At the time a startup compensates an advisor with incentive equity, it is best practice to also have a written agreement typically called an “Advisor Agreement” or “Advisor Letter” in place to protect the startup. The Advisor Agreement also has the side benefit of managing expectations on both sides.
A typical Advisor Agreement defines the startup-advisor relationship. For example, the Advisor Agreement will typically set forth the advisor’s incentive equity amount and type (i.e. options or restricted stock grant) and a vesting schedule. (Note that the Advisor Agreement is not a substitute for the Stock Option Agreement or Stock Grant Agreement.) More importantly, the Advisor Agreement should include, or have attached, various terms and conditions.
The protection of confidential information should be addressed. To be useful as an advisor, they will have to know all about your startup including some or all of the confidential information and/or technology you may have. Advisors aren’t in the business of divulging confidential information, but worst case scenario you will have an agreement in place and set the expectation that your startup’s confidential information is not to be disclosed or used for any other purpose. This type of clause is usually non-negotiable, except maybe for the duration of the obligation. Meaning, if a potential advisor will not agree to the confidential information clause, it’s time to let that ship sail and find a new advisor.
Another essential issue relates to the assignment of intellectual property. While all startup employees should be party to an inventions assignment, the inventions assignment provision in an Advisor Agreement should likely be ‘narrower’ than a typical employee’s inventions assignment clause. And in some cases, it may be deleted.