Rather than answer this one myself, I thought I'd pop over to my friend and freelance author agent Matt Wagner. Here's what he has to say on this subject:

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Agency contracts are (or should be) pretty straightforward. In fact many agents don't use a contract at all but do a handshake deal and let the agency clause in the publishing contract govern the relationship. At the moment I am working sans contract because by and large I am working with people I know and like and who trust me, and I don't presume that they should be beholden to me if they want to work with someone else on future books. This is a relationship business after all, and if I can't sustain my relationships I should find another line of work.

When needed, I do a deal memo outlining the agent-client relationship. Here's what it looks like: I charge a 15% commission on US sales, a 20% commission on foreign rights sales (where I may use a sub-agent), and in the event the client decides to terminate our relationship while I'm working on a particular project I ask for 60 days to finish up with whatever leads I have. Plus, I reserve the right to invoice clients for copying and/or postage fees on submissions. This is all fairly standard and, I believe, fair.

Someone just sent me a contract for an agency that will go nameless here, but I was amazed to see what some agents get away with. The agent asks for a $500 from his client on signing the author-agent agreement, and further stipulates that the entire agency commission for the advance is taken from the client's first proceeds. So if you have a $20,000 advance and a $3000 signing payment, the agency would take the entire signing advance.

My advice? Never sign a contract with an agent that asks for expense money up front -- there are plenty of legitimate agents who do charge for copying and postage -- but spending hundreds of dollars up front for an agent who hasn't even submitted your proposal is a very bad idea.

And maybe I'm wrong and the practice of taking the entire commission up front is more common than I believe, but if I were an author I would avoid signing with an agent who is paid from first proceeds.

As an agent I have a fiduciary responsibility to my client, and I have an interest in ensuring that my client is paid promptly, paid correctly, and represented in all matters pertaining to the book to the best of my ability. If a book should suddenly go south, an author needs an agent who likewise won't get paid unless the problem is fixed.

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My two cents, now that you've heard from Matt: I agree completely. Agent representation should be "pay for performance" because you, as an author never really know if the agent can land you a fulfilling and worthwhile contract, and an agent can never really know whether an author can deliver printable prose at the end of the day.

It's a risk/reward equation. If I had an agent who wanted payment up front, I'd expect them to have a significantly lower percentage than the more traditional relationship.