A common legal dilemma among entrepreneurs involves the authoritative and mystical figure of the business advisor. Yes, an advisor is useful and cool if you are tackling an industry you don’t know well (yet), but how do you plan/define/measure an advisor’s role in your startup?
It’s common to pay your advisor in equity, but how much? And how do you make sure the man/woman is doing a good job? Venture Hacks did an amazing blog post answering these questions and demystifying the role of the advisor, but the guys at Founder Institute did something better: they drafted a balanced standard advisor agreement and open sourced it here on Docracy: https://www.docracy.com/263/founder-advisor-standard-template.
The Agreement seems pretty solid, avoids unnecessary legalese and leaves a lot of space for customization. Let’s have a quick look at the content, following the amazing Advisory Board Agreement Checklist:
1. Description of relationship (Section 1)
Advisory agreements are serious. There’s money involved and you can’t just say, “Please, be my mentor”. Carve out in detail what you expect the advisor to do for the company, as he was a consultant (God forbid!). Schedule A of the Agreement helps you do that by outlining 3 different levels of commitment: “Standard”, “Strategic” and “Expert”. It also gives you some examples of practical things that the advisor can help with: recruiting, business development, fundraising. The more you can be specific with services, the better. Accountability rules.
2. Disclaimer of Employment (Section 5)
Very important legal clause, that prevents the IRS to consider the guy an employee, and make you pay a lot of taxes. It also prevents the advisor to claim continued pay, or a job at the company. Be careful, though: the advisor is not a representative of the company, so he can’t negotiate on your behalf unless you explicitly allow it.
3. Payment for Services (Section 2)
Every service needs a consideration. Stock options are standard for advisors (sometimes a monthly fee might also be appropriate, if the time commitment is substantial) and should be granted according the company’s option plan. Don’t forget vesting! The Agreement suggests a shorter vesting period than the classic 4 years (usually given to employees), and shrinks the cliff from1 year to 3 months. These terms are of course negotiable, and largely depend on how long you need the advisor for. The longer the vesting period, the more protected you are from an advisor that leaves, or does a poor job.
Schedule A of the Agreement tells you how much equity is appropriate, according to a mix of company stage and level of service. As usual, every situation is unique, but at least you have a benchmark to start from, and you can minimize the risk of making an offensively low offer.
4. Confidentiality (Section 6)
This clause is simply an NDA embedded in the Agreement. It’s pretty standard, so beware any request for modification.
5. Competitors (Section 10)
It’s almost impossible to get an advisor to work exclusively for you - without actually hiring him! - but you can mitigate the risk of having him help competitors. The “No Conflicts” clause provides for the advisor to notify you if his other work might compromise your business, so that you can at least exercise you termination rights.
6. Ability to perform services (Section 10)
You have to make sure that the advisor is legally allowed to advise you, as he might have some previous conflicting commitments. This is also covered by the first part of Section 10 of the Agreement.
7. Ownership of work product (Section 8)
Advisors usually don’t like this clause, but you should have it to make sure every idea that comes from them can be exploited by the company (and the company only).
8. Termination (Section 4)
You should be able to dismiss your advisor, and vice-versa. The Agreement suggests a very quick notice of 5 days, but nothing prevents a longer term.
Founder Institute reviewed hundreds of different advisor agreements before coming up with this framework, “around a simple desire for mentors to lend a hand, and for startups to get help”. And now, you can even sign it online via Docracy, which means he will see that the document is coming from a legitimate source, and you’re not asking for the moon. This post is not legal advice, and look for a startup lawyer if you have further questions, but I hope it helps!
Related documents: Founder Advisor Standard Template: https://www.docracy.com/263/founder-advisor-standard-template