How does a private company with no existing equity plan compensate advisory board members?

Q: How does a private company with no equity plan in place compensate advisory board members based on performance? 

Barry Reiter

A: Well-constituted and operated advisory boards can add great value. Members may be willing to serve as advisors when they would not wish to accept director liability, or the company principals may not be willing to share information or control.

The company can institute a cash-based “bonus” program that pays out to advisors based on targets related to the company’s performance generally or its performance in areas specifically tied to the advisor’s expertise.

But the company may be in a cash-preservation mode, in which case stock-based bonuses may be preferable. The company need not have a formal ESOP in order to issue stock (including RSUs or options) or a stock-tracking phantom instrument. The company should address matters typically dealt with in ESOPs and like equity plans – tax consequences, vesting, termination of rights (generally and on sales and changes of control), buyouts of the right, confidentiality, non-competes and non-solicits – but otherwise just needs whatever corporate approvals are generally required for equity issuances (board approval plus whatever may be required by shareholder agreements).