This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.
Try Not To Jeopardize Relationships
Up-front communication of a director or advisor’s term of service and duties helps to foster a healthy relationship and facilitate a potential termination without jeopardizing relationships. For start-ups, relationships can be an incredibly valuable asset, and although a businessperson’s term of service to the company ends, he/she may remain a resource for years to come. Importantly, the director or advisor’s tenure should be productive and the rapport built with one another should remain productive in the future.
Assigning duties can be tricky. Because directors have fiduciary duties, additional explicit duties do not normally need to be defined, although some companies have explicit director agreements. For advisors, I recommended that companies avoid too much specificity, but nail down the length of service and the option terms, include an indemnification provision, and provide for confidentiality in a written advisor agreement, the term of which may be terminated at any time. When expectations are clear, everyone is happier.
Ultimately, equity-based compensation should motivate independent directors and advisors by offering them a favorable, but fair, vehicle through which they can profit. Favorable conditions, such as a short vesting schedule and an extended post-termination exercise period, promotes director and advisor interest and keeps them driven. If used properly, a stock option or other equity incentive plan solves a number of problems at once: it helps preserve cash, it serves as a powerful tool for recruiting talent, and it offers a compensation structure that aligns incentives with interests and promotes dedication to growth and success. Establishing and administering a plan is not always easy, but with these five rules of thumb and a solid compensation strategy, everyone can succeed.