Advisors may be critical to the success of a new firm. They may provide advice, support, and important connections. While advisers are meant to assist your firm, there are several legal requirements that should not be disregarded. As with employing any employee or consultant, certain agreements must be in place, and frequent legal hazards should be avoided.
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Pre-Relationship Discussions
Are you just getting started talking with a possible advisor? This sometimes necessitates disclosing some extremely “secret sauce” information. While you want to be able to trust your adviser, having a non-disclosure agreement (“NDA”) in place may help create the right private tone.
If you are looking for an adviser that sits on many advisory boards or is prominent in the startup community, you may have a difficult time convincing them to sign an NDA. Because your advising agreement (see below) will almost always include a secrecy clause, an NDA should only be utilised at the start.
Compensation
It is uncommon for most organisations that hire consultants to compensate them in anything other than stock. This is significantly simpler to conduct in a company with shares than than an LLC (but can nonetheless be done with an LLC by offering what is called Profit Interest that is akin to employee stock options).
The normal equity range is between.1% and 2% and is defined by a variety of variables. Three of the most important components in this equation are 1) the advisor’s time commitment to the organisation, 2) the advisor’s profile, and 3) connections to other individuals (money, PR or recruiting). Each of these can significantly increase the company’s value. It is not unusual to have consultants who play many responsibilities.
Expectations Must Be Clearly Defined
Defining the relationship clearly, as with any other relationship in your business or startup, helps to avoid problems. The most important aspect of this is probably understanding what you are getting from the advisor. While it may seem childish, write down what is expected of the adviser, such as 1) monthly meetings, 2) email availability, 3) anticipated connections, 4) fundraising assistance, and so on. If you have difficulty explaining these issues to your adviser, you may have difficulty communicating with them in general, or you may get disappointed when they fail to meet unrealistic expectations. It occurs on a regular basis.
The Advisor Contract
An advisory agreement is comparable to an independent contractor arrangement in many ways. In reality, you should put a phrase in the agreement declaring that you are an independent contractor. This clearly states that the adviser is NOT an employee.
You should include a confidentiality provision in the agreement. This is a common clause that should not be negotiated. An “invention assignment” provision, which assigns to the business any work product developed by the adviser for the firm, is another usual clause. Customer lists, designs, code, possible investor lists, and contact information are some examples. This may be a debatable subject, and the phrasing may need to be tweaked somewhat, but this is a standard provision that should not be removed from the document.
Advisory Agreement Sample Document
Although amicable, active advisors have a propensity to object to terms in the advising agreement. They have been schooled to do so as astute businesspeople. Do not be frightened to retaliate. These measures are in place to safeguard your business if the connection fails. It is OK to modify the agreement to meet the interests of both parties, but make sure you know what you are doing