Sunday, September 1, 2013

PS On Startup Advisory Board Contracts and Compensation

StartUp Advisory Board Feedback ... and Concerns

After my recent post on Advisory Boards I had a number of conversations with entrepreneurs who agreed (for the most part!) with my comments but were wary about what they needed to do to make it happen. Especially when it came to the sort of contacts and compensation agreements I mentioned. Sounds all very well ... but a potential time sink to set up and maintain!?

(Hat tip to Vamsi Sistla for finding this cartoon - used in his blog post on mentors/advisors at startup accelerators.)

Framing the issue: Why adopt formal Advisor agreements?

My basic point was that, as a startup moves beyond its initial boot strapped phase and has raised capital beyond FF&F, the value added by Advisors obviously benefits an increasing number of external investors. As in many other areas of its activities I noted that this seems like a good time to professionalize the relationship with Advisors and give them a stake in the company's value creation too. It creates clear alignment and allows for better definition of roles. Also it is, for what of a better word, "fair" to the Advisor. 

The questions I got focused on three topics:
1. Advisor agreements
2. Advisor compensation
3. Finding Advisors 

1. Advisor Agreements

No need to over think this! Putting in place Advisor agreements is pretty easy and standard. There are two key ones:

a) Advisor Contract
Any good start up attorney will be able to provide a basic Advisor contract. By way of publicly available version I think the Founders Space Standard AB Agreement is short and to the point while covering the key issues - which include confidentiality, non compete and expenses. It includes an Appendix covering time commitment and duties. This can be expanded and/or made more specific based on dialog between the entrepreneur the Advisor around where the Advisor can contribute most and how much time they have. The Appendix also summarizes the stock compensation terms. However these need to be separately set out and signed off in a specific stock option agreement.
b) Stock Option Agreement
The options summary in the Advisor agreement must be fleshed out in a detailed and specific and separate option agreement. This is pretty standard stuff and mostly all legal boiler plate. Again there are sample open source stock option docs you can use, and I am sure your lawyer can run one off again in a matter of minutes - so this is very simple. Here is an Orrick version: Sample Stock Option Agreement. Personally I like the idea of a one year agreement/compensation package. It allows for a meaningful but not overly onerous duration of relationship and crucially allows the CEO to re-up, or not, her/his Advisors on a time frame that makes sense for a fast moving business. (For a more general lawerly discussion of the key issues facing entrepreneurs when it comes to issuing options the "Ten Tips" guide from Walker Corporate Law is a good read.)

2. Advisor compensation

Compensating startup Advisors is of course a non cash equity business and a matter of agreement related to the magnitude of the expected benefit to the company. As such it should be tied to specific deliverables and with the options being granted on appointment and vesting over time. 

In my prior post I noted that early stage full Board members (who are not founders/VCs) typically get 1% of equity through options vesting over 3-4 years. An Advisory Board member will have less time commitment and no fiduciary responsibility. So, logically, should be paid less. How much less? I said that 0.10%/year as a start point with more depending on contribution seemed fair. That wasn't deemed especially helpful by those looking for some more specific guidance as it relates to level of commitment, services provided and the stage of their company. Filling that gap I think the Founders Institute has a very useful grid for Advisor stock compensation contained in their own model Advisor agreement: Founders Institute Advisor agreement and compensation scaleNote that they recommend a 2 year agreement so, for example their "standard performance" level at their definition of "start up stage" is 0.10%/year ... thankfully aligned with my prior math!

3. Finding Advisors

All of the above is academic unless you actually have a slate of Advisors to work with but I will deal with that separately in due course! So, I was asked, all this technical stuff is well and great but ... how do I find them! Yes, that's a big one. Big enough in fact to defer to another post.