Essential Annual Actions for Start-up Boards
As a founder of a start-up, you have your hands full, and the end of your start-up’s fiscal year can sneak up on you. But, as the year-end approaches, you should be mindful of a few key actions your start-up board will want to consider on an annual basis. In this article, we’ll walk through the most common annual actions to be approved by start-up boards at their meetings held around the end of the fiscal year: the budget, compensation, including bonuses and equity awards, and other administrative action (including, the appointment of auditors and ratification of officers). Keeping your board engaged on these crucial items yearly will allow the board to see that you are capable of leading all aspects of the business, including in the area of corporate governance, and will ensure you receive valuable guidance and feedback from your directors.
Review and Approval of the Annual Budget
As a start-up, planning your budget for the next year is crucial, and you should present it to your board of directors for their approval each year. In fact, it is customary for the investors’ rights agreement entered into as part of a venture capital financing to provide that the annual budget be presented to the board for approval at least 30 days prior to the end of each fiscal year.
In preparing the budget, work with your finance team to review financials from the current year and determine realistic growth targets and goals for the next 12 months. Factor in expenses, like hiring new employees and product development, and your anticipated revenue and fundraising plans.
Of course, start-ups are fast-moving creatures, so you need flexibility in your budget. If new opportunities or challenges arise during the year that require changing funding allocations or revenue targets, go back to your board for input and approval of a revised budget. Although your board wants to see you meet agreed-upon goals, directors will understand that start-ups may need to make adjustments. The budget is a living document, so revisiting it with your board as conditions change is perfectly acceptable and even encouraged.
With an approved budget and fundraising plan in place for the next 12 months, you have the foundation and resources to have an impactful year for your start-up. Keep your board members in the loop on progress and obtain board approval on any major adjustments — that way, the entire team can feel good about the direction the company is heading.
Approval of Bonuses for Performance from Last Year
Each year, a key determination by your board of directors will be how much to reward your employees for their hard work over the past year. These bonuses can be completely discretionary or can be based on the achievement of certain corporate goals that were set at last year’s annual board meeting.
When determining discretionary bonuses, your board of directors can consider things like:
- How much effort and initiative did the employee demonstrate? Someone who consistently went above and beyond expectations probably deserves a bit extra.
- What key wins or accomplishments did the employee drive? If they landed a major client or launched a successful new product, that achievement should be rewarded.
- How did the employee’s performance impact key metrics or the bottom line? Strong contributions that moved the needle in a big way warrant solid compensation.
Executive bonuses are typically tied to performance criteria and achievement of corporate goals.
For non-executive employees, propose bonuses that are likely to motivate your employees but still within typical ranges for similar start-ups. You can review statistics about what level of compensation is customary for roles at companies that are at a similar stage of development as you within your industry. You may want to consider a mix of cash and equity if possible.
When presenting to your board of directors, provide a clear justification for each proposed bonus based on the criteria above. Be prepared to answer any questions about how bonuses were determined. With a fair, well-thought-out proposal, your board is likely to approve the bonuses, and you’ll be able to reward your team for their much-deserved contributions over the last year. Compensation and motivation are key to retaining talent, so take the time to get bonuses right. Your employees and start-up will benefit from it!
Approval of the Bonus Plan for Next Year
As a start-up, designing an effective bonus plan is crucial to keep management (including yourself!) and your employees motivated and aligned with key company goals. This will be part of the annual budget, but it should be a separate item for board approval.
Determine measurable goals or key performance indicators (KPIs) for each role that contributes directly to company success and set the maximum or target bonus payable upon achievement of such goals. For example, targets for your sales executive may include new customer acquisition, upsells, and renewal rates, and targets for your chief science officer may focus on product efficiency, quality of output, or runtime. Be as specific as possible to avoid confusion and provide clear direction.
Typically, bonuses are tiered such that bonuses are paid out even if less than 100% of the corporate goals have been achieved, and more than the target bonus would be payable if the company exceeds its corporate goals. For example, if the corporate goals are 75% achieved, 75% of the target bonus would be payable, and over 100% would be payable if corporate goals are exceeded. This incentivizes overachievement and rewards those who go above and beyond.
You may also wish to call out the bonus plan for non-executives in the budget for your board’s attention so that they are informed as to how much you are planning to allocate to non-executives in the form of bonuses. The board can then provide feedback regarding that plan. Typically, non-executive bonuses are discretionary, as determined by the chief executive officer of the start-up, to provide flexibility, if needed, to manage cash runway. For some start-ups, the board will be more involved in the decision-making regarding bonuses for non-executives than with other start-ups.
Approval of Compensation for the Upcoming Year
Similarly, executive compensation (including your salary) is typically a separate discussion and approval even though it would be contemplated in the budget. It can be an awkward topic to tackle, but don’t be shy — it is customary and expected to be discussed.
As a start-up, you likely can’t match the base salaries of large, established companies; however, you still need to pay executives fairly based on their experience and contributions. Your board can help you benchmark compensation for comparable positions at other start-ups to determine an appropriate range.
You may wish to call out non-executive compensation as a separate item for board consideration as well, especially if you are proposing a company-wide increase in compensation or proposing merit-based increases in compensation to certain employees that have performed particularly well during the last fiscal year, or to employees who show promise for significant contribution to the company in the coming years. As with bonuses for non-executives, some boards are more actively involved than others in the decision-making related to salary and other forms of compensation for non-executives.
Approval of Equity Awards to Employees
The annual board meeting may be a good opportunity to grant equity incentive awards to executives and other employees. As you may already know, the typical type of award issued by start-ups to service providers is a stock option. See our post on why start-ups choose to issue stock options here.
Stock options give your service providers the right to buy shares of your company stock at a set price called the exercise price (which must be no less than the fair market value of a share of common stock at the time of grant), even if the value goes up later. This incentivizes them to help the company grow and share in its success. In order to set the exercise price, you should obtain an independent valuation, called a 409a valuation (named after the relevant tax code section) from an experienced valuation firm. Remember to start this process a few weeks prior to the meeting so that you can be sure to have a completed 409A valuation ready.
Typical vesting schedule for stock options is four years with a one-year “cliff” of 25% — e.g. no shares vest for the first year, then 25% at the anniversary, followed by the remaining shares vesting monthly over the next three years. Service providers must remain with the company during the entirety of their vesting period to earn their full shares. Vesting motivates them to contribute to the long-term success of your start-up.
An equity grant at the end of the fiscal year would reward existing executives and non-management employees for their contributions to the start-up during the prior fiscal year and also incentivize them to contribute to the growth of the start-up in the coming years. You will want to take into consideration the amount and terms, including the vesting schedule, of equity awards already held by existing employees when considering whether to make a new year-end grant.
Approval of Other Administrative Tasks
Appoint Auditors
Many times, investors will require audited financial statements to be prepared each year, or your board of directors may deem it to be in the best interest of the start-up to begin auditing financial statements. The board, or the audit committee of the board, if one is created, is responsible for appointing independent external auditors. Auditors examine the company’s financial statements and accounting records to verify they are accurate and comply with relevant regulations. The appointment of such auditors is typically done on an annual basis.
Appoint Corporate Officers
The annual board meeting is a good time for the board to review who the company’s corporate officers are and consider making changes to these roles, such as president, treasurer, and secretary.
Conclusion
Having annual board meetings covering these topics locks in some critical governance items and ensures your board has eyes on the course ahead while fulfilling key fiduciary duties. By covering these topics annually, your directors can better steer the start-up ship in the right direction to reach new horizons.
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