Being a business owner or a leader in the corporate world entails donning many hats. Multitasking, managing and charting new courses, to name a few.
However, there certainly comes a time when the solution to a particular problem eludes you. And When you are bested by a subject that does not fall within your area of expertise, your desire to seek external help arises.
In the corporate world, this is where advisors come into the picture. Most frequently, entrepreneurs growing their startups require advisors to come on board so that they have access to the right advice at the right time. Again, this is essential for nascent businesses at a critical turning point.
Advisors can also be called upon outside the startup world, perhaps by large companies looking to achieve goals that internal teams cannot meet.
The crux here is that advisors provide flexible services and serve as the valuable sounding boards that business leaders need. Their areas of expertise are unbounded and span skills related to marketing, strategy, taxation, sales management, and so on and so forth.
Subsequently, retaining any professional for their services requires a written agreement agreeable to all parties involved. The result is what is known as an ‘advisor’s agreement’, and we outline everything it entails below and everything you need to know about advisors.
Also, we’ll share a Sample Advisor Agreement. Keep reading.
Types of Advisors and How to Approach Them
Before diving into an agreement, first look at the individuals involved: advisors themselves. Simply recognizing that you need help to achieve a particular goal is not enough. Neither is it in your best interests to approach the first advisor you come across and seal a potentially fatal deal.
It is incredibly important to understand the type of advisor your business will best benefit from and how fruitful your working relationship will be.
To begin with, analyze what type of advisor you require. For example, is it someone with an extensive network you seek who could open doors to an untapped market? Or perhaps someone armed with technical knowledge who can practically help your business in the domain required?
After having defined your needs, you can then begin your search. It is, however, strongly advised that you engage advisors on a ‘trial’ basis, perhaps for a month or two. This can help you reassess your requirements, whether they’re being met, and whether you need to change tactics.
Having said that, the most common manner of approaching an advisor includes the following steps:
1. Conducting thorough research
Looking for the right person to onboard can be like looking for a needle in a haystack. Nevertheless, it’s not uncommon for business owners to scout 20 potential advisors and move forward.
2. Making contact
After identifying possible matches, it’s important to make an impactful first impression and introduce yourself. This can be done through a clever and concise message on a professional network or through a mutual contact who can facilitate a meeting and vouch for your business.
3. Making a proposal
After the preliminary pleasantries, it is essential to move past the surface level quickly and clearly state your requirements. This could include stipulations for a trial and details about your business endeavors and goals.
4. Securing a deal
If you’ve gotten through the first three stages unscathed and are happy with the way things are going, it may be time to consider a formal agreement.
Solidifying this business relationship with your advisor would require a detailed discussion of terms and conditions and signing an advisor agreement.
The Advisor Agreement: Clauses You Need to Know
The last step in formalizing the value addition of an advisor to your business would be the advisor agreement. This legal document outlines the details of your working relationship with the said advisor and is sealed with signatures from the advisor and a company representative.
This agreement is especially beneficial when advisory services are contracted for a short period and require no obligations to hire an employee full-time.
A typical advisor agreement includes a statement of work/services and additional clauses. Some of the most critical clauses include:
1. Compensation
While startups may not have the liquid capital required to pay an advisor a salary, equity is usually the preferred alternative. Equity agreements entail giving advisors RSAs (restricted stock awards) or NSOs (nonqualified stock options), which can go up to 1% of company shares.
Recommended read: Equity Compensation for Startup Advisors: How Much to Offer?
2. Tenure and Termination
This clause details the term for which an advisor will work with your business. It is strongly advised to have a clear duration in mind, detail the terms of termination, and include possibilities for a renewal of services.
3. Confidentiality and Intellectual Property
This part of the agreement outlines an advisor's obligations toward a company. It is essentially a promise limiting outside access to and knowledge of sensitive information. This could include trade secrets, technical know-how, products, designs, etc.
4. Nature of Relationship
This is an essential clause in clearly defining an advisor's relationship to the company and the rights they hold. Advisors are neither employees nor shareholders and must be clearly defined to avoid potential disagreements.
5. Conflicts of Interest
It is critical for the advisor agreement to include a clause that specifies the duties of an advisor to a company, especially when it concerns advisors potentially working for competitors. Such situations can endanger both companies and advisors, and hence, any conflicts of interest must be disclosed.
Advisor Agreement Template
Both fledgling and established businesses alike can stand to gain from the outside perspectives of advisors when required. The basic idea is that it is essential to recognize when to stand back, let someone else come in, and simplify your work as a business owner.
Download the Advisor Agreement Template (PDF)
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