Advisory Agreements: Purpose, Benefits, Drawbacks, and Key Inclusions

As an entrepreneur in the early stages of forming a company, you might consider seeking the expertise of an Advisor to help with business operations and growth. However, it is important you understand your rights and obligations when establishing a relationship with an Advisor. This article looks at what an Advisory Agreement is, when it should be used, and how to write one.

What is an Advisor?

Advisors typically provide expertise on a specific aspect of a business in exchange for compensation, such as equity. 

Consultants and Advisors are not the same. Advisors typically work with a company with the aim of helping it to achieve its long-term goals. In contrast, Consultants tend to be hired by companies in instances where they lack certain expertise or in response to specific challenges. 

What is an Advisory Agreement?

An Advisory Agreement is a legal contract outlining the terms and conditions of a formal relationship between a company and its Advisor(s). It is a written agreement that sets out the obligations of both sides. For example, the agreement will cover how they will work together and what the Advisor will bring to the business. This can be encouraged through a Startup Advisory Share Agreement, whereby the advisor receives equity in the company for services - as the company’s success is the advisor’s success. 

While there is no legal requirement for a company to enter into an Advisory Agreement, it is highly recommended, especially for start-ups. Advisory agreements provide a clear and defined scope of work for the Advisor. This can help ensure that the Advisor’s expertise is utilised effectively.

The agreement also helps to establish the boundaries of the relationship, including the expectations of both parties and the services to be provided. For example, the Advisor has a duty to provide advice and maintain confidentiality in respect of the company’s proprietary materials including commercial sensitive information. It also specifies the payment for their services, which can be in cash, equity or both.

Benefits of an Advisory Agreement	Common Pitfalls and Mistakes
Advisory Agreements can help to avoid any misunderstandings or disagreements between the parties. Parties can refer to the agreement if any issues arise during the course of the relationship	Startup Advisors are usually classified as independent contractors, but this may not always be the case and can change over time. The Advisory Agreement may include an indemnification clause to protect the startup from liability if your Advisor’s work results in a lawsuit. To ensure the proper classification of your startup Advisors, it is essential to seek the advice of an expert in employment law.
It establishes an independent relationship between the two parties. This means that the Advisor is not considered an employee of the company and is not entitled to any employee benefits.	Advisors may be compensated with equity, which can dilute the ownership of existing shareholders and complicate the company's cap table. It is important to include payment provisions in the Advisory Agreement that do not undermine the interests of your business.
A written formal document makes it easier to evidence non-performance and to seek legal action or remedies if this issue arises.	Poorly drafted or ambiguous Advisory Agreements can lead to legal disputes and liabilities. It is important to include dispute resolution terms in the case that conflict arises.

When to use an Advisory Agreement?

An Advisory Agreement should be used when you have Advisors or Mentors sharing their expertise with you to help your business grow and expand. 

If a startup is looking for advice from an experienced individual in a specific area to assist with business development, an Advisory Agreement may be appropriate. This agreement is suitable if the Advisor is not offering any other services to the startup, like legal or financial services, and is not an employee, board member, or shareholder of the startup.

Examples where an Advisory Agreement may be useful for a startup include:

• Investment: If you are seeking investment from an angel investor or venture capitalist, having an Advisory Agreement in place can help to provide reassurance to investors that you are working with experienced and knowledgeable Advisors who can help guide your business towards success;

• Marketing and Branding: If you are looking to increase your brand awareness and develop effective marketing strategies, you might seek the assistance of a marketing expert;

• Financial Planning: If you are looking to manage your finances and create effective financial strategies, having a financial expert can help you make informed decisions and achieve your financial goals.

What to include in an Advisory Agreement?

To make sure the Advisory Agreement is clear and comprehensive, the following information must be taken care of:

• The names and contact details of everyone involved, including the startup and the Advisor (or Advisors);

• A clear description of the services that the Advisor will provide to the startup, outlining the specific areas where they will offer guidance and expertise;

• Details on the compensation arrangement for the Advisor's services, including any equity that will be conceded as part of the agreement. This should also include how the payment will be made and any other benefits that the Advisor will receive including bonuses or other incentivised payment schemes;

• The term of the agreement, which specifies the length of time the Advisor will be providing their services to your business. This can be a specific timeframe or an ongoing agreement that can be terminated by either party.

Including these key elements will help to ensure that both the startup and Advisor are on the same page and understand their respective responsibilities and expectations.

Click here to find an exhaustive list of common sections included in Advisory Agreements and a sample example of one.

Advisory agreements are not one-size-fits-all. The specific terms and conditions will vary depending on the business and its unique needs. Advisory agreements are very fact-specific and it is important they are tailored to the specific circumstances of the start-up.

Consulting a legal advisor can help ensure that the agreement covers all necessary aspects and provides the necessary protections for your business.

Author: Natalie Achou -

Author: Natalie Achou -

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DISCLAIMER

This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.

Sources

'Create Advisor Agreements' (SeedLegals, unknown) <https://seedlegals.com/start/team-agreements/advisor-agreement/> accessed 9 April 2023 

'Advisory Agreement: Templates & More' (Gavel , unknown) <https://www.gavel.io/resources/documate-is-now-gavel> accessed 9 April 2023

'Legal Documents ' (Advisor Agreement, 13th of September) <https://lawpath.com.au/legal-documents/advisor-agreement> accessed 9 April 2023