Many startups get independent and experienced advice from an advisory board. Board advisors are typically experienced hands who can help the board of directors fulfill its duties without getting bogged down by the details of company oversight. Retaining board advisors is a great idea for many companies, but before establishing your own advisory board, keep in mind these five key legal issues.
- Reducing Legal Liability
Some potential advisors won’t take a role on an advisory board that exposes them to any legal liability. While your regular directors have fiduciary duties (e.g., the duties of care and loyalty), one of the upsides for being on an advisory board is that the advisors don’t have those fiduciary duties. However, advisors risk having fiduciary duties imposed upon them if they become quasi- (or de facto) directors. This happens when your advisor claims the title of director and performs the duties of a director. Basically, if you walk like a director and talk like a director, then you may have the duties of a director. This liability is easy for an advisor to avoid: just never, ever hold yourself out to be a director. See how easy that is?
There are also federal securities law issues, which we can save for another day.
- Keeping it All in the Family
An advisory board is not very useful (to say the least!) if your advisors undercut your company. Confidentiality agreements can be key. You should also make sure that your advisors don’t have conflicts of interest or that, if they do, any conflicts are disclosed and minimized. The agreements you reach with your advisors should make it clear what their roles are and deal with conflicts of interest. It is a judgment call to determine whether a conflicted advisor adds enough value to outweigh the complications of managing a relationship that could result in value-reducing events.
- IP Concerns
You need to plan ahead or else members on your advisory board will probably own any intellectual property they create in their duties as an advisor. You can avoid these issues by ensuring each advisor expressly assigns to you all intellectual property that he or she creates within the scope of his or her duties to your company or from using your company’s confidential or proprietary information. You should be mindful of risks that may be posed by advisors who have prior experience working with competitors. For example, a competitor may sue you for theft of their IP if your advisor received proprietary information or trade secrets while advising or working for them.
- Avoid Waiving the Privilege
The attorney-client privilege ensures that confidential communications between a client and his or her attorney remain confidential. For better or for worse, the advisors do not count as the client, and their presence can destroy (yes, that’s a legal term) the attorney-client privilege. Don’t include your advisory board in the meetings, conference calls, or written communication (or any other communications!) with your lawyers if you want to maintain the privilege.
- Payment structures
Some advisors will give you their services for free while others will want payment. The issues with compensating advisors are substantially similar to other compensation issues for start-ups (e.g., cash or equity, vesting schedules, etc.). One consideration specific to advisors is that their stated role at the company is purely to advise, not to govern or manage. An advisor with voting rights as a shareholder then takes on both roles, which you might or might not want.