By Marc Ernaga, Partner –

Advisors can play an important role in the development of startups and early-stage companies. These individuals often bring experience, industry knowledge, and networks to help guide startups through their growth phases. Whether they are seasoned entrepreneurs, experts in specific fields, or investors with a track record of success, advisors contribute insights that can shape a startup’s strategy and operational decisions.

Typically, the relationship between a startup and an advisor is documented through a straightforward advisor agreement. I have reviewed several of these agreements in recent months, and it appears that they are becoming more concise and standardized, which is a good thing.

At their core, advisor agreements are fairly simple documents. They primarily address two key aspects: the services the advisor is expected to provide and compensation (often through a small slice of company equity). Additionally, these agreements usually cover essential legal housekeeping matters, like intellectual property (IP) ownership and confidentiality.

While it’s easy to focus solely on the services and compensation, it’s important for advisors to recognize that there are nuances throughout the entire agreement. Advisors should take the time to read the entire document carefully, as seemingly minor details can have significant implications—small nuances can have significant implications, including issues like indemnification.*

*For a deep dive on indemnification in advisor agreements, see our previous post here.

Below, I’ve outlined key terms and concepts to consider when reviewing an advisor agreement:

1. Scope of Services

What It Is: Early in the document, most advisor agreements will outline the specific services the advisor will provide. Often, the language used in company-favorable drafts is quite general, providing that the advisor will be responsible for consulting and advising as requested by the company and not much more.

Considerations: While the agreement can typically be terminated at any time (meaning the advisor is never compelled to provide services they don’t want to), it’s important for the advisor to ensure that the scope is clearly defined to align expectations. Specifically defining the services helps avoid misunderstandings about responsibilities. I often recommend inserting guardrails around how the services are provided. This can include:

• The maximum number of hours the advisor will commit per month.
• Availability during specific business hours.
• Specifying any required frequency of meetings or check-ins.

2. Compensation Structure

What It Is: Every advisor agreement will have a section that specifies how the advisor will be compensated, whether through cash, equity, or a combination of both.

Considerations: At the early stage of startups, equity is the predominant form of compensation for advisors, especially when cash flow is tight. Advisors should evaluate the fairness of the compensation package and the vesting schedule for any equity grants. Typically, early-stage grants range from 0.1% to 0.5% of the company’s fully diluted capital, depending on the advisor’s experience and stature. The standard vesting period is over two years, which usually aligns with the period where advisor contributions coincide with the typical startup growth trajectory.

Since advisors are seldom retained after a sale, I have been successful in negotiating single-trigger vesting acceleration by highlighting that fairness associated with such acceleration if the advisor’s services contributed to a quick exit. Additionally, it makes sense to require that the equity grant be made at the next board meeting to ensure favorable pricing.

3. Intellectual Property (IP) Ownership

What It Is: Most advisor agreements contain a section stating that the company owns all works of authorship, technology, inventions and intellectual property created by the advisor in connection with providing their services or in connection with any of the company’s confidential information.

Considerations: Advisors should carefully review this clause to understand the extent of the IP they are assigning to the company. It’s crucial to ensure that any personal projects or work for other companies are clearly distinguished from the inventions assigned to the company. Advisors should take proactive steps to document their independent work and avoid any overlap with their advisory role. This can include keeping separate records of their projects and ensuring that no confidential information from the company is utilized in their external work. Clear communication with the company about the boundaries of their contributions can help prevent any misunderstandings or potential disputes regarding IP rights.

4. Confidentiality

What It Is: Most advisor agreements impose fairly standard confidentiality obligations on the advisor with respect to the company’s proprietary information.

Considerations: Typically, these confidentiality obligations do not specify an end date for the obligations. Advisors might consider requesting that the obligations terminate at a specific point after the advisory relationship has ended. When proposing an end date, it is common to land on 1, 3, or 5 years after termination, depending on the nature of the confidential information (with exceptions made for trade secrets, where the obligation typically survives the life of the trade secret). Additionally, it’s important to ensure the agreement includes standard carve-outs from confidentiality, such as information that is in the public domain or situations where the company is no longer protecting certain confidential information. Advisors should also seek provisions that allow for disclosing confidential information if compelled by law.

5. Non-Solicitation

What It Is: Most advisor agreements contain a section that prevents the advisor from soliciting any employees or consultants of the company during the term of the agreement and usually for a year or two after the relationship has ended.

Considerations: Advisors should be aware of this restriction and assess whether it will affect their ability to pursue other projects or engagements. Additionally, advisors can negotiate carve-outs that allow them to make general advertisements or communications in any media not specifically targeted at the employees or consultants of the company. They should also seek the ability to use search firms that are not specifically targeting the company.

6. Termination

What It Is: Most advisor agreements provide that either party may terminate the agreement for any reason at any time.

Considerations: As alluded to earlier, these agreements are intended to be frictionless. This can be a bit frustrating for advisors, especially since they typically have a two-year vesting schedule. If the agreement is terminated before that period, the advisor won’t receive full vesting. Advisors with significant leverage might negotiate terms that allow for termination before full vesting only if they materially breach the agreement or engage in other bad acts. In my experience, this is a term that many companies are reluctant to change, and sometimes the easy termination can ultimately benefit the advisor.

7. Indemnification

What It Is: An indemnification clause protects individuals from financial loss or liability resulting from claims or legal actions arising from their role or actions taken on behalf of the company. However, most advisor agreement forms do not contain an indemnification provision.

Considerations: It is important that advisors do not take on unnecessary risks when assuming these roles with companies. I recommend that all my advisors have a clear and comprehensive indemnification provision in their agreements. For more detailed information about this subject, read my separate blog post dedicated to indemnification considerations [linked here].

The Takeaways

All advisors should carefully review their agreements. While it’s natural to focus on the services you’ll provide and how you’ll be compensated, it’s crucial to recognize how the many nuances can significantly impact your risks and responsibilities. We’ve highlighted a few important elements to consider, but keep in mind that agreements may differ, and not all situations are the same.

Have Questions About Your Advisor Agreement? Feel free to reach out for further guidance. 

Reach Out to Marc Ernaga

• Email: marc.ernaga@momentuslegal.com
• Phone: 650.391.5367
• LinkedIn: @MarcErnaga