What Are Advisory Board Contracts?
An advisory board contract is a written agreement delineating the rights and responsibilities of both the advisory board and your company. It usually describes the services that will be performed, compensation arrangements, interaction between the advisory board and the board of directors, minimum terms for membership , and maximum terms for membership. The advisory board agreement should specify the discretion of the advisor with respect to their service and any required confidentiality obligations. Although the advisory board agreement is not legally required, it is an important first step in formalizing the relationship between the advisory board and your company. The agreement can protect your company from misunderstandings or disputes that may arise regarding the officer and director status and the benefits that accompany these roles.
Essential Features of Advisory Board Contracts
Every advisory board contract should contain the following terms:
Roles and Responsibilities — The contract should include a section that clearly delineates the roles and responsibilities of the advisory board. Be specific. The more clear and detailed you are, the less likely you will have disputes about the advisory board’s role in the company.
Compensation — Be clear whether the advisory board member is being paid an hourly rate or a flat fee for participation on the advisory board. What is the payment schedule and method? If the member is a stockholder, make clear how stock compensation will be handled. To the extent possible, try to tie advisory board compensation to performance benchmarks. Compensation tied to successful funding or an IPO is preferable over an equity-based compensation program. If your advisory board is seeking funding, the fact that you are paying your advisory board may help you raise money (not to be confused with paying a stockholder who happens to be a director of the company, which is the basis for an action by Caremark that is familiar to most directors.).
Confidential Information — Ensure that advisory board members will not use your confidential information for their own benefit or the benefit of competitors. Require them to promptly return such information to you when they leave the board. Require them to agree not to make use of confidential information for a period of time after they leave the advisory board.
Term — Advisory board members should generally serve for a term of 1 year. You can also use the term to rotate members in and out.
How Advisory and Fiduciary Board Contracts Differ
Advisory board contracts differ from fiduciary board contracts in that fiduciary board contracts create a legally binding contractual relationship as to the fiduciary duties of board members of the company. Advisory boards, by contrast do not create any legally binding obligations either as to the advisory board itself or the individual members of the advisory board to the company. Furthermore, the advisory board has no fiduciary obligations to the company its officers, directors, employees or any other third parties.
The only purpose of an advisory board is to advise the company on certain matters as requested by the company. If the member of the advisory board is deemed to be an employee, director, or officer of the company for any period of time, then he or she will have whatever rights and duties apply to those positions as provided by the law of the state in which the company is incorporated (and the state in which the individual may live). As mentioned previously, however, the advisory board has no fiduciary obligations under the law. This means that the members of the advisory board do not owe any duties to any other department or entity of the company nor to its customers, clients, employees, shareholders or officers. The members of the advisory board have no authority to bind the company either directly or indirectly. Members of advisory boards have only two obligations: (1) to perform advisory board services according to the applicable agreement and (2) to follow directions from the company.
Advisory Board Contracts
Contracts for advisory boards can be expensive if they are customized for legal provisions, but just like any other type of contracts, you can reduce them to simple pieces. Here are four pieces of language you need and some tips on how to draft an effective advisory board contract.
- The information about the Company. This can go both in the body of the contract and in a representation section. The Company’s business activities, structure, offerings, typical clients, background, history, etc., can be included. This is especially important if you have more than one board and everyone receives your contract. Otherwise, they will only wonder what the company is all about.
- Explanation of the purpose of the advisory board, goals, expectations, description of what the board is supposed to do, and background information about the goings-on that will help keep the advisory board informed as to what is needed and expected.
- Explanation of confidentiality. This is a must. If you are disclosing intellectual property, trade secrets , or proprietary or confidential information, you need to have a confidentiality provision that protects you. NDA’s aren’t enough.
- The legal language. Use it, don’t try to get around it, do what it says.
- Photos. As you’ve heard: A picture is worth a thousand words. So do it. Have a professional photographer take photos of the board members, and use them in your promotional materials, newsletters, social media posts, etc.
- A new contract. If you have not done it yet, sign a new contract with every advisory board member you have now. Don’t rely on any old language you have used before. Be thorough. Have a good article listing all of the legal items you’ll need for an advisory board. Make sure you have everything you need.
- If you have to do it, use plain English. We all know that contracts can be pretty complex. They have to be. But this doesn’t mean that you have to use overly complex words and phrases. Use plain English, avoid long sentences; rights and obligations aren’t that difficult to describe.
Legal Issues and Compliance with Advisory Board Contracts
A legal advisory board contract must comply with all applicable laws. State laws differ on the legal duties of directors and advisors, and the inclusion of advisory board members may require compensation to be paid or directors’ and officers’ liability policies to be expanded to cover the additional directors. The concerns may be different depending upon the circumstances of the organization using an advisory board, which might include a for-profit company (public or private), a tax-exempt organization or a governmental entity.
When determining whether the functions and activities performed by the advisory board will constitute "directing" or will be performed by "directors," consideration should be given to the organization’s structure and governance and whether any advice provided by the advisory board is advice that must be provided by a "director" to qualify as a director. For example, a community health center that has a medical director may have physicians as advisory board members to provide direction to the medical director but does not give advisory board members any responsibilities or authority that would constitute management of the center, such as approving the center’s budget or hiring or firing any employees. Thus, individuals serving on the advisory board likely would not be considered directors.
Depending upon the state agency overseeing the organization, there also may be statutory law considerations, such as considering whether reimbursement under federal health care programs will be at risk if there are financial incentives to advisory board members who are high prescribers of drugs or high orderers of services. Financially interested individuals should not serve on an advisory board as long as there is any possibility of them exercising significant influence over decisions on purchasing or reimbursable procedures provided by the organization, or else they might be considered "principals" subject to the federal anti-kickback statute.
Best Practices for Advisory Board Contracts
Once an advisory board contract is executed, the real work of managing that contract begins. Here are some best practices for making sure your advisory board contracts remain aligned with your business objectives and continue to incentivize the board members.
First, be sure to keep the contract front and center as your team discusses ongoing roles, responsibilities, and compensations of advisory board members.
Next, you should revisit and review any written conflict rules from time to time to consider how those rules have been followed in practice. For example, if a contract contains a provision allowing the advisory board member to serve on another board of directors, who has actually followed that contract and done so? Is it important that the advisory board member serve on this other board?
Also, if companies ask advisory board members to waive certain immunities given to directors in a for-profit corporation, it is considered a best practice to keep a log of those waivers and any related conversations so that it can be used as evidence of the advisory board member’s actual knowledge and experience with those risks . This ensures the advisory board member has a clear understanding of what responsibilities he or she is assuming by agreeing to serve on the advisory board.
Remember that the value of your advisory board contracts will be impacted by your ability to communicate regularly with advisory board members regarding their performance and value. Having regular meetings with advisory board members will also ensure you understand their expectations.
If it happens that an advisory board member is actually underperforming (for example, not attending meetings on a regular basis, never giving substantive feedback, or failing to attend periodic in-person meetings), it is advisable to document when and how that advisory board member underperforms. You should also inform the advisory board member of their underperformance, and give them a chance to address those concerns before terminating the contract.