EMPLOYMENT AGREEMENT

Exhibit 10.17

EMPLOYMENT AGREEMENT

           AGREEMENT dated January 21, 2004 between ALLIANCE FINANCIAL CORPORATION, having a principal place of business at 120 Madison Street, Syracuse, Onondaga County, New York, the “Employer”, and JOHN H. WATT JR., residing at 42 Monroe Avenue, Pittsford, Monroe County, New York, the “Employee”, as follows:

           1.     The Employer employs the Employee, and the Employee accepts employment upon the terms and conditions of this agreement.

           2.     The term of this agreement shall be effective as of October 6, 2003 and shall terminate on October 6, 2005 unless extended by mutual agreement of the Employer and the Employee.

           3.     The Employer shall pay to the Employee for all services rendered a salary of $150,000.00 for the calendar year 2004, payable in equal bi-weekly installments. Salary payments shall be subject to withholding and other applicable taxes.

           4.     The Employee shall serve as the president of an as yet unformed subsidiary of Alliance Financial Corporation devoted to banking and non-banking acquisitions and mergers, merchant banking and investment opportunities, shall be in charge of the operation of said subsidiary, and shall have full authority and responsibility, subject to the general direction, approval and control of the Employer’s Board of Directors, for formulating policies and administering the subsidiary in all respects. The Employee may be assigned other senior management roles. The Employee will report directly to the Chairman and Chief Executive Officer of Alliance Financial Corporation and will be appointed a senior vice president of Affiance Financial Corporation.

           5.     The Employee shall devote his entire time and attention to the Employer’s business. During the term of the agreement, the Employee shall not engage in any other business activity, regardless of whether it is pursued for gain or profit However, the Employee may invest his assets in other companies so long as they do not require the Employee’s services in the operation of their affairs.

           6.     Relative to confidential information and trade secrets belonging to the Employer, the Employer and the Employee agree as follows:

a.

During the term of this agreement, the Employee may have access to, and become familiar with, various trade secrets and confidential information belonging to the Employer. The Employee acknowledges that such confidential information and trade secrets are owned, and shall continue to be owned, solely by the Employer. During the term of his employment and for six months thereafter, if employment terminates without cause, or for twelve months thereafter, if such employment terminates for cause, the Employee agrees not to use, communicate, reveal or otherwise make available such information for any purpose whatsoever, or to divulge such information to any person, partnership, corporation or entity other than the Employer or persons expressly designated by the Employer, unless the Employee is compelled to disclose such information by judicial process.

b.

For a period of six months after this agreement has been terminated without cause, or for twelve months after this agreement has been terminated for cause, regardless of whether the termination is initiated by the Employer or the Employee, the Employee agrees that he will not, directly or indirectly, solicit any person, company, firm or corporation who is or was a customer of the Employer during a period of three years prior to the termination of the Employee’s employment or who was solicited by the Employee during his period of employment. The Employee agrees not to solicit such customers on behalf of himself or any other person, firm, company or corporation.

c.

The Employee agrees that for a period of six months after the termination of his employment without cause, or for twelve

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months after the termination of his employment for cause, he will not accept employment with a competitor of the Employer, or enter into competition with the Employer, either by himself or through any entity owned or managed in whole or in part by the Employee within the State of New York excepting the New York City metropolitan statistical area.

d.

The Employee acknowledges that compliance with this paragraph is necessary to protect the Employer’s business and good will and that a breach of the clauses contained herein may irreparably and continually damage Employer, and that an award of money damages may not be adequate to compensate for such harm. Consequently, the Employee agrees that in the event he intentionally breaches or threatens to breach any of these covenants, the Employer shall be entitled to both a preliminary or permanent injunction in order to prevent the continuation of such harm and money damages, insofar as they can be determined, including, without limitation, all reasonable costs and attorneys’ fees incurred by the Employer in enforcing the provisions of this agreement. Nothing in this agreement, however, shall prohibit the Employer from also pursuing any other remedy.

           7.     The Employer has the right to terminate this agreement at any time for cause or without cause. The Employee may, without cause, terminate this agreement by giving sixty days’ written notice to the Employer. In such event, the Employee, in the discretion of the Employer, shall continue to render his services and shall be paid his regular compensation up to the date of termination.

           8.     The Employer shall provide, and the Employee shall be entitled to receive, the employee benefits provided to all employees on the same terms and conditions, including health insurance benefits. In addition to the above benefits, the Employee shall be entitled to receive from the Employer, and the Employer shall provide to the Employee the following:

a.