Before finalizing your board member contract, it is often wise to consult an attorney—ideally one familiar with corporate governance and labor (or employment) law. This step ensures you fully understand your obligations, liability exposure, and financial terms. Below is a checklist of questions to guide your conversation with legal counsel, helping you make an informed decision about serving on a private equity (PE) portfolio company board.
1. Compensation and Equity
Payment Structure
- “Are the cash retainer and/or per-meeting fees reasonable compared to market standards in this industry?”
- “How likely is it that the compensation may be re-negotiated or adjusted in the event of major company changes?”
Equity Grants or Options
- “Is the equity vesting schedule typical for a PE-backed board role?”
- “Does the contract provide vesting acceleration upon a sale or IPO? If not, can we negotiate that?”
Tax Considerations
- “Are there potential tax implications (e.g., 409A valuations, ISO vs. NSO stock options) that I should be aware of?”
- “How does the contract address withholding or reporting for any equity or cash compensation?”
2. Indemnification and Liability
Scope of Indemnification
- “Does the indemnification clause fully protect me against lawsuits arising from good-faith board actions?”
- “Are there any carve-outs for certain types of misconduct that narrow the clause too much?”
D&O Insurance Coverage
- “Does the board agreement explicitly require the company to maintain Directors & Officers (D&O) insurance?”
- “What is the coverage limit, and does it include tail coverage after I leave the board?”
Exclusions and Limitations
- “Are there specific acts—like gross negligence, fraud, or SEC violations—excluded from indemnification that might pose risk?”
3. Non-Compete and Non-Solicitation
Duration and Geography
- “How long does the non-compete remain in effect after I step down from the board, and what is the defined geographic scope?”
- “Is the language overly broad, potentially restricting me from legitimate opportunities?”
Exceptions and Carve-Outs
- “Could we include carve-outs so I can serve on other boards in the same broad sector but non-competing segments?”
- “If I already have other industry engagements, how can I protect them from being construed as competition?”
Enforcement Mechanisms
- “What remedies might the company or PE firm seek if they believe I’ve violated the clause, and how difficult is it to contest?”
4. Termination and Removal Provisions
Notice Period and Process
- “Does the agreement specify a mandatory notice period for my removal or resignation?”
- “If the PE sponsor can remove board members at will, how does this interplay with my unvested equity?”
Equity or Compensation on Early Departure
- “If I’m terminated without cause, do I forfeit unvested options, or is there a partial vesting formula?”
- “Are pro-rated cash retainers or final payments clearly addressed?”
Mutual Consent or At-Will
- “Is board service purely at-will, or does the contract indicate any conditions for ‘for-cause’ removal?”
5. Governance Duties and Potential Conflicts
Fiduciary Obligations
- “Is the language around fiduciary duties (loyalty, care) standard for a PE portfolio board, or does it impose extra burdens?”
- “How do I handle potential conflicts of interest if I serve on multiple boards within the same industry?”
Insider Information
- “Does the contract align with insider trading policies and define how non-public information is safeguarded?”
- “If I might join other boards, do I have to recuse myself from certain topics to avoid cross-company conflicts?”
Regulatory Compliance
- “If the portfolio company operates in a highly regulated sector, does the contract specify extra compliance duties for me as a director?”
6. Confidentiality and Intellectual Property
Confidentiality Boundaries
- “Is the confidentiality clause standard and does it extend indefinitely beyond my board tenure?”
- “Are there exceptions if the company information is already public or if I need to disclose certain details under legal obligation?”
IP Ownership
- “If I provide strategic ideas or frameworks as part of board discussions, does the company claim IP rights to them?”
- “Is there a mechanism for me to use or repurpose my own methodologies if not specific to the company’s unique processes?”
7. Dispute Resolution and Governing Law
Arbitration or Litigation
- “Does the contract require arbitration for disputes, and under what rules (AAA, JAMS, etc.)?”
- “Would I have to litigate disputes in a specific court (e.g., Delaware Chancery Court)?”
Choice of Law
- “If the contract references Delaware (or another state’s) law, am I comfortable with that legal environment?”
- “Is there a separate ‘forum selection’ clause that specifies which courts or venues are permissible?”
Enforcement Costs
- “If a dispute arises, does the agreement specify who bears legal fees? Is there a ‘loser pays’ scenario, or do we each handle our own?”
8. Compensation Mechanics and Payment Schedule
Frequency of Payment
- “Is compensation paid monthly, quarterly, or annually, and is there any deferral mechanism I need to consider for tax or cash-flow planning?”
- “In a scenario where the company experiences liquidity concerns, can the board reduce or delay payment?”
Expenses Reimbursement
- “Are all travel and lodging costs for board meetings covered, and does the contract specify a maximum threshold or ‘reasonable’ standard?”
- “Is there a pre-approval process for certain expenses?”
Performance-Based Incentives
- “Does the contract include any bonus or performance-based compensation if the company hits key milestones (e.g., EBITDA targets, successful exit)?”
9. Ongoing Communication and Reporting
Access to Information
- “Does the contract guarantee I receive timely financial and operational updates, or is that purely at the board chair’s discretion?”
- “Are there constraints on requesting additional data from management if I believe it’s vital for oversight?”
Meeting Cadence
- “How often are board and committee meetings scheduled, and can extraordinary sessions be called?”
- “Is it standard to have monthly calls in a PE context, or is quarterly enough?”
10. Insurance and Risk
D&O Insurance Details
- “Beyond broad indemnification clauses, do I have clarity on the coverage limit, the policy issuer’s financial strength, and policy exclusions?”
- “Does the contract say anything about tail coverage after an exit or if I leave the board?”
Other Liability Insurance
- “Are there any other relevant insurances, such as Errors & Omissions (E&O) or cybersecurity coverage for directors?”
11. Miscellaneous Points
- Integration with Prior Agreements: “If I have prior NDAs, consulting contracts, or non-competes, does anything in this board agreement conflict with them?”
- Amendment Procedures: “How can this contract be altered? Do changes require unanimous board approval or just the majority shareholder’s sign-off?”
- Enforceability Across Jurisdictions: “If I live in a different state or country, is there anything additional to note about cross-border legal requirements or tax compliance?”
