MSN Law Office

Advisory Boards
Columbus, Ohio

Entity Formation and  Structuring
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Advisory Boards
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Formation and Governance

PRACTICE AREAS

Advisory Boards

Startups and small businesses may choose to include an advisory board in their business structure to bring in individuals with relevant experience, expertise or even connections without necessarily hiring those individuals as employees. In this context, advisors are typically appointed by the company’s founders and serve at their pleasure. The advisors generally do not have any authority to make decisions or bind the company. Instead, their role is limited to providing advice and making recommendations to management. 

There should be a written agreement between the company and its advisors outlining each advisor’s role and responsibilities and the anticipated time commitment. The agreement should also limit the advisor’s potential liability, protect the company’s confidential information, and address how conflicts of interest will be handled. The agreement should also consider whether the advisor will be in a position to potentially create new intellectual property for the company and how the rights in such IP will be assigned to the company. 

While some advisors may not expect to receive any compensation for their services, it is not unusual to at least reimburse advisors for reasonable expenses and to offer some equity in the company in exchange for their services. When equity is offered, it often comes with numerous restrictions. For example, the equity award may be subject to vesting restrictions, may not include any voting rights, may be repurchased by the company if the relationship ends or forfeited if the advisor breaches the advisory agreement, and may not be sold or transferred except back to the company. These types of equity awards can even be offered in LLCs in the form of units or profits interests. 

Of course, offering equity (or any other compensation for that matter) to advisors should be discussed with both legal counsel and your tax advisor because doing so can raise wide ranging tax and securities law issues. Although advisors are not “purchasing” equity in your company, federal and state securities laws can still apply to the mere issuance of equity interests. Under federal law, small businesses often rely on Rule 701 of the Securities Act, which provides an exemption for equity issued as compensation (among other reasons). 

Our business attorneys can help small businesses with forming advisory boards, drafting advisory board member agreements, determining how much, if any, equity to offer, and making sure that the business does so without losing control of the company or running afoul of securities laws.