After the question “How do I find my first non-executive director role?” the topic of this post is the next on the list. It is one that has no defined answer but I’ll try to cover each area of the topic.
If i join a business is it better to join with salary or equity?
You guessed it! There is no easy or firm answer to this one. Whether it is better to join a business with a salary or equity depends on a variety of factors, including the specific business, the stage of the company, and your individual circumstances. In general, I tell most non-executives that “receiving a salary can provide you with a steady income and can be a good option if you need a stable source of income”. On the other hand, receiving equity in the company can provide you with the potential for greater rewards if the company is successful, but it also carries more risk. It’s important to carefully consider all of these factors before making a decision.
To most aspiring or first time NEDs, it may be better to opt for salary whereas those entrepreneurs who are in the, let’s say, more twilight years of their professional careers, may be better opting for equity/options. It is often this route that leads to greater financial rewards but it is by no means guaranteed.
What if the business can’t afford to pay me a salary? Should I take equity and zero salary?
If a business can’t afford to pay you a salary, you may want to consider negotiating a mix of (reduced) salary and equity, or taking a lower salary in exchange for a larger equity stake in the company (if this is available). This can provide you with some income while also giving you the potential for greater rewards if the company is successful in its medium and longer term objectives.
However, it’s important to carefully consider the risks and potential rewards before making a decision, and to make sure that any agreement is fair and equitable for both parties. This is obviously easier said than done. It may also be helpful to consult with your peer group who will help you understand your options and make the best decision for your situation.
Is the equity/salary debate any different for non-executive directors?
As a non-executive director, there are no specific rules regarding whether you should receive a salary or equity, or a combination of both. This will typically be determined through negotiations between you and the company, and will depend on a variety of factors, such as the company’s financial resources, the stage of the company, and your individual circumstances.
Are options better than equity?
It’s difficult to say whether options are better than equity, as it depends on a variety of factors, including the specific company and the individual circumstances of the person receiving them. In general, options give you the right to purchase a certain number of shares of the company’s stock at a fixed price in the future. This can provide you with the potential for greater rewards if the company’s stock price increases, but it also carries the risk that the stock price may not increase and you may not be able to exercise your options.
Equity, on the other hand, represents ownership in the company, and can provide you with the potential for greater rewards if the company is successful, but it also carries more risk. It’s important to carefully consider all of these factors and to make sure that any agreement is fair and equitable for both parties before making a decision.
What happens if I leave before the vesting period?
If you leave a company before the vesting period for your stock options, you will typically lose the right to exercise those options. The vesting period is the amount of time that must pass before you are able to exercise your stock options and purchase shares of the company’s stock. It’s important to carefully review your options agreement and the company’s policies to understand your rights and obligations in this situation.
Do I need a shareholders’ agreement as a non-executive director?
As a non-executive director, you may not need to enter into a shareholders agreement, depending on the specific circumstances of your role and the company. A shareholders’ agreement is a contract between the shareholders of a company that outlines the rights and obligations of the shareholders with respect to their ownership of the company.
If you are a non-executive director, you may not be a shareholder of the company, in which case you would not be a party to the shareholders agreement. However, it’s important to carefully review the terms of your appointment as a non-executive director to understand your rights and obligations, and to consult with a lawyer if you have any questions.
Do stock options mean I need to have a shareholders’ agreement?
If you have stock options, you may need to enter into a shareholders agreement, depending on the specific circumstances of your options and the company. A shareholders agreement is a contract between the shareholders of a company that outlines the rights and obligations of the shareholders with respect to their ownership of the company. If you have stock options, you may be considered a shareholder of the company once you exercise those options and purchase shares of the company’s stock. In that case, you would be a party to the shareholders agreement and would be subject to its terms.
NOTE: It’s important to carefully review the terms of your options agreement and the shareholders agreement, and to consult with a lawyer if you have any questions.
Is there a typical salary/equity ratio for non-executive directors joining private companies?
There is no typical salary/equity ratio for non-executive directors joining private companies, as it can vary depending on a variety of factors, such as the size and stage of the company, the specific responsibilities of the non-executive director, and the individual circumstances of the director.
But, from nearly twenty years in the space, a usual equity stake is often in the 1-3% region (this applies to privately owned businesses, only).
Does the above apply if I join a Listed company in the UK?
If you join a listed company in the UK as a non-executive director, the terms of your compensation, including any salary and/or equity, will be determined through negotiations between you and the company. There is no typical salary/equity ratio for non-executive directors of listed companies in the UK.
Non-executive directors of listed companies in the UK are subject to certain legal and regulatory requirements, such as the UK Corporate Governance Code and the Listing Rules of the Financial Conduct Authority. It’s important to familiarize yourself with these requirements and to consult with a lawyer if you have any questions.