Understanding Startup Advisor Agreements
A startup advisor is someone who knows the market and can help you avoid any potential pitfalls, manage talent, find investors, and more when it comes to launching your new product. While there are plenty of pros and cons when it comes to hiring a startup advisor, one thing that will only strengthen your relationship is implementing an advisor agreement into your business plan.
An advisor agreement is a legal document that merely shows your advisor that you’re serious about heeding their professional advice and protecting your new business as you enter into the unknown. Not only does it help formalize your relationship, but it also helps both parties understand what’s expected of them by clearly defining any details that could otherwise become murky as your business starts to grow.
Why Startups Need an Advisor Agreement
Think of your startup’s advisor agreement as the foundation of your professional relationship with your advisor, a roadmap for both parties to adhere to. Your advisor is there to fill in any gaps and help you see the bigger picture of your business, and an agreement is the perfect way to get the ball rolling.
An official advisor agreement solidifies things so you can focus on helping your business grow and succeed, as well as provide you with peace of mind on the following:
Clarity for Both Parties
There’s nothing more frustrating than starting a project with unclear roles and responsibilities. An advisor agreement is a great way to define expectations for both parties. You value your advisor’s professional opinion, and they’re dedicating their time and resources to helping you succeed. Don’t muddle through anything or try to figure it out as you go – get it down on paper from the start!
Protection for Your Startup
An advisor agreement can also help protect your startup from any potential disputes or disagreements between you and your advisor. Drafting a formal agreement (especially with the help of legal counsel) not only protects your business, it helps protect all parties involved. Questions regarding any disagreements won’t prove to be detrimental to your startup since your agreement acts as a reference point on how to navigate any troubled waters.
Rip the Band-Aid off now and discuss advisor compensation in an open, honest manner. Remember, this agreement is a roadmap and will serve as something you can come back to time and again. Don’t leave your advisor in the lurch on how they’re going to be paid.
Minimizing Potential Legal Implications
An advisor agreement can be a great form of risk management. While it’s important to protect your startup from any interpersonal disputes, it’s just as important to protect it from legal ones as well. Keep in mind any clauses that you deem important to your startup’s future. They’ll be essential to include and define in your agreement document.
What Is Included in an Advisor Agreement?
Just how nitty gritty does an advisor agreement need to be? Yes, it’s a roadmap, but what exactly needs to be included in the document itself?
While the agreement will need to be drafted to fit your specific startup’s needs, there are several items that should always be included in your advisor agreement:
Roles and Responsibilities
Help save you and your advisor from any potential headaches or growing pains down the road by defining things like:
- Advisor involvement or influence
- How much time the advisor can expect to spend helping your startup
- The proposed duration of the relationship
Compensation and Equity
The compensation portion of your agreement should include:
- When your advisor can expect payments to begin
- How much they’ll be paid
- The extent to which it will be distributed (i.e., shares, cash, any equity clauses, etc.).
The more clearly you can define these things upfront, the more prepared you’ll be when it comes time to invest more than just money into your startup.
Term and Termination
While it may seem counterintuitive to outline the duration and potential termination of your startup advisor, having a sound exit strategy is critical to your business’s success. Including this in your advisor agreement helps all parties involved understand how to proceed should things not work out as expected.
Again, the point of your advisor agreement is to protect your startup, especially when it comes to your business’s deliverables, intellectual property, equity distribution, and more. Be sure to clearly outline and define what’s confidential to your startup (like trade secrets, intellectual property ownership, etc.) so that you can confidently move forward.
Disputes happen. Conflict is a part of business that all founders navigate. However, knowing how you’re going to resolve them before they arise will only be beneficial for you in the long run.
How are you going to resolve disagreements? Through arbitration? Mediation? Every startup is different, so be sure to find legal counsel whose opinion you trust so you can decide what option is best for you.
Non-Compete and Non-Solicit Clauses
These clauses make sure that should a dispute or termination arise between you and your advisor, they won’t run into the arms of your competitor or poach your top employees. Fortify your agreement and startup as much as possible from the get-go, and thank yourself in the long run.
Best Practices When Drafting an Advisor Agreement
Now that you know what to include to create an advisor agreement that everyone can agree on, here are some best practices that will help keep your startup chugging along smoothly:
Legal Counsel Is Your Friend
It’s important to always have a set of eagle eyes on any business agreement, and this one is no different. Seek out reliable legal counsel to go over your agreement. They’ll be able to help with:
- Flagging any potential hazards to your startup
- Providing additional advice they deem is necessary
- Making sure everyone’s on the same page by going over your agreement with you and your advisor
Make Sure It’s a Living Document
One of the best things you can do is to make sure that your agreement is a living, breathing document. Things change all the time when it comes to businesses and relationships, and being able to consult your agreement at any point and update it to fit your startup’s needs is essential.
Common Pitfalls to Avoid
Startup advisors help you avoid business pitfalls, but here are some you should definitely avoid in your advisor agreement:
The more murky or foggy your agreement is, the harder it will be to adhere to down the line. Avoid vague descriptions of responsibilities or compensation. Nothing will get you in hot water faster than keeping your startup’s business network in the dark when it comes to the important stuff (like getting paid).
This goes back to making your agreement a living document. Things may change once your startup starts making a profit, so be sure not to overcommit when it comes to things like equity or shares.
You can avoid this by creating a sound equity distribution strategy or building an equity distribution system once things get off the ground and there’s a clearer picture of what your profit margin will be.
The Bottom Line
There’s a lot of time, effort, and money that goes into creating a successful startup. It’s important to surround yourself with people you trust, including a startup advisor that can help you reach your company’s full potential.
Taking the time and effort to draft an advisor agreement will only strengthen your business and help all parties involved move forward in a clearly defined way. Seeking reliable legal counsel to help you draft a comprehensive agreement is one of the smartest ways you can make sure your startup is legitimized, protected, and ready to reach new heights.
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