Tips for Startup Advisor Agreements
Many startup companies look to advisors to provide strategic advice and counsel on company operational matters. In contrast to putting together a Board of Directors, building a team of advisors (sometimes referred to as an Advisory Board or Board of Advisors) is completely optional. The addition of advisors can be beneficial for companies, as advisors can bring unique skill sets and experiences that can complement or enhance the capabilities of the company’s founders and team members.
For early stage companies, advisors can be particularly useful for tasks such as building out a company’s network of fundraising options, recruiting top-level talent and the development and deployment of cutting-edge technology. Typically, early stage companies are able to entice high-level advisors by offering equity incentives. While the hope is that the advisor relationships will be long-lasting and very fruitful, the reality (as with all other relationships) is that sometimes issues arise and, as such, it is important for both advisors and companies to have a well-structured, written advisor agreement that governs this relationship.
This article is intended to provide a high-level overview of some of the key issues that advisors and companies need to be aware of when reviewing/preparing an advisor agreement.
1. Advisor’s Role and Time Commitment
Advisor agreements should provide a description of the advisory’s role with the company. While certain circumstances may call for a very generic high-level description of the advisor’s responsibilities, in most cases, providing a somewhat detailed description of the advisor’s role and responsibilities based upon the advisor’s expertise is highly recommended. Additional detail not only provides legal certainty with regards to the obligations that an advisor must perform, but also serves the important purpose of defining the relationship between the company and the advisor from the outset.
In defining the advisor’s responsibilities, one often-overlooked component is the amount of time that the advisor will spend working with the company. Many advisor relationships disintegrate over the company’s feeling (whether correct or not) that the advisor is not allocating enough of his or her attention to the company. This issue can be addressed from the outset by providing a description of the amount of time that the advisor will need to spend working with the company over specific periods. A description of the advisor’s time commitment can be articulated in many different ways, but it is often stated as a number of hours of service and/or a number of meetings or conference calls in which the advisor will participate, typically over a monthly or quarterly period. The advisor’s time commitment should be tailored to the role of the advisor and the amount of equity being granted to the advisor, but it generally ranges from 4 – 20 hours per month with a commitment to be available on a reasonable “as needed” basis.
In most cases, advisors are compensated with an equity stake that typically ranges from 0.2% - 1% of the outstanding common stock of the company (on a fully-diluted basis) as of the date of grant. The appropriate level of compensation depends on a wide range of factors, from the stage of the company to the skills that the advisor is bringing to the table. Advisor equity is most commonly subject to vesting on a monthly basis over a two-year vesting period (sometimes with a short “cliff” period upon which the vesting will begin).
It is important to note that the advisor agreement alone is not sufficient to officially grant equity to an advisor. The grant must be approved by the company’s Board of Directors and issued pursuant to a valid equity incentive plan that has been approved by the company’s Board of Directors and stockholders. Additionally, the company must ensure that it has enough authorized and unissued shares of common stock to cover the equity grant and that it is granting the equity at fair market value as of the time of grant. These formalities are required by law.
Because equity is such a precious resource, companies should be very careful and conscious of the amount of equity they are allotting to their advisors. Giving too much equity away to an advisor, especially one that ends up not being particularly useful to a company, can be painful when it comes to an exit or liquidity event.
3. Confidentiality and Invention Assignment
In the course of their work with a company, an advisor will become privy to much of the inner-workings and confidential information within the company. This confidential information may include financial models, customer information, personnel information, intellectual property and other proprietary information. Companies have a legitimate interest in keeping this type of information private and thus must ensure that the advisor agreement requires the advisor to keep such information confidential during and after the term of the advisor’s relationship with the company.
Additionally, the company should ensure that any inventions and ideas that an advisor develops for the company, in the course of the advisor’s work with the company, should be the property of the company itself. To ensure that this occurs, the advisor agreement should contain an express provision assigning any such inventions and ideas to the company.
4. Conflict of Interest
Advisors are not employees of the company and are typically actively involved with other businesses. As such, advisor agreements should include an express representation from the advisor that such advisor is not violating the terms of any other contractual obligations (whether other advisor agreements, employment agreements, stockholder agreements or otherwise). In addition, advisor agreements often contain non-compete and non-solicit restrictions that must be adhered to by the advisor during the term of the advisor agreement and for a period thereafter (often one year). These are particularly sensitive provisions that should be addressed at the outset of an advisor engagement.
There is no denying that advisors can play crucial roles in a company’s ultimate success. By entering into a formal advisor agreement upfront, companies and advisors can kick off the relationship on solid footing and avoid potential disputes in the future.
Scannavino Lamb LLP is a boutique law firm based in New York City offering legal and business advice to forward-thinking entrepreneurs, startup companies, and startup investors. Founded by former Big Law lawyers, the firm serves its clients by blending world-class service with entrepreneurial perspective. Check us out at www.scannavinolamb.com.
This publication is for general information purposes only. The information in this publication should not be construed as legal advice or legal opinions, is not a substitute for fact-specific legal counsel, does not necessarily represent the views of the firm or its clients, and is not intended to create a lawyer-client relationship. This publication may constitute attorney advertising in some jurisdictions.