joining the board at 71% o public frm respondents.

Only 18% o private companies ollow such a policy. Equity remuneration, when it is part

o the overall package, is higher on average than prior samples taken o entrepreneurial

companies.

Recommendations:

Vell Executive Search suggests the ollowing approaches or entrepreneurial frms:

Fill empty board seats. Empty board seats devalue overall production o the board and

rob your company o the opportunity to draw rom the wealth o experience that seat

could oer.

Maintain a diversity o skill sets and industry experience on your board. This oers you a

well-rounded perspective on the opportunities and challenges your company aces.

Ensure that the skill sets on your board match your company strategy and complement

the skill sets on the management team and the board.

Pay close attention to the candidates overall industry experience and credentials.Seek to grow your board to about six to eight members. Too many members can breed

conusion; too ew can leave important perspectives buried.

Direct boards, especially in ast-paced industries, such as sotware and

telecommunications, hold board meetings more requently than companies in

traditional industries.

Deine your ideal board candidate and pursue them. Experienced board directors

will oten agree to serve or stock options rather than large cash-based compensationpackages.

Make equity compensation part o the package in order to attract and retain the interest

o top-level executives. Only 50% o our survey respondents oer stock options/RSUs or

some other type o equity compensation.


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Entrepreneurial Boards Composition SurveyFindings rom the Vell Entrepreneurial Boards Composition Survey

ABOUT THE SURVEY

Vell Executive Search set out to reexamine the state o board director membershipin entrepreneurial companies. Our goal in this document is to:

Identiy trends in board practices and corporate governance o entrepreneurial

technology companies

Provide a baseline to benchmark practices and compensation

Compare and contrast practices o private companies and public companies

Analyze the reasons or the dierences in practices

Establish a benchmark to measure uture trends in board membership.Over the course o our months, Vell Executive Search contacted a non-random sample

o companies and 150 responded. The survey was conducted through a targeted e-mail

distribution to ensure optimal response. Vell Executive Search sent invitations to participate

in the survey to CEOs, venture capitalists, vice presidents o human resources and board

members.

The survey questionnaire posed roughly 25 questions, requiring over 150 separate data.

These questions spanned three broad categories: (1) company characteristics, such as

size, industry, and ownership structure, (2) board composition and background, and (3)board remuneration. These responses represent the primary data on which this reports

indings are based. (Note: Approximately 150 companies completed at least one

section on the electronic survey. )

For a detailed view o the geographic and industrial sectors o the respondents, see

the charts displayed on the ollowing pages. Approximately 50% o the companies

had average annual revenues o less than US$10 million. That makes the revenue o

the sample frms much smaller than those studied in earlier research. The majority


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o responding frms were privately held companies. Two thirds o frms have been

operating or more than 10 years.Demographic Characteristics of Sample Firms

Vell Executive Search purposely chose a broad range o companies in terms o

varied locations, industries, ages, sizes, and ownership structures in order to deine

both corporate-wide and more granular trends.

O the 93% o survey respondents with headquarters in North America, 63% are located

in the U.S. and 30% are located in Canada. (See Figure 1a.) The remaining 7% o

participating frms are headquartered Europe and in Japan.

Figure 1a: Global Geographic Concentration

France 2%

Hungary 1%UK 2%

Greece 1%Japan 1%

Canada30%

USA63%

U.S. State Geographic Concentration

O the 63% o responding frms that are headquartered in the U.S., the majority are

based in Massachusetts. Caliornia, Connecticut, New Hampshire, and Pennsylvania

are also represented in the survey results. (See Figure 1b.)


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Figure 1b: State Geographic Concentration

Connecticut6%

California6%

Other 33%

Pennsylvania5%

New Hampshire5%

Massachusetts45%

Canadian Province Geographic Location

O the 30% o frms that are headquartered in Canada, the majority are located in Ontario.

However, Quebec, British Columbia and Alberta are also represented in the survey.

(See Figure 3.)

Figure 1c: Canadian Firm Geographic Concentration

Ontario

69% Quebec13%

BC and Alberta18%


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Industry Concentration

Vell Executive Search elicited responses rom a wide variety o industries, rom education

and healthcare to hardware and telecommunications. In act, the survey represents the

practices in more than 18 industries, which include utilities, retail, fnancial services,

banking, insurance, real estate, consumer products manuacturing and consumerservices,

manuacturing, aerospace and automotive, business services, and sotware.

More than 40% o the frms represented in the survey serve the sotware industry.

Approximately 9% o the participating frms are involved in producing telecom

equipment, while another 7% provide telecommunications services. (Figure 2summarizes the industry concentration among respondent companies.)

Figure 2: Industry Concentration

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Education

Utilities

Retail

Healthcare

Financial Services, Banking, Insurance, Real Estate

Consumer Products Manufacturer & Consumer Services

Manufacturing, Aerospace, Automotive

Hardware

Telecommunications Services

Business Services

Telcommunications Equipment

Other

Software

Years in Operation

The irms that responded to the survey have a common thread: most are younger

businesses. One third o the companies represented in the survey have been

incorporated or less than ive years. Two thirds o the irms have been incorporated

or ive to ten years. None o the respondents have been incorporated or longer

than ten years. (See Figure 3.)


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Figure 3: Number of Years Since First Incorporated

5.1 - 10 Years

3.1 - 5 Years

2.1 - 3 Years

1.1 - 2 Years

< 1 Year

0% 10% 20% 30% 40% 50% 60% 70%

Revenue of Sample Firms

Most o the responding frms have revenues o less than US $10 million. Only 11% o the

sample frms had annual revenues o over US$100 million. By contrast, the average frm

in the NACDs study oEffective Entrepreneurial Boards had average annual revenues o

US$122 million. The proportion o respondents that are privately held 77% is similar

to the NACD Survey.

Figure 4: Size (Revenues)

> $100M

$50.1M - 100M

$25.1M - 50M

$10.1M - 25M

$5.1M - 10M

$1.1M - $5M

< $1M

0% 5% 10% 15% 20% 25%


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SURVEY RESULTSCharacteristics o the Boards & Members

The characteristics o the boards who completed the survey were dramatically dierent,

even among companies doing business in the same industry. Perhaps one o the most

insightul dierences is the make up o the board members proessional backgrounds

and industry experience. For example, there were large variances among companies in

the proportion o board members who are company ofcers, venture capitalists, major

investors and independent outsiders.

Much like NACDs study, our results revealed public company boards are signifcantly

more independent than private company boards. The median proportion o independent

directors is 20% at private companies. That number skyrockets to nearly 70 percent at

public companies. There are our reasons why:

First is the talent myth. CEOs and investors believe that they cannot attract world-class

talent to a privately held company. That premise is awed. Our experience has been that

senior executives want to give back and enjoy contributing to entrepreneurial companies

or reasons beyond compensation.

A second reason it is common to see ewer independent directors on the boards o private

companies is the lower level o external scrutiny or the independence o board members

in private companies.

A third reason is control. VCs and private equity players sometimes want to maintain tight

control o the boards o privately held companies.

A fnal reason is that this is not top o mind or the board members or the CEO. Typically,

the boards frst concern is attracting a management team. Later, the board ocuses on

its own makeup. This ties back to the frst premise that CEOs and investors mistakenlybelieve that they cannot woo top talent to entrepreneurial frms.


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Figure 5a: Board Composition of Private Companies: Spread in Representation

Independent

Consultant

Supplier

Customer

Investor

VC

Attorney

Ofcer

0.00 0.05

KEY:

REPRESENTATIVE

Denotes the median

representation, among

all boards in the sample

0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65

Not surprisingly the proportion o venture capitalists on private company outstrips

public company boards. VC representation is much more prevalent at private

companies. At the median private frm, almost one in fve board members brings a

VC afliation. At the median public frm, there is no VC representation on the board

o directors. With VCs ocused on private companies, it stands to reason that VCs who

have invested in private companies will take a seat on the board o those companies

and exit the board when the company goes public.

Proportion of Board that has given relationship with the company(Bottom of Bar = 10th percentile; Top of Bar = 90th Percentile)


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Figure 5b: Board Composition of Public Companies: Spread in Representation

Independent

Consultant

Supplier

Customer

Investor

VC

Attorney

Ofcer

0.00 0.05

KEY:

REPRESENTATIVE

Denotes the median



0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85

Considering the relatively short liespan o the responding companies most frms

were in operation or less than 10 years and none have been doing business or more

than 10 years it ollows that director tenure at the surveyed frms is short.

Specifcally, the median director in the surveys sample o small technology frms

reports a mere 3 years tenure. By contrast, in 2005, the median director among S&P

1500 frms had a 6 year tenure. Given that more than 65% o respondent companies

have been in business or 5 to 10 years, we can conclude that many directors were not

members o the board when the companies they serve were initially launched.

Proportion of Board that has given relationship with the company(Bottom of Bar = 10th percentile; Top of Bar = 90th Percentile)


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Figure 6: Director Tenure Number of Years on Present Board

Less than 1 Year

3%

One Year

15%

Two Years

21%

Three Years

14%

Four Years

11%

5 Years

8%

Six Years

8%Seven Years

7%

Greater than Seven Years

13%

The survey discovered a welcomed disparity, though, between the directors tenure on

the board and his/her experience in the technology sector. Although less than 10% o

respondents reported greater than US$100 million in revenue, the median director has at

least $100 million in liquidation experience. (See Figure 7.)

Figure 7: Directors Highest Liquidation Experience

0 - $10M21%

> $100M49%

$50.1M - 100M10%

$25.1M - 50M11% $10.1M - 25M

9%

Massachusetts is a technology hotbed. Given that the greatest concentration o surveyed

companies are located in the state, its not surprising that approximately one ourth o all

directors represented in the survey report signifcant experience in the sotware industry.


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More than 20% o board members come rom the fnancial services sector, while more

than 10% come rom telecommunications. About 8% are in the business servicesfeld, while about 7% are in the hardware sector. 5% are in the health care and

pharmaceutical feld. Less than 5% are in the education, manuacturing, aerospace,

and automotive felds. Consumer products and services were least represented, with

less than 5% o directors coming rom that sector o the economy. (See Figure 8.)

Figure 8: Director Experience Industry Specialty

0% 5% 10% 15% 20% 25% 30

Consumer Products and Services

Education

Manufacturing, Aerospace and Automotive

Health Care & Pharmaceuticals

Business Services

Hardware

Telecommunications

Other

Financial Services

Software


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Size o the Board

The average board represented in the survey hosts six members. This mirrors the NACDs

survey o entrepreneurial boards. The fnding suggests that boards o small technology

frms are substantially smaller than boards at most public corporations. For example, a

2006 study conducted by Spencer Stuart, a global executive search frm headquartered

in Chicago, showed that the average S&P 500 frm has 10.7 members on its board. That

same study shows a mere 15% o S&P 500 frms have eight or ewer board members.

To put these statistics into perspective, consider the practices o S&P 500 frms. SpencerStuart ound that 57% o S&P 500 companies pay a board meeting ee and 58% o

S&P 500 companies pay a committee meeting ee (both down rom 72% and 68%,

respectively, in 2001). According to Spencer Stuart, the average meeting attendance

ee paid by S&P 500 corporations was US$1,955 in 2005. Although it is possible that

the lower prevalence o meeting ees in our sample frms is due to a greater adoption

o good governance guidelines, we eel that the decreased emphasis on meeting ees

likely reects the act that many small technology frms are cash constrained and

have directors with signifcant equity stakes.Drilling down into the survey results or small technology frms participating in our

study shows a clear relationship between the size o a company and the size o its

board. For example, the median number o directors at the smallest frms within

our survey (i.e., frms with less than US$5 million in annual revenue) is fve. The

median number o directors at the largest frms within our sample (i.e., frms with

greater than US$25 million in annual revenue) is seven. The size o boards varies

considerably at companies o similar size, especially among frms with less than $25

million in annual revenue. (See Figure 9.)


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Figure 9: Board Size by Company Size

Greater

than

25 Million

Between

5 and

25 Million

Less

than

5 Million

1 2

KEY:

Revenue($

US)

Denotes the median

size, among all boards

in the sample

3 4 5 6 7 8 9 10 11 12 13 14 15 16

Given that the public companies in our sample are signifcantly larger than the private

companies, the public companies had much larger boards. However, when we comparedpublic and private companies with the same revenue, we ound that the median size o

boards was virtually identical. Using this sub-sample o revenue-matched frms, we fnd

that the median dierence in board size is zero. In other words, holding revenue constant,

hal o private frms have boards that are at least as large as those o public companies, and

hal o private frms have boards that are at least as small as those o public companies.

However, in cases where public boards are larger than private boards, public boards tend

to be much larger than the private boards. And when private boards are larger than public

boards, the discrepancy is generally smaller (by approximately one member).Noteworthy is the signifcant dierence in the number o empty board seats across public

and private companies. Roughly 1 in 3 private companies have at least 1 empty board seat.

By contrast, only one in six public companies have a vacant board seat. (See Figure 10.)

This fnding holds or both the revenue-matched and non-matched samples. Dierences

in company size or actors that are typically associated with size, such as the visibility o

the corporation, do not make a signifcant impact on the number o empty board seats.

Size of Board(Bottom of Bar = 10th Percentile; Top of Bar = 90th Percentile)


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Figure 10: Proportion of Boards with Empty Seats

0% 5% 10% 15% 20% 25% 30% 35%

Private:Public

Board InvolvementBoard involvement is airly consistent across industries, despite some swings in both

the high and low end o the spectrum. The survey demonstrates considerable diversityin the requency o board meetings, or example: The number o board meetings at

respondent companies ranged rom one to 28 meetings per year. However, 80% o

companies had 4 to 12 meetings. The median (mean) number o meetings among

respondent frms was six (seven) meetings per year. The median number o ace-to-

ace meetings was 4 per year. (See Figure 11.)


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Figure 11: Number of Board Meetings

Face

to

Face

Total

1 2

KEY:

TypeofMeeting

Denotes the median



3 4 5 6 7 8 9 10 11 12 13 14 15 16

Interestingly, the survey reveals that the requency o meetings at small technology-

oriented companies is similar to the requency o meetings at larger, more complex,

organizations. For example, Spencer Stuarts 2006 survey reports that, among S&P

500 frms, boards had as ew as 3 meetings and as many as 39 meetings per year.

According to Spencer Stuart, the average S&P 500 company holds 8.4 meetings per

year, up rom eight meetings per year in 2001.

Director RemunerationThe Relative Importance o Cash and Equity

The Entrepreneurial Boards CompositionSurvey unveiled broad dierences in the

remuneration structures o public and private technology frms. In particular, the study

revealed private companies are much less likely to use cash-based remuneration, such

as cash-based meeting ees or a cash retainer. In act, private companies are much more

likely to either not pay their directors, or rely exclusively on equity awards, such as annual

awards or awards upon appointment.

Number of Meetings(Bottom of Bar = 10th percentile; Top of Bar = 90th Percentile)


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Figure 12a: Director Remuneration: Cash/Equity for Private and Public Companies

Public Companies

Private Companies

Cash Only8%

No Cash and No Equity25%

Equity Only40%

Cash and Equity27%

Cash and Equity

58%

Equity Only17%

No Cash and No Equity0%

Cash Only25%

Cash-Based Meeting Attendance FeesConsistent with the good governance guidelines that groups like the Council o

Institutional Investors have publicized, theEntrepreneurial Boards Composition Survey

fnds most small technology frms do not pay meeting attendance ees to board members,

committee members, or committee chairs. Only 27% o companies that responded pay

a board meeting ee. Among the respondents that pay board members to attend, the

mean meeting attendance ee is US$1,600. The median cash compensation or meeting

attendance is US$1,000. In act, nearly 50% o the frms that pay or board attendance pay

exactly US$1,000 per meeting. (See Figure 12b).


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Figure 12b: Board Meeting Fees

Greater

than

25 Million

Between

5 and

25 Million

Less

than

25 Million

2

KEY:

Size(Revenue)

Denotes the median

fee, among all

boards in the sample

400 800200 600 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000

Figure 12c: Distribution of Board Meeting Fees Among Firms that Pay Such Fees

$200013%

Between $1,000 and $2,00016%

$1,00046%

Less than $1,000

16%

Greater than $20009%

60% o frms that pay board member meeting ees also pay additional ees to non-

chair committee members. Among the respondents that pay such ees, 35% pay exactly

US$500 extra per meeting, while 40% pay exactly US$1,000 extra per meeting.

(See Figure 13.) And o the irms that pay augmented non-chair committee ees,

40% provide additional payment to committee chairmen. Among frms that make

these awards, the median cash payment is US$1,000.

Meeting Fee (US $)(Bottom of Bar = 10th percentile; Top of Bar = 90th Percentile)


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Figure 13: Distribution of Additional (non Chairman) Committee Fees for

Firms that Pay such Fees

Exactly $1,00040%

Between $500and $1,0004%

$500 Exactly35%

Greater than $100017%

Less than $5004%

Annual Cash RetainerAccording to the survey, there is a strong association between a companys revenues and

the dollar fgure o the annual cash retainers it pays to board directors. (See Figure 14.)The corporations ownership structure, however, appears to be the most signifcant actor

in the payouts. In order to determine whether the size o annual cash retainers varies

across public and private frms, the survey drilled down into the revenue-matched sub-

sample data o the companies described earlier.

Based on this sample, the survey revealed public frms are three times more likely to

pay an annual cash retainer to board members. In other words, when the size o the

companies remain constant, approximately three quarters o the public frms in the size-

matched sample pay a retainer. By contrast, only one quarter o the private frms pay anannual cash retainer to board members.

Drilling down deeper, the survey oers fnancial data to fll in the big picture. Specifcally,

among the size-matched public frms that pay a cash retainer to board members, the

median retainer is US$12,500. Among the size-matched private frms that pay a cash

retainer to board members, the median retainer is US$20,000. The act that the median

retainer among private frms is larger than the median retainer among public frms may

seem odd at frst glance. However, this anomaly occurs because more public companies

provide cash-retainers, and, thereore there are a greater number o small retainers.


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Figure 14: Board Member Annual Cash Retainer

Greater

than

25 Million

Between

5 and

25 Million

Less

than

25 Million

0 4,000 8,000 12,000 16,000 20,000 24,000 28,000

KEY:

Size

(Revenue)

Denotes the median

retainer, among all

boards in the sample

32,000 36,000 40,000 44,000 48,000

Equity-Based RemunerationTheEntrepreneurial Boards Composition Survey discovered signifcant dierences in

the structure o equity-based compensation across public and private frms. In 44% o

private companies, board members receive equity awards only upon joining the board.

By contrast, only 4% o public companies employ the same policy. Instead, individuals

receive an annual equity award and equity upon joining the board at 71% o public frms.

Only 18% o private companies ollow such a policy. (See Figure 15a.)

Not surprisingly, the survey confrms public and private frms dier in the emphasis

they place on stock options vis--vis ull-value awards, such as restricted stock, deerredstock, and unrestricted shares. In particular, public companies rely much more heavily

upon stock options than do private frms. This increased emphasis is present in both

appointment awards and annual awards. (See Figure 15b.)

Annual Retainer (US $)(Bottom of Bar = 10th percentile; Top of Bar = 90th Percentile)


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Figure 15a: Equity Award Structure and Vesting

No Equity RetainerBut Equity Upon Joining44%

Equity RetainerBut No Equity Upon Joining5%

Equity Retainer& Equity Upon Joining18%

No Equity Retainer &No Equity Upon Joining33%

No Equity RetainerBut Equity Upon Joining4%

Equity RetainerBut No Equity Upon Joining0%

No Equity Retainer& No Equity Upon Joining25%

Equity Retainer& Equity Upon Joining71%

Equity Awards: Private Companies

Equity Awards: Public Companies


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Figure 15b: The Structure of Equity-Based Remuneration

OptionAwards Only65%


OptionAwards Only

100%


Full Value Awards& Option Awards

15%


12%


9%

Full ValueAwards Only

20%

Full Value

Awards Only21%

Equity Retainer:Private Companies

Equity Retainer:Public Companies

Equity Upon Joining:

Private Companies

Equity Upon Joining:

Public Companies

The data or equity compensation shows the median percent o shares outstanding

upon joining as well as an annual retainer or board members and or the board chair.

Only 50% o companies give out stock options. This data is or companies providing

stock options. In terms o board members, a typical option grant would be 0.3% o the

shares outstanding upon joining and 0.1% per year. In terms o the median or the


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chair, a typical stock grant would be 0.5% upon joining and 0.1% per year. Figure 16

provides a more detailed breakdown o equity grants. The implied option price or privatecompanies is the most current price available, oten the price o the stock at the last round

o fnancing. Many times, i there is an upcoming round o fnancing, then the option

price could be a blended rate o the current and past rounds o fnancing. The number o

total shares outstanding in a cli is typically consistent with the option price blended

rate. It is interesting to note that the vesting schedule or option awards varies rom 3 to

5 years, with a median o 4 years. These numbers are typical and very expected.

These numbers are surprising and we consider them to be on the high end o what

we have experienced beore. They are reective o very senior board members. A priorrandom sample o equity stock option grants showed 0.19%. It is important to note

however that i our statistics included companies that paid no equity, the numbers in

Figure 16 would be lower.

Figure 16. Percent of Equity Compensation

Note: This is the median or companies oering equity as part o compensation.

Roughly 50 percent o our sample oers equity as part o the board members,

compensation package.

Remuneration Upon Joining:

Board MemberBoard Member N Median

Restricted Stock Units 9 1

CommonShare Grants

14 2

Stock Options 65 0.3

Deerred Stock 1 1

Annual Retainer:Board Member

Board Member N Median

Restricted Stock Units 7 0.75

CommonShare Grants

5 1


Deerred Stock 0 N/A

Remuneration Upon Joining:

Board ChairBoard Member N Median

Restricted Stock Units 6 1

CommonShare Grants

8 1.25


Deerred Stock 0 N/A

Annual Retainer:Board Chair

Board Member N Median

Restricted Stock Units 3 1.75

CommonShare Grants

3 0.1


Deerred Stock 0 N/A

Equity Compensation ( % of Shares Outstanding )


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CONCLUSIONSThe evidence is in and the overarching conclusion is this: Entrepreneurial companies are

ying solo, with little in the way o best practices or their boards. The Entrepreneurial

Boards Composition Survey reports a wide variance in board practices, such as a broad

range in the requency o board meetings (rom 4 to 12). It is clear that small- to mid-

sized companies must take action to develop and incorporate best o breed practices or

their boards o directors in order to derive the maximum beneft rom members and to

attract world-class talent.

David Thomson, author o Blueprint to a Billion analyzed the seven essentials ogrowing companies rom zero to $1 billion in revenues. What he discovered is proound.

Tier 1 board members are common to every single company in his research that grew to

$1 billion in revenue. He oers some valuable advice or companies looking to revamp

their boards, or create them or the frst time:

Blueprint company boards were heavily weighed with alliance partners, customers and

CEOs who had scaled a business. Companies with investor-dominated boards tended to

struggle. Blueprint company boards were a much valued extension o the companys

business strategy and management team. These external members provide cross-industryexperiences that can greatly beneft a company. We thought that smart investors would

dominate the most successul boards. While exceptions existed, Blueprint company boards

predominantly eatured some combination o customers, alliance partners and CEOs.

Whether an entrepreneurial company is seeking to break the billion-dollar revenue mark

or not, theEntrepreneurial Boards Composition Survey oers fndings in avor o

careully selected boards that draw rom a diverse base o industry experience. Selecting a

board member needs to be based on company strategy and complementing the existing

skill sets o the leadership and governance team. Given the act that one-third o companiesthat participated in the survey have at least one board seat open, there seems to be either

a lack o recognition o a boards value, or a lack o understanding that entrepreneurial

companies can attract top talent.

In public companies there are ewer empty seats than in private companies. That seems

to suggest litigation concerns are not necessarily a large challenge in recruiting talent

to the board. It stands to reason that smaller, private companies are not as visible in

the marketplace and thereore may have a more difcult time gaining the attention o

qualifed board members. This can be remedied with an aggressive strategy to seek out


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veteran board members. Cook and Vernon assert, The strength o the boards composition

should be regarded as a critical success actor that will aect the quality o incominginvestment as well as the quality o decision making.

While some frms may shy away rom taking on the cost o board members and the

time or meetings the data shows that it doesnt take a billion dollars to attract a billion-

dollar mind. In act, most o the cash outlay is nominal or cash-sensitive companies. The

return on the investment is great. The risk is low. The data also shows that entrepreneurial

companies do not have to settle or inexperienced board members. The sample o survey

participants reveals small companies are consistently attracting veteran executives to their

boards.The high prevalence o option-based rewards is surprising in light o liability concerns

at large, public companies adhering to Sarbanes-Oxley. Many larger companies are

beginning to move away rom distributing stock to directors. However, the lions share o

the compensation rom small technology companies in the survey appears to be option-

based rather than cash stipends. The data oers some guidelines as to remuneration

requirements or board members, which may be less than many small companies

expected.

To the Sarbanes-Oxley issue, small private companies may not make the ront page oThe Wall Street Journal i there is an accounting scandal, but the repercussions are still

potentially devastating or an entrepreneurial organization and its stakeholders. Boards o

directors, and their audit committees, help to establish and maintain proper accounting

protocols.

The overarching conclusion rom theEntrepreneurial Boards Composition Survey is

this: Building and maintaining a strong board o directors is just as important i not

more important or private companies as it is or public companies. Keep in mind that

the underlying reason or corporate governance rules, such as independence o the boarddirectors, is or the companys general health. Entrepreneurial companies in any industry

typically cannot aord to hire the cadre o C-suite executives that make up a dream team.

But a board o directors oers a steppingstone that benefts the company today and into

the uture.

Roger Raber, past president and CEO o the NACD, put it this way: Todays engaged

director is more committed than ever to providing rigorous analysis and decision making,

as well as adding strategic value to the company and shareholders.


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APPENDIX: Survey QuestionsGoverning Board

1.1. Composition of Board

1.2. # Board Members who are family members of CEO

1.3. # of Board Meetings Per Year

1.4. # of Meetings Face to Face

1.5. Do you also have an Advisory Board?

Yes No

Background o Board MembersInstructions: This survey aims to identiy which aspects o corporate governance

(e.g., committees, unctions, and competencies) are currently ollowed. Even though the

company may not employ all aspects, please complete the survey questions that ask or

your view o the importance o each aspect.

# o each typecurrently

# o each typeopen

Company OfcerOutside corporateattorney/counsel

VC representative

Other signifcant investor

Customer

Vendor

ConsultantsIndependent


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2.1. Background of Board Members

For each board member

Country/State o Residence

Principal Industry Background

Job Function

Check i Board Chair

# o Years on Board

Highest Value o Prior Liquidation Experience

International Experience

Board Compensation

3.1. Board Member Compensation on Joining Board

% o total sharesoutstanding

(Fully diluted)

VestingPeriod(Years)

Vesting Period(Schedule)

Restricted Stock Units

CommonShare Grants

Stock Options

Deerred Stock

3.2. Board Member Annual Retainer


(Fully diluted)




CommonShare Grants

Stock Options

Deerred Stock


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3.3. Board Member Per Board Meeting Fee

3.4. Board Member Annual Retainer Cash amount3.5. Board Member Per Committee Meeting Fee

3.6. Vesting Period Years

3.7. Board Chair - Compensation on Joining Board


(Fully diluted)

VestingPeriod

(Years)



CommonShare Grants

Stock Options

Deerred Stock

3.8. Board Chair Annual Retainer (In 1000 USD)


(Fully diluted)




CommonShare Grants

Stock Options

Deerred Stock

3.9. Board Chair Annual Retainer - Cash

3.10. Board Chair Fee per Board Meeting - Cash

3.11. Board Chair Fee per Committee Meeting - Cash


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Demographics

4.1. Company Type

Public Private

4.2. If Private, Amount of Capital Raised to Date:

< $1M

$1.1M - $5M

$5.1M - $10M

$10.1M- $20M

$>$20M

4.3. If Public, # of Years Since Going Public:

< 1 Year

1.1-2 Years

2.1-3 Years

5.1- 10 Years

>10 years

4.4. # of Years Incorporated

> 1 Years

1.1 - 2 Years

2.1 - 3 Years

3.1 - 5 Years

5.1 - 10 Years 4.5. Whats your Principal Industry

Other

4.6. Company Size (Revenue)

< $1M

$1.1M - $5M


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$5.1M - $10M

$10.1 - $25M $25.1 - $50M

$50.1M - $100M

> $100M

N/A

4.7. Headquarters of Company

Country:

State/Province:

4.8. Contact Information for Report Results

Name:

Title:

Organization:

Phone:

Email:


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NOTES


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NOTES


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