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How should I compensate a silent investor?

My business partner and I are in the process of opening up a second business.
Ryan Himmel answered November 19, 2010
URL: http://www.entrepreneur.com/answer/222195
It sounds as if you are looking for an angel investor to help launch your business. Angels typically are affluent individuals that provide capital in exchange for equity ownership or convertible debt in a start-up business.

Typically, these investors will take seats on the board of directors and provide strategic advice when necessary.

When structuring the deal, it is important to assess:

1. The amount of capital you need
2. The ownership you are willing to give up
3. Management's relationship with the silent investor

The compensation that you provide this silent investor really depends on whether you are looking to secure convertible debt financing, straight debt or pure equity.

With the convertible debt and straight debt options, the compensation would be based on interest due to the investor and a distribution for a company takeover. If it is just equity, then the main form of compensation will likely be a distribution as a result of a dividend issue or company acquisition or public offering.

Typically, it is not very appropriate to provide a silent investor with a fixed salary since they do not have any involvement in the operational aspect of the business. However, companies have compensated the board of directors with a fixed salary or mix of stock and options.

Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys.  His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.