A Shotgun Legal Guide to Advisors

Advisors can be a key element of a young business’s success. They can provide guidance, support and key connections. While advisors are intended to help your company, there are legal formalities that should not be overlooked. Much like hiring any employee or consultant, certain agreements must be put into place and you should avoid common legal pitfalls.

Pre-Relationship Talks

Are you just starting to talk with a potential advisor? Sometimes this takes revealing some very “secret sauce” information. While your advisor is someone you want to be able to trust, sometimes having a non-disclosure agreement (“NDA”) can set the appropriate confidential tone.

If you are seeking an advisor that sits on a number of advisory boards, or is active in the startup space, you may not have much luck getting them to sign an NDA. Your advisory agreement (see below) will almost always contain a confidentiality provision, so an NDA should only be used at the beginning.

Sample Document – Non-Disclosure Agreement

Compensation

For most companies that bring on advisors, it is rare to pay an advisor in anything except ownership. This works much easier within a corporation structure that has shares vs. an LLC (but can nonetheless be done with an LLC by offering what is called Profit Interest that is akin to employee stock options).

The standard equity range falls between .1% – 2% and is determined by a number of factors. Three of the most dominant factors in this equation are 1) time commitment to the company, 2) profile of the advisor, and 3) contacts to other people (money, PR or recruiting). Each of these can significantly improve the value of the company. It is not uncommon to have advisors that fill different roles.

Clearly Defining Expectations

Just like any relationship in your business or startup, clearly defining the relationship helps to avoid problems. Understanding what you are getting from the advisor is probably the most important piece of this. While it may seem juvenile, put in writing what is expected of the advisor such as 1) monthly meetings, 2) email availability, 3) expected connections to make, 4) help with fundraising etc. If you have trouble communicating these items to your advisor, you may have trouble communicating in general with them, or may get frustrated when they do not deliver on unreasonable expectations. It happens all the time.

The Advisor Agreement

An advisory agreement is very similar to an independent contractor agreement. In fact, you should include a clause in the agreement stating that the relationship is that of an independent contractor. This makes it clear that the advisor is NOT an employee.

You should make sure you have a confidentiality clause in the agreement. This is a standard provision and should not be negotiated out. Another standard clause is an “invention assignment” provision which assigns to the company all work product produced by the advisor for the company. Examples include: customer lists, designs, code, potential investor lists and contact info. This may be a contentious point, and the language can be changed a little bit, but again, this is a standard clause and should not be removed from the document.

Sample Document – Advisory Agreement

Active advisors, although friendly, have a tendency to push back on provisions in the advisory agreement. As savvy business people, they have been trained to do so. Do not be afraid to push back. These provisions are put in place to protect your company if the relationship goes sour. It is OK to adjust the agreement to match the needs of both parties but make sure you know what you are doing – so consult an attorney.