Advisory Board Agreements
Members of a company`s board of directors have fiduciary duties to shareholders and may be held liable for any breach of those obligations. Advisors to the Board of Directors, on the other hand, are not elected by shareholders and do not have the authority to make business decisions for the Corporation. As a result, they have no fiduciary duty to the company`s shareholders under company law solely on the basis of their advisory role. Contractors must deal carefully with consultants. Just because someone has a good reputation or expertise doesn`t mean they`re a good consultant or there`s the necessary level of good chemistry. The Founder Institute recommends that an entrepreneur work with a potential advisor for at least a month and spend at least 8 hours together before discussing the FAST agreement. The FAST agreement includes a three-month “cliff” in the acquisition of equity that allows an unproductive advisory relationship to be terminated without the need to allocate equity in the first three months. But before you think about the number of shares or options to issue an advisor, there are a number of points to settle. What role does the consultant play? Will it provide marketing information or advice at the board level? How long should she spend each month and for how long? What is it paid? Establishing these points will help determine the right amount of fairness and ensure that everyone is on the same page in terms of expectations and responsibilities. This article and the accompanying article on board advisors both deal with a corporate governance regime in which the capabilities of the formal board of directors are complemented by persons appointed as observers or advisors. These persons do not have the fiduciary duties of the elected members of the board of directors. Board observers are usually a phenomenon of venture capital-backed companies and represent the interests of these investors.
In contrast, the use of board advisors is increasingly becoming a feature of board meetings across the spectrum, including narrow-held family businesses, venture capital or privately funded companies, and publicly traded companies. In many cases, investors in companies funded by venture capital or private equity firms have the contractual right to appoint board observers to attend meetings and receive information available to directors. A Council observer represents the interests of the appointing investor and, therefore, from the perspective of the entity, the Council observer is a mandatory requirement determined by the rights and needs of investors. For this reason, while observers may provide the board and management with valuable advice and perspectives similar to those of advisors, they may face greater skepticism or hostility from directors or management because they primarily protect the group of investors they represent. The FAST agreement recommends standard equity grants for a single consultant. It is not uncommon for a tech start-up to have a 5% share pool allocated to a group of strategic advisors or an advisory board. Like an observer of the board of directors, an advisor to the board should not be considered a trustee of the corporation solely because of his or her role as an advisor. The imposition of fiduciary duties on advisers to the board of directors would be largely incompatible with the corporate law basis of fiduciary duties. The company`s fiduciary duties derive from the concepts of trust – a party that manages an asset for the benefit of another party is bound by standards of diligence and fairness in managing assets for the beneficiary. Thus, because their activities and affairs are managed by or under the direction of the board of directors, the directors of a corporation owe fiduciary duties to shareholders. However, in order to ensure that consultants can effectively support the Board of Directors or management, the Corporation must provide copies of all communications, minutes, reports and other documents that the Corporation makes available to the members of the Board (or Committee) at the time such documents and documents are made available to the members or to the Board or Committee.
However, the agreement must be clear whether or not the Company may, in its sole discretion, provide information that it deems necessary or appropriate. Consultants usually serve according to the will of the board of directors or management of the company. However, defining a term encourages advanced planning and helps keep the business and consultant on the same page as the minimum expected exposure. It also provides the company with a graceful way to end the relationship if the consultant doesn`t add value. Even if a clause is set out in the agreement, it must clearly state that the consultant is acting in accordance with the will of the board of directors or management and that the contract may be terminated at any time by either party, with or without giving reasons. Because of his or her participation in meetings of the Board of Directors and access to documents, an advisor to the Board of Directors runs the risk of being named a defendant in shareholder lawsuits or other actions affecting the Company. This is especially true for start-ups, where an advisor often has a higher net worth than the business itself (and can therefore be considered a “deep pocket” by potential litigants). In a broader sense, the company should in turn consider the potential conflicts of interest of its advisors or potential advisors. In general, a company may not want to hire a consultant who also serves or consults with a competitor or company in a related sector. These circumstances create the conditions for possible cross-discussions on protected information or trade secrets, which can lead to disputes over intellectual property rights. For this reason, the agreement should specify whether the consultant`s role in the company is exclusive, and the consultant should declare and guarantee that his obligations under the advisory board agreement do not conflict with an agreement with another company or company.
For practical and legal reasons, a company should define its relationship with the members of its advisory board in a written agreement or policy. While there is no legal obligation to have specific documents, clearly worded agreements and other documents can help avoid misunderstandings and confusion about consultants` roles, limit their liability, and protect the company`s interests, including confidentiality and intellectual property rights. Board consultants are individuals with business experience or other relevant expertise who advise a company`s directors and management, most often on management and strategy issues. Advisors to the Board of Directors are appointed voluntarily and sit at the discretion of the Board or management. Board advisors attend board meetings and can advise the directors and management of the corporation, but do not have the real power to make business decisions. Since advisors are not elected and do not have the authority to make business decisions, they do not have fiduciary duties to the Corporation`s shareholders because of their advisory role. This is a significant difference from the directors of the corporation, who have fiduciary duties and are subject to liability arising from a breach of those obligations. This distinction may be a contributing factor to the increasing use of advisory boards that allow consultants to contribute to the management and strategic planning of the company without the associated duties (and liability risks) as directors of the company. .