How Much Should Equity Crowdfunding Directors Be Paid?
In their proposed “Crowdfunding Offering Document” from March 20, 2014 the Ontario Securities Commission requires crowdfunding companies to disclose how much money the directors and officers of the corporation made in the last 12 months and how much they are “expected” to be paid in the 12 months following the offering. The OSC template offering document reads:
Setting an Industry Standard
Founders raising money under a crowdfunding exemption should ensure that:
- They receive a reasonable salary in the circumstances;
- A portion of their salary will be performance based;
- They agree to permit the corporation to buy back a portion of their shares (at a nominal rate) if they leave the company shortly after the raise (i.e. a reverse vesting agreement); and
- If they quit, they agree not to compete directly with the company for a period of time.
Putting together a fair offering when it comes to compensation may end up being a key issue for the crowd when they are deciding to invest. Founders who go above and beyond their disclosure obligations may find themselves rewarded with more interest in their offering. I would encourage companies to include the details of director and officer compensation packages for up to three years following the raise and not just the proposed twelve months.
As a prospective investor in a crowdfunding company, I want to know there are reasonable restrictions on the directors and officers paying themselves unwarranted salaries or other forms of compensation. At the same time, I want the founders to be vested in the success of the company with stock and performance incentives. Lower salaries and more stock will encourage directors to distribute profits as dividends which lends to the crowd realizing a return on their investment as well.
The above calls for well structured crowdfunding companies to prepare:
- Clear and concise employment contracts with directors, officers and employees;
- Stock option plans or option agreements; and
- Shareholder agreements.
Pre vs. Post Revenue Companies
When it comes to the question of reasonable compensation for crowdfunding companies consider whether you are a pre or post-revenue generating company. Companies who raise money from the crowd before they have any meaningful revenue should have relatively low base salaries with incentives like bonus pay and stock options based on performance. Performance requirements can pegged to revenue, profits, milestones, product launches etc. but should be clearly and simply explained to the crowd. Revenue generating companies have more slack. Factors like how much money was raised from the crowd and how profitable the company was at the time of the offering should be considered. Again, be transparent and disclose a three-year projection for your salary and incentives. Transparency will be rewarded.
John Wires