Unlike public companies where directors receive substantial cash and stock, independent directors at early-stage startups are primarily compensated with equity. A typical grant is around 0.1% of the company, vesting over a two-year period. Significant cash compensation is rare until the pre-IPO stage.
Founders cannot unilaterally remove a director appointed by investors. Preferred stock financing documents grant a specific stock series (e.g., Series A) the exclusive right to elect and remove their designated board member. Common stock votes, even super-voting shares, have no say over these specific seats.
Instead of waiting for a Series A, founders should consider forming a small, formal board when the sum of capital raised and revenue hits the $2-3 million threshold. This helps establish good governance habits and formalizes processes, making the company more attractive to future institutional investors.
Unlike board directors who have a fiduciary duty to the company, board observers do not. This means they are not automatically bound by the same legal obligations of confidentiality and loyalty. It is crucial to have observers sign a specific agreement to protect sensitive company information discussed in meetings.
While founders often view board seats as a sign of commitment, many VCs prefer an observer role. This allows them to receive crucial information about company progress and upcoming financings without taking on the legal risk and fiduciary duties associated with being a full director.
The selection of an independent director is rarely a unilateral decision. Legal documents often structure the process so that one side (e.g., the common stockholders/founders) nominates a candidate, but the other side (the preferred stockholders/investors) must approve them, creating a mutual veto power.