Reprinted from Under 30 CEO. See original article here.
Advisors can be a crucial additional to any company. The right advisor can provide necessary guidance to accelerate your company in critical areas. An advisor, however, is like any other employee or contractor. Their role, compensation and legal relationship should be clearly spelled out. Due to the amicable circumstances surrounding many advisors, companies often fail to appropriately address these issues, leading to disappointment and frustration.
Clearing Defining The Advisor’s Role and Compensation
Before seeking advisors you should know what your company needs and what you need from an advisor. Be realistic about what your advisor can do for your company. Just like any business relationship, clearly defining the expectations of the parties is crucial for meeting your goals. The greatest problems with advisors arise when the company does not define the advisor’s role. There is no standard template to follow because each advisor’s contributions to a company can be so different.
The next step is determine how to compensate your advisor. For most companies that bring on advisors, it is rare to pay an them with anything except ownership. Time is really what you are buying from your advisor with your company’s ownership. It takes time to meet, answer emails, and even make connections. Before you make an advisory role official you should sit down with your advisor and draw out the expectations. Will the advisor make their time available for monthly meetings, emails, making connections or help with fundraising? If you have trouble communicating these items to your advisor, you may have trouble communicating in general with them. It happens often.
Not all time is created equal. Some advisors’ time is worth more than others. The standard equity range for advisors, however, falls between 0.1% – 2%. Four of the most dominant factors in this equation are 1) time commitment to the company, 2) profile of the advisor, 3) contacts to other people (money, PR or recruiting) and 4) the life stage of your company.
The Advisory Agreement
Once the details have been hammered out, you should seal the deal with your advisor by executing advisory and stock agreements. An advisory agreement is very similar to an independent contractor agreement since that is the legal nature of the advisory relationship.
View and Download a Free Advisory Agreement Document
You should make sure you have confidentiality and invention assignment provisions baked into the agreement (the document linked above does). These clauses protect your company’s intellectual property as they would with any other employee or contractor. The invention assignment clause assigns to the company all work 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, but rarely should you allow advisors to not assign this kind of intellectual property to the company.
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.
The type of equity that each advisor receives depends on a number of factors. In some circumstances it may make sense for your advisor to purchase restricted stock. In other circumstances it may make sense for you to grant stock options to your advisor. This is a determination you should make with a lawyer. You should also probably have an equity incentive plan in place.
In all cases, however, you should put vesting on the advisor’s stock like you would anyone else in your company. You want your advisor invested in your company for the long haul. Vesting is one mechanism to incentivize them to do so.
Advisors can be a tremendous asset to your company. Having the right game plan when choosing an advisor and defining their role will more than likely result in your company reaping the full benefits of an advisor.