The important details of your advisor agreement

What to look for in your startup advisor agreements

May 24, 2022

Hey founders et. al. In today’s episode we’ll discuss some of the fine print you’ll come across in your advisor agreements. Note: thoughts and commentary are solely my own, and not those of Scale LLP.

The legal details of your advisor agreement

You’re a startup. You have dreams of taking over the world (or at least your addressable market). However, since cash is tight, you can’t go hire your dream employees. What to do? You could put your sales hat on and recruit them to be an advisor. I tend to think of advisors as people I wish I could hire, but can’t yet. An advisor relationship works if you’re able to give up a little slice of equity and leverage their limited time effectively.

Once you find the right advisor and you’re ready to formalize the relationship, you’ll need to put an advisor agreement in place. Here, we talk about the main legal provisions of an advisor agreement and what to focus on when finalizing one of these for your startup.

The Services

The advisor agreement will likely mention that the advisor will be providing some sort of advice, consulting and/or mentorship, and then reference a “schedule” (or “exhibit”) that further describes what the advisor will actually be doing. This is your chance to draw out all of the important details regarding the nature of the advisor relationship you want. This can include (1) the time commitment expected, (2) important meetings to attend, (3) common activities or tasks that will be requested, (4) expected responsiveness to requests made by the company, (5) a catch-all that emphasizes the importance of active promotion and introductions for the business.

Below is an example of the Services provision:

Services: Advisor agrees to act as a mentor or advisor to the Company and provide advice and assistance to the Company from time to time as further described on Schedule A attached hereto or as otherwise mutually agreed to by the parties (collectively, the “Services”).
….
SCHEDULE A
Time: Advisor will commit an average of 5 hours per month of advisory work to the Company.
Meetings: Advisor will attend quarterly strategy meetings and scheduled Advisory Board meetings.
Responsiveness: Advisor will respond to company requests as soon as reasonably practicable.
Promotion: On top of the regular advice and insights, Advisor agrees to actively promote and make introductions on behalf of the Company through Advisor’s overall network of business contacts, including forwarding the Company’s business plan and other materials as requested by the Company.

Compensation

Compensation for early startup advisor agreements will almost always be entirely equity-based. The agreement should call this out with a simple sentence, such as “Advisor shall not be entitled to receive any cash compensation for the Services provided under this Agreement.” The compensation section will likely again reference a separate schedule as well. In that schedule, there are a few important things to double-check:

Nothing happens without board approval. Even if you are a one person company, you will need to formally approve the equity or option grant before delivering the stock option agreement or stock purchase agreement to the advisor. This should be called out in the advisor agreement, so that the advisor knows that the offer is conditional upon board approval. The vesting start date can technically start before the board approves, but make sure to take care of board approval as quickly as possible (within a month is preferable). Your advisor will be waiting.
Provide the number of shares or percentage of equity stake in the offer. Make sure you call out the number of shares or options, if known, at this time. Alternatively, you could agree to grant a certain percentage of the company’s outstanding common stock, but make sure you disclaim that the “percentages shall be based on the number of outstanding shares of common stock of the company, calculated on a fully-diluted basis of all outstanding and convertible or issuable securities as of the date the Board of Directors approves the foregoing equity compensation.” This gives you some time before you need to calculate the number of shares or options - and percentages are likely easier to conceptualize for the advisor.
Vesting. Because Advisors may not add value for as many years as an employee, a common vesting schedule for an advisor is two years, either with no cliff or a shorter cliff of 3 months.
1. Although it may not be covered in the initial advisor agreement, advisor grants also typically have a longer exercise window post termination of service, and will usually have single trigger acceleration on an acquisition, because no one expects advisors to stay on with a company once it is acquired. (Source: Holloway Guide to Equity Compensation). These details will either be covered in the stock option agreement or stock purchase agreement that will be delivered later.
Reference the future grant documents (stock option agreement or stock purchase agreement) and your equity incentive plan, if you have one.

An example of these topics written into a simple advisor agreement is below:

Subject to the approval of the Company’s Board of Directors, the Company will grant Advisor either a non-qualified stock option to purchase, or restricted stock in the amount of, [INSERT NUMBER OF SHARES] shares of the Company’s Common Stock (the “Shares”) at a price per share equal to the fair market value per share of the Common Stock on the date of grant, as determined by the Company’s Board of Directors in good faith. The Vesting Commencement Date is [START DATE]. [1/24th] of the Shares shall vest each month, subject to Advisor continuing to provide Services to the Company pursuant to this Agreement. The Shares will be subject to the terms and conditions of the Company’s equity incentive plan and the applicable grant agreement. There is no guarantee that the Internal Revenue Service will agree with this value.

Confidentiality and Intellectual Property

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. These are generally pretty long, so see the linked templates for examples of these.

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. Below is an example of this language.

Assignment of Inventions. Advisor agrees that all notes, records, drawings, designs, software, inventions, improvements, developments, discoveries, trade secrets, know-how and other similar materials that Advisor conceives, discovers, develops or reduces to practice, solely or jointly with others or that relate to the business or technology of the Company or that have been created in the course of performing the Services, as well as any copyrights, patents or other intellectual property rights relating to the foregoing (collectively, “Inventions”), are the sole property of the Company. Advisor hereby acknowledges that it is “work made for hire” for the benefit of the Company and hereby assigns all rights, titles and interest to such Intellectual Property to the Company.

Conflicts 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).

No Conflicts. Advisor represents that Advisor’s compliance with the terms of this Agreement and provision of Services hereunder will not violate any duty which Advisor may have to any other person or entity (such as a present or former employer), and Advisor agrees that Advisor will not do anything in the performance of Services hereunder that would violate any such duty. In addition, Advisor agrees that, during the term of this Agreement, Advisor shall promptly notify the Company in writing of any competitor of the Company which Advisor is also performing services. It is understood that in such event, the Company will review whether Advisor’s activities are consistent with Advisor remaining as an advisor of the Company.

And remember, work with an attorney…

*** As always, this isn't legal advice. It’s always smart to have an attorney go over your advisor agreement with you before using one for the first time.***

That’s all for now. Stay lawyerly,

Brian