Advisory boards · Entrepreneurship

What is a good model for an advisory board agreements?

David Coleman

January 7th, 2016

We have a great advisory board (5 people), some of them participate more regularly than others. Should I base theirequity (over a number of years) based on their level of participation, the value of what they say, introduction they make, etc? Any one have a good model for this and a sample advisory board agreement that has worked well for them?
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Victoria Cabrera Marketing Coordinator at Patxi's Pizza

January 7th, 2016

There are several discussions that you might want to refer to that can be of help such as : http://members.founderdating.com/discuss/452/Advisory-or-Consulting-Agreements-Equity or http://members.founderdating.com/discuss/2011/What-is-reasonable-equity-and-dilution-for-an-advisory-board-member
Also, FD has our very own advisory board agreement template that can be helpful as well. Remember to always do a quick search before posting to save yourself some time!

Peter Kestenbaum Advisor, Investor, Mentor to Emerging firms

January 7th, 2016

David... I certainly have several good advisory board agreement templates but prefer not to share. Can discuss over telecon if you wish. You can get basic templates in many locations but to be blunt advisory board agreements have two components... one is easy and is built around the compensation and general business terms.. -some amount of stock vested over some years, -standard clauses such as cliffs, buyback clauses ( if there is no liquidity event in x years and revenue exceeds n then the company will buy back vested shares at y% on the dollar... Protects the advisor if the company stays private ), - operating terms such the advisor can't spend company money - termination, - Legal separation between advisor and company and many more. As mentioned these are templated. The second piece is actually the more important piece... what exactly do you want the advisor to do and how much time or effort is expected.. Some samples - The advisor shall commit N hours nominally per quarter in support of the company - The advisor is expected to have a minimum of one face to face meeting per quarter with the founders to review specific company issues or plans. - The advisor shall be available for approximately four 30 Minute calls per quarter to discuss issues relative to the company - The advisor and founder shall agree on a quarterly basis on a limited number of tasks to advance the stature of the company ... examples of such tasks could be -introduction to n companies in the advisors network to evaluate early prototypes or perhaps participate in a beta program... - the review and assistance in preparation of the companies pitch deck... - assistance in recruitment or participation in the interview process of ..... introduction to finance partners (angel investors VCs).... - reviewing the operational/go to market plans... You might also have some bonus clauses in your agreement... Again this unique to each situation... it could be stock or cash... If the advisor introduces us to a client and is instrumental in securing an order of X the advisor shall be entitled to .... (stock, cash, other ). Sorry... I know this is not specific to your firm but hopefully you get the big picture.. pk

Jerry Hall CEO at PourSafe

January 7th, 2016

I'll be using what's called the F.A.S.T. agreement tailored by Y Combinator. Here's a link: https://www.ycombinator.com/documents/ Jerry *Jerry Hall * CivicArchive Jerry@CivicArchive.com 858-344-1104 cell LinkedIn

Michael Barrett Entrepreneur - Writer - Investor

January 7th, 2016

David, I may be stating the obvious, but equity is not a good incentive for any advisor if the company does not have a real exit planned. The company I co-founded is profitable and our intention is to keep it private, profitable, and growing. Therefore we pay advisors cash and cover all expenses. On the other hand, as an investor and advisor with another company, the equity for me is appealing because the intention is to have a liquid event. In that last case I invested at a discounted rate early. So I feel good about my upside.

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

January 7th, 2016

That's an excellent question. In considering your answer, be aware that your answer will begin to signal which kind of company culture you will have. If you choose to reward advisors on participation (effort) you signal your company culture is that the company is a "family", where people stick with family members even when their results are subpar, because that's what family members do. Superstar performers may resent that they get the same rewards as the subpar performers. So you will lose those who think that their short term results are more important than maintaining good relationships with the rest of the "family" members, including those currently in a slump. The old "HP way" culture of the 1940s-1980s, stressed this sort of "family" / relationship driven culture as part of the reason for its success. If you choose to reward advisors based on results, you signal your company culture is that the company is a "pro sports team" that retains and rewards top performers as long as they are top performers, and loses interest in them when they are no longer top performing. But when former top performers hit a slump, they can feel a lack of loyalty when the company cuts their rewards and moves ahead without them. NetFlix has been a strong advocate for this kind of culture. You can choose either culture. There have been some big successes with each culture. But it is really hard to change your culture along this dimension once it is long established. Much of the turmoil of Carly Fiorina's tenure actually stemmed from internal and board level debate about whether the HP Way culture would drive future growth or a millstone to future growth. As you might expect, the second culture often is more responsive to short term changes in stock price. And these companies tend to be more volatile, hitting higher highs, but sometimes hitting lower lows. The first culture tends to stick with longer term plans. Sometimes the stock market punishes them for a long time when there are not great quarterly results, but also moderates upturns when there is a good quarter. That's not surprising since the goal of this company is to have the higher performing employees lift the lower performers, and therefore moderately lifting the average performance, while the second approach keeps trying to raise average performance by dumping low performers, but then doesn't have long term continuity in its workforce. So, "Choose wisely".

David Coleman

January 7th, 2016

Victoria,

Thanks, I am new at this and should have done a search first, in that I am sure someone else asked a similar question.  Thanks for the links!

David Coleman

January 7th, 2016

Victoria,

Thanks, I am new at this and should have done a search first, in that I am sure someone else asked a similar question.  Thanks for the links!

Andrew Lockley

January 7th, 2016

A rule of thumb I use is that the advisory board should (together) have half the equity of the lowest-vested co-founder. This assumes they join on day 1. Personally, I prefer using ordinary stock with no vesting. If you use vesting, it has to be hugely front loaded, as almost all the risk is borne in the first few months of work. A

Wade Eyerly CEO, co-founder at Beacon

January 7th, 2016

.25% early on. Vesting over 4 years with a 1 year cliff. .1% later. Same other terms. 4 years with a cliff at 1. This is very standard and this isn't the place to be innovative. Sent from my iPhone

David Coleman

January 7th, 2016

Chris,  did not see your # but glad to call after 2:00. Sent you a LinkedIN request to connect, and maybe you can get me your # that way?

Van, thanks for the Badass Advisor link, looks interesting.

Wade, thanks for the formula. What does a 1 year cliff mean?

Jerry,  I looked at your site, and the document, not sure it is what I need right now.