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Chances Are, Your Startup Advisor Agreement Form is Farkakte
For some reason, lately I’ve seen a lot of so-called “advisor agreement” forms that don’t make a lot of sense from a business perspective. So here is quick post to help you think about the main concepts that should – and some that shouldn’t – be in the agreement you have with your advisor.
Some Do’s:
1. Your advisor agreement should be terminable on short notice, by either of you. This is truly an at-will relationship from both sides of the table.
2. It’s very rare for early-stage advisory relationships to involve cash compensation, so there should be a clear statement that there are no fees or other compensation unless expressly set out in the agreement. And it’s also usual for there to be an expenses clause that states that only pre-approved expenses will be paid. See the last point below re option compensation.
3. A short statement of confidentiality is essential – advisors will often learn about important strategic or even tactical elements of the business. But it’s very easy to go overboard with these (many people just copy these clauses from their other boilerplate). Keep in mind that advisors are busy people, with many oars in the water, and it may not be worth the trouble for them to risk being foreclosed from other opportunities because of an over-anxious confidentiality clause. (It might not even be worth their time to read your 2 page long confidentiality section.) Generally, in the advisor context, I think these should be narrower and more specific than what you would generally see in the employment context or in an independent contractor agreement (where the other party has very little bargaining power, and will generally be privy to very confidential materials over an extended period of time). And of course may advisors may gain lots of insight into current strategy, but they rarely get a deep look into what I would call true trade secrets.
4. A short inventions clause can be useful in some cases – though I have heard of very few cases where an advisor has created or developed anything that could reasonably be described as intellectual property. And, just as with confidentiality, advisors often have multiple simultaneous engagements, often in the same industry – and they need to be careful about retaining control of generic elements of their expertise and the tangible manifestations of that that arise in day to day work.
5. A governing law and jurisdiction clause – these agreements are, in my experience, almost never litigated, but they do often cross borders, so a clear statement of what laws and courts apply is helpful.
Some Don’ts:
1. Never (ever ever) include strong pro-company remedies language for ‘breaches’ by the advisor of their duties (or for anything else (like negligence), except confidentiality). First, advisors almost never have ‘duties’ in the sense you’re probably thinking of – you certainly have expectations of them, and you’ll both see if there’s a fit and value added, and if not you will (or should) quickly go your separate ways. And second, given the nature of the work being done it will as a practical matter generally be very difficult to prove entitlement to a remedy even if you include the language – the work is judgment based and there are often no clear standards of performance related to it. Remember, this relationship is not like an employment or contracting relationship where people are paid specific amounts for specific output or deliverables. And no advisor wants to accept substantial potential liability for what is essentially “helping out” with a mere possibility (i.e. equity that might but almost certainly won’t ever ever ever have any value) of some small financial gain.
2. Never (ever ever) just send out your independent contractor template, with the words “independent contractor” scratched out and the word “advisor” written in. I’m surprised by how often I see this. They are very different relationships, with very different commercial implications. The advisor is technically an independent contractor – in the sense of not being an employee – but (as discussed above) they are not an independent contractor in the usual sense – i.e. someone who is hired on a contract basis for a specific amount to do a specific job.
Equity Compensation
Almost every advisor agreement uses equity as the only compensation. The usual vesting period is 2 years (you sometimes see up to 3), the usual size of the grant is under 1%, there is often a cliff of about 3 months, and they usually accelerate on a change of control. But if the relationship is terminated, the option generally has to be exercised within a short period of time or it terminates automatically (this language is almost never in the advisor agreement – it’s in the plan, which no one ever reads – savvy advisors will ask about this, though). This means that at termination the advisor has to make an essentially blind investment decision, possibly investing quite a bit of $ – to keep the possibility of compensation from the work – or forfeit it entirely. If the advisor quits, that’s sometimes (at least arguably) fair, I suppose (but you can still make a strong argument they should even then keep the vested portion). But otherwise? Not so much.
There’s a lot of potential for abuse in this system. It’s never made any sense to me for advisors (some point out that it doesn’t really make any sense for anyone). And I generally think that at least for advisors, at least on termination for convenience by the company (and, especially if there is a cliff, by the advisor, too), it’s more fair to say instead that whatever has vested ought to be exercisable until the ordinary expiry date of the option. (As usual, if you want to do this consult your tax advisor first).
Comparison to Investment Banking Advisory Agreements
It’s useful to compare and contrast the case of a startup advisor with investment banking advisory services – mainly because the nature of the work – judgment based business advice – is so similar (and is very similar to almost any type of business advisory relationship). These templates are used for a variety of services – M&A, fairness opinions, raising private capital, IPOs, and so on.
Here is a bullet list of key terms in a typical ibanking advisory agreement. As you read through it, keep in mind that this is an enormously competitive and highly paid field, and that just about everyone involved in it gets to see the terms that their competitors offer (at least partly because they go into the forms that their own lawyers use as templates) – as a result, all other things being equal, you would think the bankers would be competing to make their terms as client-friendly as possible. But – despite all of that, this is not the case. These forms are *dramatically* different than the ones I see being used for startup advisors. And also note that I use the ibanking case only as an example – as I noted above, mainstream advisory contracts for traditional *blue-chip* advisory services – whatever they are – are very similar (and hence equally client *un*friendly) to each other – you will find almost exactly the same approach, for example, in the engagement agreements used by management consultants (equally competitive, equally lucratively paid, templates equally client *un*friendly).
– term exclusivity (i.e. you can’t engage anyone else to do this for you – not always, but often)
– advisory work that is very much judgment based and tough to pin negligence on
– ginormous fees
– fee diversification – often a work fee plus a fee tied to the value of the transaction, not conditional on anything other than closing of the deal
– all reasonable expenses paid by client, no pre-approval (sometimes subject to a cap)
– high degree of advisor control over the work product after delivery to client – i.e. how it may and may not be used by the client
– high degree of responsibility of the client for its own performance – i.e. specific obligations of the client
– virtually complete independence of banker related to potentially conflicting engagements or activities
– extremely broad indemnity in favour of banker and all its related parties that protects them from virtually any liability arising from the mandate (sometimes, except for its own gross negligence or fraud).In summary, effectively the opposite of the forms you generally see for startup advisory work.
A Last Word – Free Online Templates
Every template I’ve ever seen online, including ones provided by reputable incubators / accelerators,. has failed to address the key points noted above.
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“A Survival Guide for the Millennial Entrepreneur”
This is one of the best things I have ever read about the mindset of a builder.
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Terms of Service; Didn’t Read
This is a fantastic resource on terms of use. Lawyers are trapped by the law in this area – your clients need them, but everyone knows the exercise is, in many cases, absurd, built as it is on the largely untrue notion that terms are ever read or at least broadly understood.
I’m not sure where the market is going with terms of use – perhaps towards a consumer protection model where in many cases the most critical issues are mandated by law. Or perhaps on their current path – which seems to be directly toward even deeper complexity and absurdity. But either way, I believe site operators ignore at their peril the impression that their terms create on the careful reader. And I think there’s much to be gained from an enlightened, transparent and consumer-friendly approach.
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Top internship opportunities in technology
This is mind-boggling.
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Free Templates for Great Startup Board Decks, Direct from VCs
This is a terrific resource for founders.
