The word advisor has an ambivalent connotation in the startup world.
On the one hand, there is certainly an overabundance of advisors overall and it seems that there are more people claiming mentor status than actually accomplished businessmen. On the other hand, getting savvy individuals on board, whether they’re successful entrepreneurs, well-connected investors or extremely talented professionals, is often crucial to taking a business to another level.
Advisors are neither employees nor contractors and, given their exceptional status, they preserve particularly high level of independence and are usually compensated in equity only. Therefore, the challenge arises when it comes to formalizing the relationship between advisors and the company.
The Founder Institute and Seedcamp have released well-drafted templates which can be reviewed to see how an agreement with an advisor should look like – see links at the end of this post. Therefore, we want to focus on a few contentious issues we have to often address:
- Difference in the European and American approaches to advisor contracts
- Contracting investors as advisors
- Non-solicit, non-compete, IP assignment and confidentiality clauses
- Scope and performance indicators in advisor agreements
Differences in the European and American Approaches
Based on our experience, it seems like European startups are less often procuring the assistance of advisors in general. It seems that the function of an advisor still haven’t crystalized yet and is being confused with the role of a consultant. Consequently, even if the term advisor is used, the agreements look more like consulting agreements than anything else, the compensation is often paid both in cash and equity and, typically for Europe, the equity percentage expectations are higher. Founder Institute did a great job of compiling proposed equity compensation levels for US advisors. We copy it below for your reference as it may serve as a powerful point of reference when negotiating equity compensation with European advisors.
|Idea Stage||Startup Stage||Growth Stage|
|Standard: Monthly Meetings||0.25%||0.20%||0.15%|
|Strategic: Add Recruiting||0.50%||0.40%||0.30%|
|Expert: Add Contacts & Projects||1.00%||0.80%||0.60%|
Source: Founder Institute
Investor as Advisor
It is not uncommon to see investors wanting to assume a more active advisor role in a startup. These are perfectly understandable arrangements, however, a few issues should be taken into consideration. First, vesting should be utilized to ensure actual assistance. Otherwise, engagement as an advisor may amount to a clever maneuver to get more shares while not doing more work that would have done been anyway. On the other hand, putting your investor-advisor on vesting may lead to awkward situations if you decide to terminate the advisor agreement, since you basically end up taking shares away from a powerful stakeholder who may disagree with your assessment of his performance as an advisor.
The Problematic Clause
Our clients often have concerns around whether or not to include certain types of clauses in advisory agreements, especially non-solicit, confidentiality, IP assignment and non-compete clauses. Often it is the result of a semi-celebrity status of an advisor who is not to be insulted by the idea that he may steal employees or leak confidential information. In practice, the first three clauses should be absolutely customary. Experienced advisors know what the market standard is and usually don’t expect special treatment. In the situation where an advisor routinely creates IP for various companies it is absolutely crucial to corrrectly adjust the scope of the IP assignment clause to avoid potential conflicts with third parties.
The non-compete clause may be the hardest to push through. It is problematic since advisors are typically advising multiple companies in the same industry given their own scope of expertise. However, depending on each advisor’s involvement and situation it is not unheard of to have a non-compete clause included in advisor agreement.
Expectations – Scope of the advisor agreement
We have seen three ways of contractually establishing a company’s expectations with regards to advisors’ performance:
- Using Key Performance Indicators (KPIs)
- Providing for a detailed scope of obligations including minimum dedicated time
- By merely describing the advisor’s envisioned role in general terms.
KPIs are rare and indeed may seem a bit awkward for an advisory agreement. However, it actually sometimes make sense to establish identifiable thresholds to qualify for equity issuance and avoid potential discord on termination later on.
The most common paradox we see is meticulous drafting of the scope of obligations while maintaining a customary few days’ notice no-cause termination right for both parties. There is no reason to describe the scope of obligations if the agreement is easily terminable without a necessary basis for such decision, even if the advisor does fulfill his or her obligations.
Therefore, we would recommend either sticking with the third option, i.e. briefly establishing the general duties of the advisor, or setting forth clear KPIs compatible with the vesting schedule without the right for premature termination barring material breach of the advisor agreement.
There are multiple good templates available online for advisor agreements. Nevertheless, every situation demands certain adjustments depending on the identity of the parties and type of company. We recommend familiarizing European advisors with American agreements and compensation standards as they have proven effective in the most robust market in the world. Additional attention should be given to advisor agreements with investors in the light of problems that may arise from such a bi-level relationship. Veteran advisors should understand the need to include such safety clauses as IP assignment, non-solicit and confidential information clause, while non-competes should be discussed individually. Finally, for the sake of practicality we advise keeping the agreement fair and simple and avoiding detailed descriptions of advisor’s obligations if no cause termination is permitted.
- Founder Institute: Founder/Advisor Standard Template (“FAST”)
- Seed Summit: Advisor Agreement Template
About the Author
Tytus Cytowski is a widely respected legal expert in matters related to venture capital and corporate transactions between Europe and the USA, including flip transactions, seed financing, venture financing and M&A. Tytus received his law degrees from Harvard Law School (LLM 2005) and Warsaw University (JD 2003) in Poland. He founded Cytowski & Partners in 2009 to focus on the representation of investors, entrepreneurs and high tech companies. He can be reached here.