The Abstract Truth

Advisory Agreements

Posted by rbpasker on August 15, 2007

My intention was to blog next about recruiting an advisor, but how can you recruit an advisor unless you know what you’re offering? So first let’s look at the components of a typical advisory agreement. Remember: IANAL and TINLA. I’m just relating my experience and data I have garnered from others in the industry. Please get proper legal advice and proper wording before embarking on an advisory agreement.

The advisory agreement should have 4 main areas: responsibilities, term, protection, and compensation.

The responsibilities section should describe the role as a consultant to the company, who advises the CEO and executive team on matters within the the advisor’s area of expertise. It is important to make sure that the agreement does not confer employment status on the advisor, so your company does not get caught up dealing with employment law issues, benefits, and tax withholding for the advisor. You also want to ensure the advisor is not an agent of the company, someone who is able to make commitments on behalf of the company.

The advisory agreement should set out the term of the agreement. If the the stock package is fixed at a certain number of shares over some number of years, the term of the advisory agreement to be fixed as well and is coterminous with vesting. In my case, I prefer two-year agreements, but in one case I had had an open-ended agreement, and the comp was based on a certain number of shares per month. Even though my agreements have a fixed term, I feel as though I’m on the hook as a stockholder to promote the company’s interests for as long as the company is in business, and the CEOs have never been shy about asking me for stuff after the two years are up.

Here are the main protections in the advisory agreement:
  1. Intellectual property – just as for an employee, any intellectual contributions — ideas, designs, specs, etc — made by the advisor have to become the property of the company. What good would an advisor’s contribution be if it didn’t come with the rights to implement it?
  2. Confidentiality –The advisor has to be bound by the same confidentiality provisions as anyone else who has access to the company’s secrets
  3. Non-solicitation — the advisor should not be able to hire away the company’s employees
Sometimes a company will want additional protections, such as a non-compete clause, but I have personally never agreed to additional provisions. It would be foolish for me to work with two companies that competed directly with each other for the same reason VCs don’t do it: I don’t want to create a situation where helping one company would hurt the other. Also, the confidentiality agreement should cover any non-public information I might possess which would be of use to a competitor. And as I mentioned previously, the agreement shouldn’t include a laundry list of tasks or a minimum number of days/hours. If you want a consultant, hire one. From an advisor, you’re looking for access and advice.

In terms of compensation, an advisor should get a stock option package that is at least the same order of magnitude as a director-level position, vests monthly with no cliff over two years, and provides for 100% single-trigger accelerated vesting. Since every company has a different capitalization structure and is at a different stage, its better to tie the size of the grant to a director-level position rather to a specific percentage or a specific number of shares. And by “director,” I mean a second-level manager who reports to a VP, rather than someone who sits on the company’s Board. Advisors of start-ups typically don’t get any cash compensation, but they do have their direct expenses reimbursed.

As you might notice, the vesting schedule for an advisor is different from a typical employee plan, which is usually 4 years, 1 year cliff, no accelerated vesting. Accelerated vesting means that, under certain conditions, instead of having to wait until the vesting period is over to exercise their options, the options stock vest immediately. Single-trigger means that the acceleration takes places when the company is acquired (or has some other “change of control”-type event, such as an asset sale or merger). Double-trigger vesting means that there has to be a change of control AND the employee is terminated or has their responsibility/pay/status reduced. Since the advisory agreement is always terminated in an acquisition, double-trigger vesting doesn’t make any sense. The reason eliminating the vesting cliff is that, unlike an employee, an advisor doesn’t get any cash compensation. So if the company gets acquired before the cliff is up the advisor should get compensated.

The last thing I like to have in any advisory agreement is a get-out-of-jail-free card: a bilateral no-questions-asked termination clause. If things aren’t working out, either side should have the opportunity to bail. This correlates with at-will employment, which I believe should be the norm.

So now you have the outlines of what an advisory agreement should contain. I have had agreements that were just a letter from the CEO with room for my signature, and others which were actual contracts. Discuss these provisions with your Board of Directors, put together a draft with your legal counsel, and negotiate with your advisor in good faith.

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