Advising

What makes a good advisory agreement?

Ryan Jackson Founder at Paid

March 5th, 2013

So for some context, I recently started advising for a friend's company.  As things became more official, the founder sent me an agreement to be on the advisory board for some options.  It was then that I realized I had no clue what to look out for as an advisor.

As an example, I know some people (myself) have qualms about signing NDAs.  I don't particularly like to restrict my ability to execute on ideas when someone is simply asking for feedback.  While advising is a bit more "official," I found some similar language in the agreement.

So, what makes a good advisory agreement?  What are things that should be in there?  What are things that shouldn't be?

Andrew Koper Senior Software Engineer at Ford Motor Company

March 5th, 2013

It has always been somewhat informal with me.  I've networked aggressively, found other entrepreneurs with a)  experience that would be valuable to me and b) I connected with on a friendship level, asked them if they would be on my board of advisers, and said that would entail me asking them questions and maybe getting together sometimes to talk.

There's always been a trust component to it.  I think "somebody's going to steal my great idea" is a beginning entrepreneur's mistake.  It just takes too many thousands of hours of work and too many years to get a company going and people have their own commitments. 

Also, good advisers spend some time with their advisees and give them important, valuable and "sensitive" information - the kind of info lawyers charge for.  Not-good advisors don't spent much time with their advisees or give them valuable information.

L. Marshall-Smith

March 5th, 2013

I am a graduate of the Founder Institute.  Founder Institute has developed an Advisory Board Member agreement template.  It includes the following clauses:

Services, Compensation, Expenses, Term and Termination, Independent Contractor Clause, and an entire section titled Nondisclosure of Confidential Information which contains the following sub clauses:  Agreement Not to Disclose, Definition of Confidential Information, No Rights Granted, Assignment of Intellectual Property, Duty to Assist, No Conflicts, Miscellaneous.

 It also includes a Schedule A that defines performance levels  (Standard, Strategic, and Expert), services expected for each performance level, as well as recommended equity compensation at three levels of a company's development:  idea stage, start up stage, and growth stage.

Scott McIntyre Director@University of Toledo; Chief Architect@Commonwealth; President@CfPA.org; Chair@Phabriq Development

March 5th, 2013

Here's a link to the document that Ms. Marshall-Smith was referring to: fi.co/contents/fast

should help. 

Anica John Co-Founder at Muse Design Lab

March 5th, 2013

Depending on how involved you are in their day to day operations, it might make sense to ask to be indemnified for any claims arising from your position as an advisor. Sometimes litigants add advisory board members to the list of defendants to maximize their chances of recovering damages. The indemnification protects you from that sort of liability.

Scott McIntyre Director@University of Toledo; Chief Architect@Commonwealth; President@CfPA.org; Chair@Phabriq Development

March 5th, 2013

Options seem to be commonly offered as incentive. Depending on the stage of business your client is at, and depending on the nature of your advisement service (ie, marketing, financing, sales), you may not want the risk of the value of those options, and should have something different to counter. I have had advisors seek monthly stipends in addition to liquid equity, to some that just do it because they believe in my mission, have time on their hands, and want to help. I prefer the latter, but they're prized friendships and come with time.

But really, you may just as well look to your own needs, financially. What's your time worth? A wise man (named Wiseman, actually) once advised me for free (because I was marrying his daughter) as a gift. He said what I've actually adopted into a project planning tool, basically a form of Reverse Engineering. It would go like this: set your goal, and if it's financial (I've learned mine typically are not), set the date for your goal to be realized, then factor your living costs along the way, and account for a reasonable compounded savings/investment portfolio, and eventually divide the remainder by the number of hours you think are optimal to work in a given day/week/month/year, and there's your hourly rate. Of course, you also need to reconcile it with the going range of rates for a particular discipline, but you get the picture. If you're as good as it gets, charge what you want, but expect people to shop around too. 

Let me know where you go. 

Labhesh Patel Chief Data Scientist at Abzooba Inc.

March 7th, 2013

I think this boils down to how much leverage the respective parties have. 

In the past, I have signed up advisors where I had them sign a NDA as well as advisors where I didn't feel that a NDA was necessary.  In general,  as an advisor, you want to push back on signing NDAs as much as possible
What I really want to establish clear expectations on, is the amount of involvement. This can range from an hour a week to an hour a month and again, depends on what you are looking for. Typically, in an early stage start up, the advisory involvement might be "top-heavy"- more involvement earlier in and the time investment decreases as time goes on.

Also, goes without saying, the options should have a vesting cycle. I was comfortable with having my advisors vest their options within 24 months instead of the standard 48 months for employees.
As an advisor, you might also be able to justify accelerated vesting of options upon certain trigger events such as key introductions.

Labhesh 

Etienne Bruin Partner & CTO, Monk Development, Inc.

March 11th, 2013

The advisory board is a team of people who care deeply about the success of a company.  Fun, food, team building make for great meetings.  NDAs, compensation and options formalize the expectations and IMHO blurs the line with a formal board of directors.

Keep it simple.  It's like having mentors. 

Jill

March 20th, 2013

I just came across this tool that might help : http://fi.co/contents/fast They have a table listed that breaks it down for you and might be used as guidelines but I agree with what everyone has said so far. Bottom line - it depends on what's worth it to you and the company.