Before finalizing a board member agreement with a private equity (PE) portfolio company, it’s wise to go through a structured checklist to ensure no critical elements are overlooked. Below is a summary of the key areas to verify in the contract, along with insurance coverage details and other relevant matters. This checklist can serve as a companion to chapters 11.1 through 11.3, helping you confirm that your interests and obligations are clearly addressed.
1. Appointment and Role
Term and Renewal
- Confirm the length of your appointment (e.g., one-year term, at-will, or automatically renewing).
- Check for re-election or removal provisions. Is there language about how and when your term ends?
Board Committees and Responsibilities
- Specify any committee assignments (e.g., Audit, Compensation).
- Ensure clarity on your expected time commitment, if noted, and any special roles (e.g., board vice-chair, lead independent director).
Title and Scope
- Verify that the contract accurately describes your position as a voting director, observer, or some other capacity.
2. Compensation and Equity
Cash Retainer / Fees
- Amount or structure (annual vs. per-meeting) clearly spelled out.
- Payment schedule: monthly, quarterly, or annual.
- Clauses about adjustments or escalation if company performance changes.
Equity or Stock Options
- Type of equity (restricted shares, options, RSUs), quantity, and vesting schedule.
- Acceleration triggers (e.g., upon a sale, merger, or certain board removal conditions).
- Tax considerations: Are you comfortable with the potential implications of ISOs vs. NSOs or the strike price?
Reimbursement of Expenses
- Definition of “reasonable expenses” and pre-approval requirements.
- Timelines for how quickly expenses are reimbursed and any caps or guidelines.
3. Indemnification and Liability
Indemnification Clause
- Language confirming the company indemnifies you for board-related actions taken in good faith.
- Clarify any exclusions (fraud, gross negligence).
- Confirm the scope remains in effect after departure.
Directors & Officers (D&O) Insurance
- Written obligation for the company to maintain D&O coverage at or above a specified limit.
- Coverage details: policy limits, Side A/B/C coverage, tail coverage duration, etc.
- Check for any unusual exclusions.
Additional Insurance (EPLI, Fiduciary)
- If relevant (e.g., you are on the compensation committee), ensure employment practices liability (EPLI) or fiduciary liability coverage is noted.
- Confirm cyber coverage if the company has significant data exposure.
4. Non-Compete and Non-Solicitation
Scope of Restrictions
- Duration of non-compete after you leave the board.
- Geographic limitations or industry definitions that might be overly broad.
Carve-Outs
- Ensure the contract accommodates your existing boards or consulting arrangements in the same or adjacent industries.
- Note any specific approvals required if you plan to join other boards during your tenure.
Non-Solicitation
- Coverage of employees, customers, or suppliers.
- Time frame following your resignation or removal.
5. Confidentiality
Definition of Confidential Information
- Confirm it includes, but is not limited to, financial data, strategic plans, intellectual property, etc.
- Ensure no indefinite obligations conflict with future roles if broad language seems excessive.
Term and Exceptions
- Does confidentiality last in perpetuity or have a defined period?
- Exceptions for legally required disclosures or information that becomes public.
Compliance
- Confirm you understand how to handle board materials, meeting minutes, and any privileged communications.
6. Termination and Removal
Removal Provisions
- If the PE sponsor can remove directors at will, confirm the contract clarifies that scenario.
- Notice requirements (if any) for removing a board member.
Impact on Compensation
- Does unvested equity accelerate or get forfeited upon removal or resignation?
- Are retainers pro-rated if your service ends mid-term?
Resignation Protocol
- Any notice period you must give before stepping down voluntarily?
- Are there any financial or equity implications triggered by your resignation?
7. Dispute Resolution and Governing Law
Arbitration vs. Litigation
- Does the contract mandate arbitration (e.g., AAA or JAMS) or litigation in a specific court (e.g., Delaware Chancery)?
- Confirm comfort with these forums and potential limitations on appeals.
Jurisdiction and Venue
- Which state’s law governs? Typically Delaware for many PE-backed entities, but confirm alignment with your preferences.
Legal Fees
- Clarify if either party must pay legal fees in dispute resolution or if each bears its own costs.
8. Additional Provisions
Board Meeting Details
- Frequency of meetings (monthly, quarterly, ad hoc).
- Protocols for special or emergency meetings, and expected attendance (in-person, virtual).
IP Ownership
- If you develop or share intellectual property in your board capacity, who retains ownership?
- Verify if it remains the company’s property or if you have usage rights.
No Conflicting Obligations
- Ensure the contract doesn’t block you from fulfilling prior NDAs or responsibilities.
- If you serve on multiple boards, confirm no direct conflict arises.
Entire Agreement Clause
- States that this document supersedes all prior discussions.
- Standard but worth acknowledging so you don’t rely on external verbal promises.
9. Red Flags or Deal-Breakers
Lack of D&O Insurance Guarantee
- If the contract doesn’t explicitly require maintaining adequate D&O coverage, consider it a major concern.
- Seek an amendment or separate coverage confirmation in writing.
Extreme Non-Compete Language
- If the scope or duration severely restricts your future professional choices without clear rationale, negotiate or reconsider.
Vague Indemnification or Equity Terms
- Indemnification that excludes typical board-level decisions or equity vesting that’s wholly discretionary could leave you exposed.
10. Final Steps Before Signing
- Consult Legal Counsel
- Share a draft with an attorney experienced in corporate governance and labor law.
- Ensure consistency with local regulations and your personal risk tolerance.
- Document All Negotiations
- Maintain a record of any addendum or side-letter agreements about committees, compensation changes, or exceptions to non-competes.
- Confirm final text matches your negotiations.
- Verify Alignment with PE Sponsor
- Make sure the sponsor’s representative acknowledges and agrees on any special carve-outs or modifications to standard language.
- Sign and Secure Copies
- Keep a fully executed copy of the contract (digital and hard copy) in a safe place.
- Note the effective date and confirm any follow-up tasks like providing official personal details or signing D&O insurance forms.
