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So you’re a go-to-market leader with several years under your belt and you’re interested in advising companies. 

Or, perhaps you’re an early stage B2B startup with a dozen customers in need of guidance on how to scale your team and business. 

Advising is one of the best ways to inject expertise into an organization without breaking the bank - however, navigating the company-advisor relationship can be challenging without understanding the different parts of the role. 

Quick disclaimer: This is not legal advice. We are sharing our own best practices of what we’ve seen work in the marketplace. Please consult with your legal counsel before executing any agreement. Also, while this article is written for the GTM Advisor, companies can use the same toolkit and principles for other advisor types.

We worked with Phocus Law to simplify the process with the Stage 2 Capital Advisor Agreement for Go-To-Market. This template standardizes terms so you and your counterpart can focus on the elements that matter most.

Let’s dive in to better understand the agreement.

Section 1: Services

The Services section defines the scope of work, expectations, and responsibilities during the advisor engagement. When doing so, be sure to pay particular attention to defining:

a) Cadence of meetings and touchpoints
b) Degree of hands-on work with the CEO or team
c) Degree of engagement with customers and clients. 

Work closely with your counterpart to understand the needs, challenges, and opportunities and how the advisor can help address those. We’ve also included additional considerations in Exhibit B of the template you should take into account when deciding on specific services.

Section 2: Compensation Types

Advisor compensation comes in two forms - equity or cash (you can also mix the two). The decision as to which one you accept is highly dependent on you and the company you’re talking to. 

Similar to compensation at your own job, cash and equity carry value in different ways. Cash is…well…cash. Its value is immediate, certain, and tangible. Equity gives you a stake in the company and thus, exposure of the potential upside and, at the same time, downside. 

From what we’ve seen, advisor engagements often weigh more toward equity compensation, as most are more strategic and long-term in nature. If engagements are more tactical, transactional, and hands-on, an advisor is likely given cash. To further breakdown the two: 

Equity

Most advisors receive a portion (sometimes 100%) of their compensation in equity. Understanding the specific security you’re receiving is key. While you may have heard about ISOs or Incentive Stock Options, these are granted to full-time employees and thus, are not in scope when discussing an advisor engagement. Instead, there are 2 types of equity most often given to advisors. 

1. Restricted Stock Units (RSUs): RSUs are “units” that represent a share of stock. RSUs have no strike price and are equivalent to the fair market value of the stock at time of issuance. RSUs are subject to a vesting schedule and are distributed over a period of time. From a tax perspective, that means you will need to file taxes for the value of RSUs that have vested. In the Stage 2 Capital Advisor Agreement template, you can specify the number of RSUs, vesting timeline, and vested shares per month. Conversion process, price, and other elements in the agreement defer to the company’s specific equity plan.
2. Non-Qualified Stock Options (NSOs): NSOs give you the right to purchase a number of shares at a specified price (the strike price) which is usually the current company share price. When you exercise your options, you pay the strike price of your option to buy stock. Typically, options are exercised only when the market price is above the strike price - the difference in the two being your profit. From a tax perspective, exercising options will generally expose you to ordinary income tax upon exercising as well as capital gain tax upon selling any stock that you’ve purchased. Strike price, vesting schedule, and shares are specified in the Stage 2 Capital Advisor Agreement. Other specific terms defer to the company’s equity plan.

Cash

For companies that have cash on-hand, having a portion of compensation in cash may be easier than giving up equity. Cash compensation is typically based on an estimated hourly rate. Depending on the specific role and responsibilities of the advisor, performance-based cash can also be used. That said, most early stage high growth startups are generally cash-strapped and typically find it easier to issue equity rather than cash.

Equity + Cash

We’ve also seen a mix of cash and equity used to bridge the gap. Often the cash would be a nominal base rate with the equity serving to align and capture upside. The precise quantum of cash/equity combo is negotiable and will depend on what each party is comfortable providing.

Section 2: Compensation Terms

Equity

It is important to negotiate vesting, the period over which equity gets distributed to you. Standard practice generally sees a certain number of shares vest each month of the engagement. 

You may be familiar with vesting cliffs, the grace period after which options begin to vest, in employment agreements. For advisors, cliffs less frequently used as the rationale for using a cliff (i.e., retention) is not as relevant in the advisor case. If the engagement doesn’t work out, the advisor and company can mutually agree to simply break the contract and part ways with the advisor keeping whatever equity had vested by that time.

Another aspect to consider in equity options is expiration. Most companies use a 90-day expiration period when an employee resigns, forcing the employee to convert the options to stock within that period or lose them. Employers use this as a retention strategy because the capital needed to both execute the options and pay the tax liability is often significant.

However, a similar retention strategy is rarely applicable to an advisor. Often, companies engage advisors or consultants for a particular purpose at a particular stage in the company’s development with the goal of parting ways once the engagement has been fulfilled. The typical option expiration might prevent the advisor from moving on, even when it makes sense.

To offset expiration limits in the company’s equity plan, either include an addendum specifying an extended expiration duration (10 years is typical), or amend the agreement when the consultant is no longer needed to renew with 0 additional equity or cash compensation thereby extending the time before the expiration clock starts.

Cash

Payment terms and frequency are the main items you should discuss with your counterparty. Generally, the full monthly rate is invoiced at the beginning of each month and ultimately paid at the end of each month of service. Milestones and targets should also be agreed to upfront.

Section 3: Expenses

As an advisor, you may incur some expenses during the normal course of business. If the company wants you to travel to meet their team, that could be a business expense you get reimbursed for. Be sure to align with the company on specific policies and limits. In particular, be clear on:

Section 4: Term & Termination

Establish clear expectations for the duration of the advising engagement. Our agreement template specifies a standard 14-day notification period and an expectation of non-renewal at the end of the engagement. If you and your counterparty would like to modify these terms, please be sure to reflect those decisions in this section of the agreement. Furthermore, be sure to fill in the duration of the engagement or a specific end date in Exhibit A of the template.

Section 5: Independent Contractor 

Advisors operate as independent contractors and are therefore not eligible for employee benefits, such as healthcare or retirement contributions. Please check with your local laws, as each state has precise definitions of what constitutes an independent contractor. For example, Washington State requires independent contractors to file for a Business License with the Department of Revenue, which is different from the requirements in Texas and South Carolina.

Sections 6-8: Confidentiality and IP

Working closely with a company requires you to access certain confidential information. These sections cover access, use, and ownership of confidential information and IP. Importantly, IP that you, the advisor, bring into the relationship is owned by you, but you’re giving the company rights to use and access that IP. However, work products and IP that are generated during the advisor engagement belong to the company. 

Lastly, to keep IP ownership clean, advisors should not incorporate copy-righted material or IP owned by a third party (e.g., the exact confidential formula from a former employer should not be used in an advisor engagement).

Section 9-13: Protections

We’ve standardized this language to balance protecting both parties. One section to call out though is Section 12 - Indemnity / Limit of Liability. In short, this section discusses how much financial cost either the advisor or company will be responsible for if something goes south. Often, advisors unknowingly expose themselves to unlimited liability, putting your entire network at risk for advisor equity in a startup. For the Stage 2 Capital Advisor Agreement template, we’ve protected both sides at a max payout equal to the compensation amount of the engagement. Depending on sensitivities and local policies, there might be room for negotiation regarding this Section.

So that’s it! You now know the key points to navigate an advisor agreement - and most importantly, what to discuss with the company.

Feel free to download the Stage 2 Capital Advisor Agreement for Go-To-Market template here. For practical purposes, the blank fields in the agreement and elements outlined in Exhibit A are where you should focus most of your time and energy during the negotiation. 

Good luck and go crush it!