The Advisors' Blog

Changes to CEO and employee pay get a lot of attention during the runup to an IPO. But with board composition being an important factor in public company success, it’s also important to understand how (and when) to add qualified independent directors.

This Semler Brossy article gives a helpful overview of how director compensation changes as a company approaches its public debut – based on awards granted by high-profile tech companies to independent directors in the 12 months prior to their IPO. Here’s an excerpt:

Compensation packages for incoming directors at private companies generally consist of Restricted Stock Units (RSUs), stock options, or some combination of the two. They are frequently front-loaded equity grants meant to cover multiple years, as opposed to the annual grants common in public companies.

In general, we found that these grants are usually coupled with a 3–4-year vesting period, and more than half of them also require an actual IPO for vesting (known as an “IPO Trigger”). Compensation is almost entirely equity based — of the 20 pre-IPO companies studied, only two offered any direct cash pay — which is typical for pre-IPO companies.

Here’s more detail about how pay structures tend to shift as the IPO approaches:

– When the IPO is 36+ months away, pay is typically in the form of RSUs or stock options, intended to cover multiple years, 3-4 year vesting schedule, no cash compensation, and shares are granted as a percentage of the company. An example median grant is 20-50bps stake in the company with a 4-year vesting period.

– When the IPO is 18-36 months away, the compensation shifts towards RSUs, still with 3-4 year vesting schedules and intended to cover multiple years. The equity portion of awards frequently matches employee awards, compensation may include a cash component, and awards are often expressed as a dollar value instead of a percentage of the company. An example median grant is an up-front grant valued at $300k-$750k, in the form of RSUs, options, or a mix.

– When the IPO is less than 18 months away, director compensation mimics a traditional public company model – mostly in the form of RSUs with annual awards and 1-year vesting periods. Cash compensation is more likely, and awards are expressed as a dollar value. An example median grant is $250k–$350k in annual total compensation, comprised of a mix of cash and equity.

– Liz Dunshee