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What Legal Documents Does a Startup Need Before Bringing On Its First Advisor?

·4 min read

  • Startup Advisors
  • Equity Grants

Before a US startup brings on its first advisor, it usually needs a written advisor agreement, documented board approval of any equity, a current valuation to price advisor options, clear intellectual-property and confidentiality terms, and a compliant way to issue the securities. A handshake and a Slack message are not enough: an advisor is a service provider receiving compensation, and often equity, so the relationship should be documented like any other grant of company value. The two most common problems are undocumented equity promises that resurface during a financing, and advisor-created work product whose ownership was never assigned to the company.

Educational information only. This is not legal, tax, accounting, or investment advice.

The short answer

A typical first-advisor packet includes:

  1. An advisor agreement defining scope, term, time commitment, compensation, and termination.
  2. IP assignment and confidentiality terms (often built into the advisor agreement).
  3. Board approval of any equity granted to the advisor.
  4. A 409A valuation to set the exercise price if the advisor receives options.
  5. A stock option or restricted stock agreement issued under the company's equity incentive plan.
  6. A securities-law compliance path for the equity grant.
  7. Updated cap-table records, plus an 83(b) election reminder if restricted stock or early exercise is involved.

1. The advisor agreement

The core document sets expectations and protects both sides. Many startups use a standardized template such as the Founder / Advisor Standard Template (FAST) agreement published by the Founder Institute, but the terms should still be reviewed for the specific relationship. Cover at least: scope of services and time commitment; term and termination (including what happens to unvested equity); compensation; independent-contractor status; and disclosure of competing commitments.

2. IP assignment and confidentiality

If an advisor contributes ideas, designs, code, or introductions, the company should own the resulting work product. Include a present assignment of inventions ("hereby assigns") and confidentiality obligations. Respect applicable state carve-outs, such as California Labor Code §2870, which limits assignment of inventions developed entirely on the person's own time without company resources.

3. Board approval of advisor equity

Advisor equity is almost always stock or options, and issuing it is a corporate action. The board sets the terms and consideration under Delaware law and approves grants by resolution or written consent (8 Del. C. §157, §152). Record the recipient, share count, exercise price, vesting (advisor vesting is often 1-2 years, sometimes without a cliff), and grant date.

4. The 409A valuation for advisor options

Section 409A treats a discounted option as deferred compensation, which can trigger income inclusion plus an additional 20% tax and interest for the recipient (IRC §409A; 26 CFR §1.409A-1(b)(5)). Private companies commonly rely on an independent 409A valuation obtained within the prior 12 months, which creates a presumption the price is reasonable. Note that ISOs are employee-only, so an advisor's options will generally be non-qualified stock options (NSOs) (IRC §422(a)(2)).

5. Issuing the equity under the plan

Grant the advisor's equity under the company's equity incentive plan using a stock option or restricted stock agreement and grant notice. Confirm the option pool has enough reserved, unallocated shares first; otherwise increase it with board and stockholder approval.

6. Securities-law compliance

Advisor equity is a securities offering and needs an exemption. Rule 701 is the primary federal exemption for compensatory equity by private companies, including grants to consultants and advisors who meet its conditions; it carries annual limits and additional disclosure once 12-month sales exceed a threshold the SEC raised to $10 million in 2018 (17 CFR §230.701; SEC Release 33-10520). State (blue sky) filings may also apply.

7. Cap-table records and the 83(b) reminder

Update capitalization records after signature. If the advisor receives restricted stock or early-exercises options, an 83(b) election must be filed with the IRS within 30 days of the transfer; the deadline generally cannot be cured (IRC §83(b); IRS Rev. Proc. 2012-29).

When to bring in a lawyer

Involve counsel when the advisor is a competitor's employee or a public-company officer, when the equity is unusually large, when the advisor is outside the US, when work product touches core IP or regulated data, or when a financing is near. Documenting the first advisor well is far cheaper than reconstructing undocumented promises later.

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