Must-have clauses in an advisor agreement in case of equity based compensation formula in exchange for advisory services in context of fundable startups
Business structure in India has undergone revolutionary changes and overhaul in the past few decades. As a result of which traditional approach and outlook towards the business has faded and been replaced by growing dynamism. The analysis of above mentioned changes show that the structuring of a business has become more liberal and creative. The modes of commencement have had vital replacements and this along with the global "fresh-industryâ€ trend has encouraged myriad young and fresh minds to take up industrial challenges and risks. There came the outbreak of what is known as "Start-upsâ€. Start-up business models have been welcomed and accepted open mindedly by the market. Though quite a few start-ups have tasted success in a short span of time, for example-start-ups in intra-city transport and e-commerce market, the challenges that they have to encounter have proved to be of manifold. Luxury of not having prior market experience or knowledge has made the start-ups taste the industrial bitter guard at times. There emerged the idea of "Advisory-boardâ€.
Advisors are those people who have at their brain store one of the most valuable assets in a market play, i.e., none other than the specialized knowledge, expertise and on field experience. The value addition of an advisor becomes necessary when the entrepreneur has little or no knowledge about the market reactions though the entrepreneur has an ideal business plan or profit gaining mechanism. An advisor is approached and asked to serve by the budding entrepreneurs when they have ideas and framework in hand to commence a company but their forward vision is blurred and uncertain. Thus, one of the best options and one of the popular choices is to engage a well experienced industrialist, entrepreneur, or an expert to guide on critical aspects in order to minimize the initial inertia arising from the fear of market. Advisors lend their advices on reactions that the business can cause in the market and how to tackle negative reactions and unexpected business blocks. Apart from the aforementioned, an advisor gives a face value to the business and helps expand the business circle as well as the network. However, the start-ups face the heat when they are to decide upon the compensation payable to advisor. In normal circumstance start-ups might not be able to pay a fixed sum or remuneration due to the limited capital resources. As a result of which most of the start-ups in the current market era tend to strike a deal where in the advisors are offered equity as the form of compensation to the services rendered. The first hurdle that the entrepreneurs have to cross is to zero in about the equity to be offered coupled with the services expected and the role of the advisor. This leads entrepreneurs to the need of an agreement between the Advisor and the start-up. As one says, agreements arose when there is a need to draw the line of limitation. Result of which is known as the 'Advisorâ€™s Agreement'.
MUST HAVE CLAUSES IN AN ADVISORâ€™S AGREEMENT
1.Services and the nature of services:
Unlike a service provider in a service agreement where a particular service is being offered, accepted, promised and delivered upon consideration; the services rendered by an advisor cannot be specifically and exhaustively laid down in the agreement. This inability arises from the nature the entrepreneur might be required to be approach the advisor for an unexpected turn of events in the business. Though aforementioned inability exists usually an advisor is asked to guide advice on investment decisions, networking and market reading. So it is important to mention all the general advices that may arise under normal circumstances but obvious in a flexible manner so as to include a provision to expand the same at times of need.
2.Term and termination:
Period for which is the service is required from an advisor is another uncertain element, and the difficulty of fixing the term of service escalates dramatically in case of start-up businesses. At the same time it is very important for any kind of agreement to lock-in certain period so as to avoid unnecessary losses. Equally important aspect is to set a time period or to pre determine the time period for which the services are required from an advisor. From the point of view of an advisor it is very important that he knows the time period for which he is required to render service.
Under this particular provision of the agreement, the mode of termination before the agreed time period is also to be made. Notification clause comes in handy this juncture and find place as a sub-clause to the term and termination clause.
As already mentioned in the introduction part; the popular choice of the day is equity based compensation. This necessarily implies that an advisor is not usually paid remuneration or entitled for cash compensation. Almost all the start-ups have adapted this way of compensation policy and this is expressly mentioned in the agreement. Companies Act, 2013 has mandated every shareholder to buy shares for or at minimum face value. So the vogue in this regard is allotting the shares on face value. This provision is crucial in the advisorâ€™s agreement as this is the clause which determines the monitory relation between the founders and the advisor.
It is seen in practice that an advisor might be required to travel for the company and also the advisor might incur expenses in course of rendering services to the company. It is obvious that the advisor has to be compensated for the expenses or in other words it is important to reimburse the advisor for the expenses accrued to the advisor for or on behalf of the company. Thus, there comes the expenses clause; normally under the compensation clause or as a part of compensation clause. This clause contains the mechanism or mode of reimbursement and the circumstances under which an advisor would be reimbursed. Another important facet is that this particular clause lays down the limit of reimbursement so as to bring in reasonableness from the part of the company as well as the advisor. This clause has to be inserted in the agreement so as to avoid all split views regarding reimbursements. So, this is a handy clause for the advisor to know his limits as well as the nature of expenses for which the advisor would be reimbursed.
5.Nature of the relation between the company and the advisor
An advisor does not in any manner is considered as the employee of the company, neither the advisor assumes the nature of a service provider or a share holder who holds sweat equities. Under this circumstance it is very important that the relation between the company and the advisor has to be perfectly outlined and defined. This avoids tussles over the allowances that may arise when the advisor claims in another capacity or when the company turns around and start treating the advisor in a capacity which deviate from that of the initial agreement. The post and presence of an advisor can easily be mistaken and be construed in some other way.
Information in wrong hands and at unfortunate times becomes deadly we pen and can cause un-liquidated damages and losses that cannot be estimated. One of the valuable assets that a company has to protect is the information regarding the company policies and strategies. So it is important that it has to be protected from leakage within the team. This brings us to the confidentiality clause, where the parties agree not to share the information obtained from the course of business to an outsider or a third party. This particular clause restrains the advisor form sharing the information of the company for which renders his service or advice.
Dispute resolution clauses such as that of Arbitration clauses have become a necessary concomitant in almost all bilateral agreements in the business circle. It aims at speedy settling of disputes and avoids hectic process in the court of law.
8.Governing law and Jurisdiction
The apex court of India has laid down opposite but apposite views while interpreting arbitration clause in agreements in case of domestic and international resolutions. It is pertinent to note here the strict interpretation formula that the Supreme Court has reiterated over time in myriad decisions; this policy of the apex court gives weight to the expressions and words that is being used to lay down the dispute resolution mechanism, governing law, as well as jurisdiction clauses in an agreement. Under these circumstances it is important to add in clear and plain terms the governing law as well as the jurisdiction of the court where the parties to intend to pursue the case in case the arbitration fail or in case arbitration is not opted.
9.Conflict of Interest
It is possible that the advisor so engaged by the company faces conflict of interest. To be clear in that aspect one must consider an example where the advisor is asked to be part of a company which is the prime competitor of the already engaged company. Then in that circumstance it is possible that the advisor may put the interest of both the companies in jeopardy.
10.Inventions Assignments or Intellectual property
It is important to expressly lay down the rights vested in the advisor in dealing with the assets and companies which include intellectual property or invention assignments. Thus this particular clause emphasizes the extent to which the advisor has right and access over aforementioned properties of the company.