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Advisor's Agreement​
How to structure an advisor’s agreement
Often people have the idea of starting a new business on their mind, but few people come up with a product or a prototype, or a service and try to find a product/service-market fit. Even few people know what to do to start building a business around that product or the service. The founders of a company often have no clue about how to launch or scale up a business, and this is where the role of advisors becomes significant.

While there are plenty of people around in the startup ecosystem (if you don't know where to find them you can start attending some startup networking events, meet VCs and pitch your business) who are happy to give entrepreneurs free advice, there are also a lot of valuable advisors who would want to work professionally with you - and would ask for small equity in your venture in return for their services. What is important here is to get a clear idea of what value those advisors bring in - and how the quality of their contribution will be measured. This is a really tricky area - and the advisor will always insist for a formal agreement to record the understanding. Hence, entrepreneurs considering taking on board advisors who would be entitled to equity must figure out how advisor's agreements work.

Essential elements of an advisor's agreement

For an advisor’s agreement to efficiently fulfil its purpose, it must contain the following elements:

Advisor’s agree to act as advisors or mentors for the company and extend advice and assistance on matters which have been described within the agreement or have been mutually agreed upon by the parties. Advisors can add value in different ways:

a) By providing advice about the
b) By making a financial investment as well
c) By providing introductions (to VCs, other startups, etc.)
d) Having a reputed person as an advisor to your business can also lend significant social proof (assuming, of course, the advisor genuinely knows the team and its business) – this can be extremely useful for the startup in achieving a favourable impression with important third parties .

The services expected out of an advisor must be discussed thoroughly and mentioned within the agreement. At the same time certain room must be left within the agreement so that if the work to be done by the advisor is can be expanded, it can be included.

Apart from describing the nature of the services, it is prudent to describe the amount of effort that the advisor will devote to the engagement, in terms of time, meetings, etc.

Some companies even set up a board of advisors. However, a board of advisors, unlike a board of directors isn’t a recognized entity. Setting up a board for the advisors is not necessary for a business; it is entirely optional. It is only for the convenience of the company and is left to its discretion.


Early stage startups often do not have stable cash flows – therefore, advisors do not usually receive cash compensation. Instead, they are more interested in receiving equity in the startup, the value which can potentially increase over time, if the startup grows. However, it is possible to enter into a relationship with an advisor which envisages monetary payments or a mix of both monetary payments or equity.

It is advisable to structure the compensation of the advisor such that the shares vest over a period of time. For example, a 2 percent shareholding could vest over a period of 2 years, such that every 6 months, 0.5 percent shares are issued.

Vesting could also be subject to successful attainment of identifiable milestones, which can be listed in the advisor agreement. This mechanism ensures that the advisor is incentivised to add value throughout the duration of the engagement, else he doesn’t get the shares.

How to issue shares to an advisor

Process of issue
In a private limited company, the Board of Directors usually has the authority to issue shares to any person (unless the articles specifically restrict this power). Hence, a board resolution issuing shares to the advisor, followed by delivery of share certificate to the advisor suffices in ordinary cases. A corresponding entry must be made in the company’s register of members, indicating the advisor as the owner of the shares.

Price and value of shares
The advisor receives equity in exchange for his unique knowledge, skillsets, advice and other mentoring, instead of a direct infusion of capital. Under Indian law, shares issued in exchange for intangible benefits (e.g. knowhow, technical skills, expert advice) are known as sweat equity and can be issued to employees and directors only as per the Unlisted Companies (Issue of Sweat Equity Rules), 2003. If they are not employed with the company or are not directors, advisors will not fall under the above category. Hence, it is advisable for the company to issue the share at face value (or slightly above face value) to the advisor, in which case the restriction will not apply.

As a company raises subsequent rounds of investment, the equity of the advisor may be diluted, in the same way as the other shareholders (including founders). Therefore, where it is contemplated that the advisor’s equity will vest over a period of time, the advisor’s agreement should clearly mention a specific date from when the percentage will be calculated. If the number of shares to be issued is calculated afresh each time shares are issued, then the advisor will receive more shares in subsequent stages, as the capital of the company increases.

Types of advisors and relationship with compensation

The amount of compensation an advisor receives is mostly determined on the basis of the category in which he falls.

Advisors are divided into two categories on the basis of their level of expertise and work. In the discussion below we have explained how much equity different categories of advisors receive, after accounting for dilution post an investment is made. These categories are as follows:

Standard advisor
Advisors who help the company to perform specific and narrowly defined tasks - for instance, advising on financial projections of the company, assistance with pitching preparation, or advise with respect to prototyping and market validation. A standard advisor comes for monthly meetings. Their work is of a limited nature.  

These advisors receive about 0.1%-0.25% of the company’s post dilution stock. As a thumb rule, you can offer them 0.25% or 0.5% of pre-investment stock - although it is entirely up to negotiation. Many advisors in India, will demand 2% or even 5% of stocks - and your job is to assess whether they will actually add so much value to your company.

Even lawyers, accountants and such other service providers may work for equity at times, but make sure that you do not overcompensate them. Paying cash may be better in India, as equity is undervalued, so advisors expect of a higher percentage of the equity.

Giving more equity than 0.5% to advisors who would not be doing substantial work for the company may not be optimal. In the Silicon Valley, this has become more standardized out of practice. In the ideation stage, the compensation received by a standard advisor is usually up to 0.25%. In the start-up stage, they receive in the vicinity of 0.15% of the company’s stock and in the growth stage, it is decreased to 0.10%.

Strategic advisor
A strategic advisor is one who aids the founders of the company with recruitment of the company personnel. Their involvement is greater than standard advisors. They meet the founders on a regular basis. Their compensation moves from 0.50% in the idea stage, to 0.40% in the start-up stage and then comes down to 0.30% during the growth stage. Strategic advisors can be of great help - even if you are good at making your own strategy - having someone to review those can be invaluable. However, getting time from such advisors is crucial - and one has to be very careful in this respect.

Expert advisor
The expert advisors are veteran entrepreneurs. An expert advisor has a great level of involvement with the company. They know the company’s prospective clients intimately and may even help in raising money for the company. An expert advisor can introduce the founders to key clients. In some cases he may even help in acquiring certain projects.

An expert advisor’s compensation usually starts at 1.00% in the idea stage, then it comes down to 0.80% in the start-up stage and falls down further to 0.60% in the growth stage.

Whatever equity a company may choose to give to an advisor of any category during any stage must be specified within the advisor’s agreement, so as to prevent conflicts in the future. While this amount may vary with the circumstances in which the company is functioning, it is certainly important to lay down a basic amount.

Once again, it is a good idea to link the equity to be given to the advisor with the number of months during which the advisors will be engaged or expected to work with a ceiling of 2 or 3 years.

An advisor may be have to travel locally or outside the city / country for various purposes related to his advisory functions itself – in such situations he will expect the company to reimburse him for out-of-pocket and travelling expenses.

A company can agree to reimburse an advisor for reasonable travel and related expenses incurred by him in the course of performance of his functions as an advisor to the company.

An advisor’s agreement should contain details of how reimbursement works operationally – that is, the requirement of suitable documents or invoices for submitting a claim for reimbursement, time period of reimbursement, mode of reimbursement , etc. A cap on the total reimbursement amount can be specified– this cap should only be exceeded with the prior approval of the company.

Term and termination
The period for which the advisor will work with the company and the method of termination of his engagement should be pre-determined within the agreement, so as to avoid any issues in future. Many companies don’t specify the term for which the advisor will be working with them –often because the founders are uncertain about the duration or extent to which they will require advice.

Companies usually terminate an advisor’s work with them, when he stops adding value to their work. At times, when a company pivots the advisor’s engagement they may have to be terminated. However, it is beneficial, both to the company as well as the advisor, if they decide upon a notification period within their agreement. For example, a company and the appointed advisor may lay down within their agreement that either party will have to give a notice 10 days prior to the termination.

Nature of the advisor’s engagement with the company
It must be noted, that an advisor is not a direct employee of the company. He is also different from a consultant who agrees to undertake a specific project or task for the company – an advisor’s role is more general and often of a much longer duration than that of a consultant.

However, it is advisable to clearly specify the status of the advisor in the agreement – for example, the agreement should state that the company will not extend any employee benefits to the advisor.

Advisors do not ordinarily have the authority to enter into contracts on behalf of the company – it is prudent to specify this restriction in the agreement as well.

Use of the advisor’s name
The company may have the advisor consent to the usage of his name on any of the marketing materials of the company, on its website, provide it as a reference to potential investors, media, etc.

Confidentiality and non-disclosure obligations
To protect critical information about the company and its product, the founders of a company should require advisors to enter into a non-disclosure agreement or include sufficient non-disclosure clauses in the advisor’s agreement. Such information can pertain to technical data, know-how, financial projections, service plans, drawings, planned marketing materials, strategy documents, etc.

A definition of confidential information is provided below for reference:
Confidential information has been defined as “any information, technical data or know-how (whether disclosed before or after the signing of the advisor’s agreement), including, but not limited to, information relating to business and product or service plans, financial projections, customer lists, business forecasts, sales and merchandising, human resources, patents, patent applications, computer object or source code, research, inventions, processes, designs, drawings, engineering, marketing or finance to be confidential or proprietor which information would, under the circumstances, appear to a reasonable person to be confidential or proprietary. Confidential information doesn’t include the details that were in the advisor’s possession at the time of disclosure or those details which have become public knowledge.”

He is also required to protect, to the best of his abilities, the secrets of the company. Furthermore, he can also be asked to return certain documents of the company that contain any such information back to the company upon his termination.

No rights to the intellectual property of the company
Along with the obligation of non-disclosure, the advisor’s agreement must also emphasise on the fact that the advisor not grante any rights to the intellectual property of the company. The advisor only has access to the intellectual property of the company, as far as, it is in connection with him rendering his advisory services to the company. This usage is also to be done with the prior approval of the company. He acquires no right over any such information.

Avoiding conflicts
An advisor is likely to maintain relationships with a large number of startups and established companies – hence, there is a possibility of a conflict of interest arising which must be ideally addressed in the advisor’s agreement.

There are multiple ways to address this:

  1. The advisor’s agreement must state that, if the advisor has a duty with any other entity or party, then he must not violate any such duties while he is working for the company with whom the advisor’s agreement is being entered into. This is done because the company doesn’t want any unnecessary conflict. 
  2. Most importantly, the advisor must disclose to the company if he is himself working with any competitor of the company. A ‘competitor’ should be widely defined, so that the company has the opportunity to know of any association that the advisor contemplates with potential competitors (whether direct or remote) in the market. If the advisor intends to work with a business that the present company does not consider to be its competitor, it can permit the advisor to do so. However, if the company is of the opinion that the other business is a competitor, it should have an opportunity to refuse the advisor from working with the other business, or in the alternative, to review the advisor’s association with itself.

Amendment of the agreement
It helps, if the agreement lays down how an amendment to the advisor’s agreement being laid down is to be made, in the future. Any amendment must require the consent of both parties, the advisor as well as the company.

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