What Is an Advisor Agreement Review?
An advisory agreement outlines expectations between the advisor and the company they work for. It is also known as an advisory contract. When hiring an investment advisor, the hired adviser must clearly understand their roles and responsibilities.
The advisor agreement describes the assignment of work to the advisor. In addition, it explains the relationship between the two parties involved in the advising relationship.
Typical contracts include details such as:
- Compensation
- Confidentiality
- Advisory shares
- Allocation of expenses
Here is an article with more information about investment advisory contracts.
Who Can Review an Advisor Agreement?
An advisory board may review an advisor agreement before hiring an advisor for their company. Likewise, a business or corporate attorney with experience advising agreements can help ensure that an agreement is legally compliant and mutually beneficial.
Here is an article with a sample advisory agreement and details on common sections and elements.
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How Much Equity Should an Advisor Get?
The rates for financial advisors vary, but the average share is 0.25% to 1%. The amount of equity an advisor receives usually depends on the size of the startup and the level of advice given.
In other words, the advisor will seek compensation through fees and equity relevant to the impact their advice likely has on your company’s growth and success.
As with any financial decision, it’s always a good idea to comprehensively understand what’s involved before entering into a contractual agreement.
Here is an article that offers sound advice about how to start an advisory board for your business.
Key Terms to Look for in an Advisory Agreement
Every legal contract has key terms that ensure it meets legal requirements. In an advisory agreement, here are some elements you should always include:
- Services. Outline the services the advisor will provide, such as “financial advice or general business advice,” and how often they will be provided. The company should also note that it reserves the right to review, consider, and decide how to act based on the advisor's advice. This also includes their right to ignore and act against advice.
- Compensation. Specify how much the advisor will be paid for their services, how often they will be paid, and how they will be paid. These terms and conditions should be clear and concise, and there should be no question of how the advisor will be compensated.
- Advisor expenses. List expenses the company will cover for the advisor, such as travel and lodging or transportation costs. The most common way to incorporate this clause is to permit the advisor to write the company a letter requesting reimbursement for specific expenses. The best way to prevent reimbursement disputes is to have an addendum (attachment) of pre-approved costs.
- Terms of termination. The company and advisor should have the right to end their working relationship. You may require formal (written) notice of termination within a certain timeframe, such as 7 days before the desired termination date. Contract termination agreement terms are entirely up to you and based on your needs.
- Confidentiality. Advisors work closely with companies, and as such, they tend to learn inside information that businesses wish to keep private. A confidentiality clause or added confidentiality agreement ensures that the company’s data stays protected. This may be referred to as a nondisclosure agreement as well.
- Independent contractor agreement. The company should clarify that the advisor is working for them as a 1099 independent contractor and that their services do not render them an employee or entitle them to any employee benefits. If you choose to offer the advisor benefits, these need to be outlined in detail.
Before you write an agreement, it is important to research your potential advisors. These individuals will play a large role in your company’s success, so trusting them implicitly is essential. A good rule of thumb is to interview several advisors to understand their level of expertise better and whether they seem suitable to manage your financial needs.
Here is an article on how to choose a financial advisor.
How Do You Compensate Advisory Board Members?
Advisory board members are compensated financially with monthly pay as well as equity. Different companies can negotiate their compensation terms with their advisory board members. Details of compensation are outlined in the advisory board agreement.
Generally, advisors seek equity through advisory shares as part of their agreement. Advisory shares are stock options awarded to advisors for their services. It is common for businesses to offer advisors the opportunity to buy stocks at a discount rather than hand them shares outright.
However, certain advisors may be given higher privileges and compensated in shares directly.
Here is an article with more information on advisory shares and how to use them.
Should You Hire a Lawyer For an Advisory Agreement Review?
Yes, working with an attorney is the best way to protect your business’s interests when forming an advisory board or to hire a new advisor for your company. Business lawyers know how to prioritize their client's best interests, stay legally compliant, and negotiate fairly with advisors. You should also interview several business lawyers before entering into a contractual agreement.
It is also advisable to research your business’s advising needs and options in-depth before enlisting any professional services. For example, suppose you are unsure whether you need an advisory board agreement. In that case, you can contact a lawyer for a free consultation through ContractsCounsel’s marketplace.
Here is an article that defines the advisory board, its role in a company, and strategies for forming one for your business.
Post a project in ContractsCounsel’s marketplace to receive flat fee bids from lawyers for your project. All lawyers have been vetted by our team and peer-reviewed by our customers for you to explore before hiring.
