Protecting Your Business Relationships

As a California business attorney with over 13 years of experience, I’ve seen countless advisory relationships go south due to poorly drafted agreements. Whether you’re a startup looking to formalize your relationship with a strategic advisor or an established company seeking specialized expertise, a well-crafted advisory agreement is essential to protect both parties.

Why You Need a Proper California Advisory Agreement

Advisory relationships are common in the California business ecosystem, particularly in tech and startup environments. These relationships bring valuable expertise to your company, but without proper documentation, they can lead to misunderstandings, intellectual property disputes, and even legal liability.

California law has specific requirements that make advisory agreements particularly important in our state. As a business owner, you need to clearly establish the independent contractor status of your advisors, protect your confidential information, and secure proper assignment of intellectual property rights.

Key Components of a California Advisory Agreement

1. Relationship Definition and Services

The foundation of any advisory agreement is a clear definition of the relationship and the services to be provided. California courts look closely at the actual nature of working relationships, so your agreement should explicitly define the advisor as an independent contractor and outline specific services they’ll provide.

The agreement should specify:

• Scope of advisory services
• Time commitment expectations
• Service delivery location (remote, hybrid, or on-site)
• Performance standards

Having practiced in California for many years, I’ve seen how important it is to be explicit about these terms. Courts apply a multi-factor test when determining whether someone is truly an independent contractor, and proper documentation is your first line of defense.

2. Compensation Structure

Advisory compensation can take multiple forms in California, each with different legal and tax implications. Your agreement should clearly address:

For cash compensation:

• Payment amount and frequency
• Expense reimbursement policies
• Tax treatment (1099 reporting requirements)

For equity compensation:

• Type and amount of equity granted
• Vesting schedule
• Exercise terms
• Tax considerations (particularly important in California)

The trend I’ve observed in California advisory relationships has shifted toward hybrid compensation models that include both cash and equity components, allowing companies to conserve cash while still attracting top advisory talent.

3. Term and Termination Provisions

California favors employment mobility, so termination provisions are particularly important. Your agreement should address:

• Initial term length (fixed or indefinite)
• Auto-renewal provisions
• Notice periods for termination
• Termination for cause versus convenience
• Post-termination obligations

I recommend including reasonable notice periods that give both parties adequate time to adjust. California courts may scrutinize overly restrictive termination provisions, particularly if they appear to limit an advisor’s future opportunities.

4. Confidentiality and IP Protection

California has strict laws governing both confidentiality and intellectual property rights. Given the state’s unique combination of trade secret protection under the California Uniform Trade Secrets Act and strong employee mobility policies, your advisory agreement must carefully balance these interests.

For confidentiality:

• Define confidential information comprehensively
• Include reasonable protection obligations
• Address exceptions to confidentiality
• Include provisions for return or destruction of confidential materials

For IP protection:

• Include strong work-for-hire language
• Secure proper IP assignment provisions
• Address moral rights waivers
• Consider pre-existing IP carve-outs when appropriate

California’s strong public policy favoring employee mobility can make broad non-compete provisions unenforceable. However, properly drafted confidentiality and IP provisions can still protect your most valuable assets.

5. Dispute Resolution

Given California’s litigation landscape, thoughtful dispute resolution provisions are critical. Consider whether court proceedings, arbitration, or a combined approach best serves your interests:

• Court proceedings offer transparency but can be public and costly
• Arbitration provides confidentiality but may limit appeal rights
• Mediation followed by arbitration offers a balanced approach

I always recommend specifying venue and jurisdiction in California, particularly in the county where your business operates, to avoid potential disputes over where any legal proceedings should take place.

California-Specific Legal Considerations

Advisory agreements in California must navigate several state-specific legal considerations:

California Labor Code: California has strict rules regarding worker classification. Misclassifying an advisor who is functionally an employee can lead to significant penalties, back taxes, and wage claims.

California’s Prohibition on Non-Competes: California Business & Professions Code Section 16600 generally renders non-compete agreements unenforceable. Your advisory agreement should avoid broad restrictions on an advisor’s future activities.

Intellectual Property Assignment: California Labor Code Section 2870 limits an employer’s ability to claim ownership of an employee’s inventions developed entirely on their own time without using employer resources. Similar principles can apply to advisors, so IP assignment provisions must be carefully drafted.

California Privacy Laws: With the California Consumer Privacy Act (CCPA) and California Privacy Rights Act (CPRA), businesses must consider data privacy implications when advisors handle consumer personal information.

Over the years, I’ve refined my approach to advisory agreements to account for these California-specific issues while still providing robust protection for my clients’ business interests.

Using the California Advisory Agreement Generator

My California Advisory Agreement Generator helps you create a customized agreement tailored to your specific business relationship. The tool walks you through all critical decisions and generates a professional agreement that addresses California’s unique legal requirements.

To get the most value:

1. Provide accurate information about both parties
2. Carefully consider the services description and time commitment
3. Select the appropriate compensation structure
4. Choose termination provisions that make sense for your business relationship
5. Consider whether standard or enhanced confidentiality provisions better serve your needs
6. Select appropriate IP assignment terms based on your relationship
7. Choose dispute resolution methods aligned with your business priorities

After generating your agreement, review it carefully to ensure it accurately reflects your intentions. While this generator creates a solid starting point, complex advisory relationships may benefit from additional customization.

FAQ: California Advisory Agreements

How is an advisor different from an employee or independent contractor?

In California, advisors typically function as independent contractors with a more limited engagement than traditional consultants. While employees work under the company’s direct control and are entitled to various benefits and protections under California labor laws, advisors usually maintain their independence, often work with multiple companies simultaneously, and provide strategic guidance rather than day-to-day operational support. The distinction matters because misclassification can lead to significant legal exposure under California’s strict employment laws.

Can I restrict my advisor from working with competitors in California?

California strongly disfavors restrictions on professional mobility. While you generally cannot prevent an advisor from working with competitors, you can protect your business through well-crafted confidentiality provisions that prevent the advisor from using or disclosing your proprietary information. The key is focusing on protecting your sensitive information rather than trying to restrict the advisor’s future activities, which courts are unlikely to enforce.

How should equity compensation be structured for advisors in California?

Equity compensation for California advisors typically involves either stock options or restricted stock units with a vesting schedule tied to the advisory relationship. The agreement should carefully address vesting acceleration on termination, exercise periods, and potential tax implications. California securities laws may also apply to equity grants, so it’s important to ensure compliance with both federal and state requirements. I generally recommend a vesting schedule that aligns with the expected duration of the advisory relationship.

What happens if my advisor creates intellectual property during our engagement?

Without a proper agreement, ownership of intellectual property created by an advisor could be contested. A well-drafted California advisory agreement will include both work-for-hire language and assignment provisions to ensure the company obtains ownership of relevant intellectual property. However, California Labor Code Section 2870 principles may come into play, potentially limiting your ability to claim ownership of inventions developed entirely on the advisor’s own time without using your resources, which is why specificity about the scope of services is crucial.

Do I need to file my advisory agreement with any California agency?

Generally, advisory agreements don’t need to be filed with state agencies. However, if the advisor receives equity compensation, you may need to comply with federal and state securities laws, which could involve filings with the Securities and Exchange Commission and potentially the California Department of Financial Protection and Innovation. Additionally, if your company is publicly traded, certain advisory relationships may need to be disclosed in your securities filings.

Creating a proper advisory agreement is an investment in your business’s future. The time spent clarifying expectations and legal rights now can prevent costly disputes later. For situations involving complex advisory relationships or significant equity compensation, I recommend scheduling a consultation to discuss your specific needs.