What is an Advisory Board Agreement?
An advisory board agreement is a legal contract between a startup company and its advisory board members. The advisory board agreement lays the ground rules and sets out the specific terms of cooperation between an advisory board and the company. Like other kinds of agreements, it protects the interests of both parties and helps ensure future success.
The most distinguishing feature of an advisory board agreement is that it’s used with a startup’s "advisory board." Advisory boards are distinct from a company’s board of directors. While a board of directors has specific duties and has "fiduciary" obligations to protect the interests of the company and its shareholders , advisory board members generally do not have such formal duties. Advisory board members provide only informal advice to the CEO or executive management group.
For this reason, advisory board agreements are not the same as board member agreements, which are covered in the agreement templates for Board Members Agreements. A board member agreement may be used with a board of directors or a board of advisors.
Key Components of an Advisory Board Agreement
Advisory Board Member. An advisory board agreement should include the name of the advisory board member(s), and their address.
Purpose of Advisory Board. A purpose must be stated in the advisory board agreement.
Term. The term of the advisory board must be clearly set forth in the advisory board agreement. It is usually a two (2) year or three (3) year period, and automatically terminates on the date of the Company’s next annual meeting of shareholders.
Termination Rights. The advisory board member or Company must have the right to terminate the advisory board relationship.
Meetings. The advisory board must meet at least twice per year to discuss matters of business related to the Company.
Confidential Information. Confidentiality/non-disclosure of intellectual property and proprietary information provisions must be incorporated in an advisory board agreement.
Compensation Terms. Compensation for advisory board members may be hourly, flat fee, annual retainer or a flat payment per advisory board meeting.
Expense Reimbursement. Travel and expense reimbursement terms must be included in the advisory board agreement.
Independent Contractor. The advisory board member is an independent contractor of the Company.
Indemnification and Liability Limitations. Indemnification and liability limitation provisions must be incorporated in an advisory board agreement.
Advantages of Establishing an Advisory Board Agreement
Companies are constantly looking for ways to develop and implement strategic goals. Many times, the results have been disappointing. Common complaints we hear involve things such as lack of implementation and failure to achieve long-term results, both of which are often due to poor communication. There is indeed an answer to this problem, and it is called an advisory board agreement.
By using an advisory board agreement, members of a strategic advisory board can be assured that their time and input will be valued. In addition, the company also benefits because its strategic plan will more likely be implemented. No longer will strategic goals be meaningless phrases on a poster hanging on the wall. The mission statement, goals, objectives and action items will be in writing, and members of the board will work together with the management team to fully understand and implement these items.
An added benefit of having an advisory board agreement is that it will likely result in members having larger networks. This naturally occurs as the board members interact with each other and with the company on a regular basis. As members become better connected, the company will also likely become better connected. As a result, there will be an even greater chance that the company will achieve its strategic goals.
How to Create an Effective Advisory Board Agreement
Representations, Covenants, and Tailored Customization
Once the company has determined the generalities of its advisory board program and invited individuals to join, it is time to formalize the relationship with a written agreement. The key provisions in any such agreement are as follows:
• Description of duties
• Compensation
• Confidentiality
• Ownership/assignment of work product
• Term and termination
• Representations of advisors
• Confidentiality obligations of advisor
• Indemnification of advisor
• Non-circumvention
• Non-competition and non-solicit and
• Tailored provisions
Each type of provision should be tailored to fit the particular situation and, in some cases, a template agreement can probably be used, but it is important to confirm with legal counsel that the agreement adequately reflects the parties’ respective rights and obligations.
Common Challenges and Tips for Effective Implementation
Advisory boards, like anything else that draws together a group of individuals to advance a common purpose such as the success of a startup company, can have their share of challenges. At the outset of a relationship with an advisory board or committee, it is important to honestly assess what the particular challenges will be. Examples may include availability and commitment, expected scope of participation, an unwieldy number of members, conflict of interest, or a need to permit reimbursement of expenses.
Availability and Commitment
Too frequently, startups will complain that their advisors are never available or unresponsive to their needs or requests. With all of the demands on the limited time of entrepreneurs, sometimes advisors need to be reminded or coaxed to step up with the availability and participation that is expected of them. In addition, it may be unclear to the advisor what is expected of him or her in terms of commitment, attendance, contributions to meetings, and accessibility to team members. It is important for these expectations to be memorialized in the advisory board agreement, and should it become necessary to deal with inconsistencies in this regard, the agreement will help guide that process and set appropriate limitations.
Scope of Participation
In addition to examining availability and commitment, sometimes challenges arise simply because the scope of the role of the advisory board member is not well-defined. For example, the board may make recommendations to the management team, which may or may not be implemented, or may release certain information to the board without adequately protecting potentially sensitive information , which later becomes known to third parties or competitors of the company when not intended.
Number of Participants
Another challenge facing management teams is that of the number of participants on the advisory board. Many companies formulate their board of advisors based on who they know, or based on the individual or individuals whom they envision will be the main users of the advisory board. However, many companies have multiple lines of business, geographical locations, product lines or divisions. In some cases, this leads to an advisory board made up of a greater number of individuals than actually needed for the purposes of establishing the desired level of participation. In these cases, it may be better to separate the organization of the advisory board by business line, division or area of expertise, and perhaps appoint members of a larger advisory board to participate on subcommittees responsible for particular areas, or group a smaller number of members into functional committees.
Conflict of Interest
Finally, many companies run afoul of potential conflicts of interest that arise when an advisor sits on more than one board. For example, you may find a situation where an advisor sits both on the technical steering committee of your open source initiative, and also on the technical steering committee of a potential competitor’s open source initiative. Sometimes there are more subtle conflicts, such as competitive relationships between unrelated businesses, or previous relationships in unrelated businesses that now seem to conflict with the business of the advisory company. In these cases, the agreements need to articulate expectations and limitations in a manner that protects the company and its intellectual property, while not being overly burdensome on the advisor.
Legal Aspects to Consider for Advisory Board Agreements
When developing an advisory board agreement, a number of legal considerations must also be addressed. Below are some key considerations:
Confidentiality Considerations
The company should clearly indicate what information should be considered confidential. Generally, the following items can be considered confidential: information that is not in the public domain, information that has been marked or identified as confidential, and information on non-public companies (and possibly public companies to the extent the information is confidential and not public). The obligations of confidentiality may extend beyond the term of the advisory agreement, but one can also consider time periods such as the earlier of when the information becomes part of the public domain or the third anniversary of its disclosure.
Ensuring the confidentiality of information disclosed by the advisory board and preventing the inadvertent disclosure of such information is key for companies. Unless otherwise indicated, any information provided by the company (whether written or oral) regarding the company’s business, finances, products, services, customers, research, development and trade secrets (the "Company Information") should be considered "confidential". In addition to other important standard provisions, the company should include acceptable disclosures in order to provide guidance for the members of the advisory board as to the permissible disclosures of Company Information. Generally, a member of an advisory board can provide information to their immediate family and affiliates (and to their professional advisers), but, should not provide this information to companies/organizations that are competitors of the company; individuals, companies or organizations that have a business or competitive relationship with the company; or individuals, companies or organizations that are prospective collaborators or investors.
Intellectual Property Considerations
General. One of the other important considerations when drafting an advisory agreement is what happens to the company’s intellectual property rights as it relates to innovations created by members or participants in the advisory board. Sometimes, companies would like to have their advisory board members agree that any invention described in a journal article, patent application, or any other intellectual property right will be assigned to the company, and that the members will not submit and may not participate in any outside consulting for the purpose of competing with the company. Members may want to have language included that allows them to obtain consultant status with clients that are engaged in drug or device development, and are conducting or supporting clinical trials that may be similar to the studies that are being conducted at the company. Participants may also want to include a provision that permits the company to review publications at least ninety days prior to submission of the proposed publication for publication so that the company can ensure that no proprietary information was included in the proposed publication. Participants may also want to include a clause that does not allow the company to review a publication arising from any work done under the advisory board contract if the scope of work does not involve innovative activities. Finally, participants may consider inserting a provision that allows the company to review the intellectual property rights if there has been no activity under the advisory board contract for a specified period of time (e.g., six months).
Non-Compete Clauses. Advisory board agreements may also include non-compete clauses that last for a specified period of time after the termination of the agreement. However, generally, non-compete covenants are disfavored by many courts, and courts may refuse to enforce them (or limit their scope) if they are deemed overly broad or unreasonable. Thus, consider including a geographical scope to the non-compete clause, specifying the duration of the non-compete clause (generally three to five years is considered reasonable), and providing advance warning of non-compliance with the provisions of the agreement.
Real-Life Examples of Advisory Board Agreements
To illustrate the elements of an advisory board agreement, the following examples provide a fictional case study of a hypothetical company creating an advisory board. The first example illustrates the elements of an advisory board that is typically more effective, while the second will show what happens inside of an advisory board that is set up to fail.
Good Example:
XYZ Drone Technologies, Inc. (XYZ) is a start-up incorporated in the state of Wisconsin with two founders and several employees who are trying to raise money to get their business going. They realize that they need access to potential partners, customers and sources of investment. However, they also realize that they do not have the money to full-time salaries for these advisors. Therefore, they decide to create an advisory board comprised of potential customers, partners and investors—and to offer them the use of the company’s products and equity in the company in exchange for their time. When they start drafting their advisory board agreement, they consider the following: 1. Purpose. The purpose of the advisory board is to assist the company in developing relationships with customers, and to provide feedback about the company’s technologies and products, and to make introductions to target customers, partners, and investors. They plan to meet quarterly via phone for one hour, and potentially for face-to-face meetings once or twice each year. 2. Term: They decide that the first term should be for 12 months, with renewal provisions at the end of each term for another 12 months if all parties agree (unless one party chooses not to renew, in which case the agreement will terminate). 3. Compensation: They decide to offer Pool B stock options in the company. They will award 50,000 options for each board member, with a 25% vesting schedule over four years. They plan to use a $1,000,000 valuation to calculate the grant price, based on a third-party valuation conducted by a CPA. They also decide that members must pay the exercise price for the options within two years after leaving the board and that they will forfeit all unvested options if they leave the board before all of the shares have vested. They also agree that they will not exercise the options if the company has not conducted its initial public offering (IPO) . 4. Time commitment: They decide that the members will be expected to spend five hours before each board meeting, and two hours per month on the phone with their mentor-mentee pairings. They will have in-person meetings twice a year, for which the member will pay all travel and lodging expenses. 5. Exclusivity. They ask that board members dedicate at least 10% of their time to the company, and that they will not serve on any other competitor boards, and will return any options they have already been granted if they do so. 6. Exclusivity: While they would like board members to dedicate 10% of their time to the company, they also realize that most board members will not be able to do so. So, the provision has no teeth. 7. Termination: They agree that either party may terminate the board agreement for any reason, and that if a member attempts to sell or transfer the options, the company may terminate the agreement immediately.
Bad Example:
ABC Drone Manufacturing Company, Inc. (ABC) has been in the market for several years. The company has been growing steadily, and it wants to continue its success into the future. The company has created a strategic plan and has identified a number of target customer bases that they plan to approach. However, they are realistic and know that they have several years before they can develop enough traction to go public. However, they cannot afford to pay fees for an advisory board to assist in their efforts, so they rush into number of advisory board arrangements with leading venture capitalists, customers and partners, and do not start out with an advisory board agreement that clearly lays out the objectives. Several of these board members start competing companies that threaten ABC’s market. Other members simply do not have the time to take calls, but are on the company website stating that they are members of the board of ABC. Compounding this issue are several of their board members who cause these issues by trying to recruit ABC’s employees for their own companies. Yet, these board members do not have written confidentiality agreements, and so the employees leave. Finally, after taking all of these problems into account, ABC decides that they want to terminate the board, but find that their written agreements do not specify a termination process.