Advisory Boards: How to Pay and How to Paper
Does your company have an advisory board or is it looking to start one? Does your company seek to attract and retain advisory board members who can give your business valuable advice? Do you want to impress venture capitalists with your professionalism, which will smooth the path towards closing your next capital raise? This article will help show you how to reach these goals.
How to Pay Advisors
Advisors generally expect compensation, and compensation should depend not only on the expectations of the advisor, but also on the advisor's level and frequency of involvement. Please note that the compensation amounts described below are just for advisors who play limited roles with your company. Cofounders, corporate board members, officers, employees and others who provide substantial services to your company will expect higher compensation and/or higher equity ownership.
If an advisor is altruistic and simply wants to mentor a growing company, or if an advisor seeks to use the advisory board for his or her own networking, then the advisor may be willing to serve just in exchange for reimbursement of any travel expenses and free meals at meetings. However, it is customary to compensate an advisor with stock options (in the case of a corporation) or profits interest (in the case of an LLC) in amounts starting at 0.25% of the company's equity, vesting over as many as three years. If you plan to use an advisor for frequent advice (e.g., monthly Board of Advisors meetings), the advisor may expect up to as much as 1% of the company's equity in addition to cash compensation, often on a monthly or quarterly basis, and reimbursement of expenses.
How to Document Advisor Relationships
When venture capital investors examine your company, you'll want to have all of your relationships appropriately documented and all of your documents in order. For an advisory board, you should have (1) board minutes or a board consent creating your advisory board, (2) an advisor agreement with each advisor (including confidentiality provisions), (3) a proprietary rights agreement with each advisor, (4) stock option or profits interest documents reflecting any equity given to advisors, together with board minutes or consents approving the grants, and (5) as all good things come to an end, termination letters reflecting the end of advisors' service to your company (whether at the end of their terms or by resignation or termination) and, if applicable, the termination of vesting of their equity.
You can ask your lawyer for a standard form for each of the documents listed above and complete them yourself to keep costs down, but all of these documents should be prepared. "Handshake" deals and self-documented deals with advisors, prepared without seeking legal advice, can be costly, as venture capitalists will expect to have nonstandard transactions cleaned up and appropriately documented before they invest. Consulting with your lawyer in real time can help you save future costs and frustration.
Christopher S. Edwards is an attorney in the corporate practice group at Reitler Kailas & Rosenblatt LLC in Manhattan. He provides counsel to a variety of companies, from start-ups to publicly traded entities, in the fields of venture capital, mergers and acquisitions, banking, securities and general corporate law. He graduated from Harvard Law School in 1998 and previously worked in several large law firms and as in-house counsel at a large financial institution.
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